Bangalore: India’s software services and back office companies could earn as much as $50 billion or over Rs2 trillion in the next five years, if the companies “innovate” in the way they deliver software services and build products for its global customers, an industry report said.

This $50 billion is in addition to the $124 billion the export-driven IT and business process outsourcing (BPO) industry expects to earn by 2012, according to a report released on Wednesday by the National Association of Software and Services Companies (Nasscom), the software industry lobby, and the Boston Consulting Group (BCG).

India’s software and BPO exports for the year to March stood at $39.6 billion and will likely reach $60 billion by 2010 according to Nasscom.

Indian software companies face increasing competition from multinational rivals such as Accenture and International Business Machines Corp. (IBM). They have also seen their profits hit by the appreciation of the rupee against the dollar, the currency in which they bill most of their revenue. Consequently, companies such as Infosys Technologies Ltd, Wipro Ltd and Tata Consultancy Services Ltd are under pressure to cut costs, improve efficiencies, and increase the value of their business with clients by doing more critical work for them.

“The Indian IT industry is entering the third phase where companies need to innovate to maintain their competitive edge and grow to challenge global players,” said Kiran Karnik, president of Nasscom.

India’s software and BPO companies began exporting services on the strength of “labour arbitrage” or by using the low cost talent base in their home turf. They have since expanded service offerings to include application development and maintainence of software and systems remotely from India.

“Very few Indian companies look beyond the pressures of the next quarter. In order to take to the next level of innovation, you need a mindset change and the industry is yet to take that,” said James Abraham, partner and director, BCG, who authored the report.

The report recommends creating an “ecosystem” for innovation with the participation of government, industry, academic institutions and financial institutions, and also bold policy changes by the government to foster innovation among IT companies.

Nasscom in association with ICICI Knowledge Park—a research and development campus in Hyderabad promoted by ICICI Bank Ltd, India’s largest private sector bank—and the government of Andhra Pradesh, is setting up a Rs100 crore innovation fund to provide seed funding for new software ventures.

“Innovations need not be breakthrough. It is constant innovation in processes and systems that eventually delivers better value for the customer. Breakthroughs happen maybe once, but the focus is on continuous improvement,” said Ganesh Natrajan, vice-chairman and chief executive of Zensar Technologies Ltd.

Companies such as Infosys have admitted that working more efficiently could help them protect their profit margins as they face the challenge of the rupee’s appreciation and competition from global majors.

“We will introduce more processes and automation to reduce costs, increase the offshore-onsite mix (of employees working on client projects), the geographical mix of customers and, of course, (employee) utilization has to go up,” K. Dinesh, director in charge of quality and productivity, Infosys Technologies Ltd, had said in an interview on 11 July. Productivity enhancement measures such as efforts to automate processes and introduce software tools related to engineering work done on projects at the company add 3% to Infosys’ net profits every year, Dinesh had said.