Nine years ago McKinsey, on behalf of Nasscom, projected that India's software and services exports would touch $50 billion by 2008.

That was audacious as in 1998-99 Indian exports had touched $2.6 billion. Recently, Nasscom announced that on the basis of exports of $40.4 billion in 2007-08 and a conservative assumption of 21-24 per cent growth, in 2008-09 the industry would touch that heroic figure of $50 billion! While celebrations are in order, the emphasis has naturally shifted to asking if such performance will continue.

The industry is clearly facing highly adverse market conditions, similar to 2002-03, when the US economy reeled under the impact of the bursting of the technology and telecom bubbles plus 9/11.

This time, the bursting of the US housing bubble and the sub-prime crisis plus the oil shock have severely impaired not just the US economy, which accounts for a massive 60 per cent plus share of the India software majors' exports, but also its financial sector, which is its single-most important market segment. The industry is anticipating not just price cuts but also lack of ballast in volume growth as US firms pause before taking spending decisions.

The industry is facing a further challenge. Global incumbents, the market leaders being challenged by the Indian players, appear ahead of the latter in offering clients a truly distributed global delivery setup which is addressing clients' increasing preference for vendors with near shore delivery capability.

Plus, a perception is growing that the incumbents are doing better in acquiring what they earlier lacked, cheap offshore capability, than the challengers in their quest for deep consulting capabilities.

This line of thinking came to the fore after the acquisition of EDS by HP, which gives the combine offshore capabilities already acquired by giants like IBM and Accenture.

Avinash Vashistha, who heads the offshoring consultancy Tholons, finds "the HP-EDS combination formidable and should make the big Indian players sit up". It is telling that the challengers and incumbents see the current scenario somewhat differently.

Whereas the challengers are saying this is a tough year, the incumbents don't feel so daunted. In the first half of 2008, the incumbents are ahead of the challengers in global client acquisition. While clients are continuing to outsource work higher up the value chain, "a significant part of that work is going to the MNCs and not to the Indian leaders". Multifunctional business knowledge or plain old consulting skills are emerging as a gap for the Indian leaders who need to make significant acquisitions to fill this gap. He finds that "the MNCs are more competitive in scaling up and satisfying clients who have global footprints and look for global delivery". He adds that while the "Indian big three had an edge till a year back, this year the MNCs will get a leg up and the gap between them the two will increase".

Acquiring global capability is the new game, agrees Siddharth Pai, the India head of TPI, the outsourcing advisory. Clients expect vendors to compete both in functions and geography.

The Indian leaders are behind in their global presence. Pai makes a distinction between the "geography of consumption and servicing". Indian firms have addressed the geography of servicing but not paid enough attention to where the clients are and their near shore preferences.

He explains that "Indian firms who already have the functional capabilities need to globalise" their delivery locations. He, however, does not see any cloud hanging over the Indian leaders.

"They will grow faster than the competition but this will be less than their own past growth rate". This is not surprising as the big three are in the $5 billion plus league and have exhausted the potential in the volume end of the business - application development and maintenance.

Till last year the leading Indian IT firms had been going great guns. According to Gartner, the top six India-based firms raised their global market share from 1.9 per cent in 2006 to 2.4 per cent in 2007.

As market shares go, this is a sharp rise. But what it underlines is that there is a lot more market to address. In outpacing the rest of the market, the top six have been routinely winning $100 million plus deals. From just ADM work, they are now into more of consulting- based work and remote infrastructure management. And deals are not only stand alone but increasingly annuity-based multi-year ones.

Within this trend Forrester sees the top three forging ahead. They now account for 46.6 per cent of software exports, up from 26 per cent in 2004. The top three are not only growing faster than the rest, they are also more profitable and earn higher revenue per employee.

This is not really the total picture as "software and services" includes BPO exports, which touched $10.9 million in 2007-08. While BPO is a strong component of the overall offering of the big three, a separate look at BPO is necessary (it will be addressed in another column) to capture the dynamics of leaders like Genpact and WNS.

BPO's rise up the value chain has in fact been even more remarkable, rapidly shifting growth focus from voice and transactions businesses to process and knowledge outsourcing.

Thus, to keep moving as fast as in the past Indian software and services leaders will have to keep transforming themselves. But considering the way they have come and their robust size, there is no reason why they will not be able to meet the challenges ahead in the next nine or ten years.