Indian Software industry: moving up the value chain?


By
Rashmii Sharma
PGP 2
Xavier Institute of Management
Bhubaneswar
E-mail:
nimi_sun@yahoo.com / u104095@ximb.ac.in
 


EXECUTIVE Summary

The Indian software exports industry presents a very mixed picture currently. On one hand it is enjoying the position of the global leader for offshore assignments, and on the other hand there is an uncomfortable question lurking- What when the competition catches up? To address these concerns, Indian firms have made an attempt to move up the value chain offering business solutions instead of only coding and maintenance services.

However they have to circumvent several problems to do it successfully. Major being lack of domain expertise and low credibility.

Hence, the firms should use their existing links to acquire domain knowledge and knowledge about the businesses that their clients are in, and use that knowledge to move up the value chain. This can be done organically (Ex:Infosys), or inorganically (Ex:Wipro).

The only critical factors here is the response of incumbent consultants, both of the traditional variety (e.g., Deloitte & Touché, Anderson Consultancy) as well as firms like IBM and Oracle that are developing large IT consultancy businesses. Not all firms will be able to prevail over these, but if the Indian software industry is to take the next step up successfully, it is vital that at least a few of the established firms succeed, which can act as the nucleus around which the industry can develop and mature.

Introduction

Traditionally, Indian IT export companies were viewed globally as a low cost alternative and received only downstream work, mainly maintenance and production support. This low cost delivery model is now under serious threat not only from global majors but also from other upcoming Indian companies who are also in a position to split the pie even smaller. Therefore, they have placed upstream IT consulting too on their agenda.

Some of them have made considerable attempts at gaining foothold in consulting business too, which have pitted them against global giants like IBM and Accenture. However it is doubtful whether this is a reason for celebration or concern.

This paper is an attempt to examine if they can successfully make the transition and what issues might prove hindrances in taking the plunge.

It begins by examining the software export industry in brief, and then India's global position which is virtually screaming to make the leap from servicing to consulting.

That is followed by a discussion of roadblocks India faces to make this leap, and proposed steps to go about it.

Indian software exports industry: Nuts and Bolts

Indian software exports consist primarily of software services as compared to software products, and the firms are remarkably similar in terms of their activities. The majority of activities carried out by them are essentially maintenance tasks for applications on legacy systems such as IBM mainframe computers, development of small applications and enhancements for existing systems, migration to client-server systems, often referred to as porting or re-engineering.

The tables below show the domains it caters to (Table 1) and the kind of export projects taken up by Indian firms (Table 2).



As is evident, the type of work outsourced is neither technologically very sophisticated nor critical to the clients businesses.

Not only is the work outsourced technologically undemanding, the projects are typically small. The mean number of man-months involved in the most important export project for firms is 510 man-months, whereas the median is only 150 man-months, which implies that the typical export project is quite small, even for the large Indian firms.

To put things further in perspective, let us take a look at the software development process. The stages are: Conceptualization, requirement analysis, high-level design, low-level design, coding, testing and support, which roughly correspond to the waterfall model of software development, as shown in figure 1.


Figure 1: The software development life cycle.

The business implication of the same is shown in figure 2.


Figure 2: Business implication of the software value chain.

At present, Indian firms provide services for the lower portion of the waterfall model and "moving up the value chain" involves providing conceptualization, requirement analysis and design services as well.

Indian companies are still positioned primarily as a cost-efficiency play" and not as upstream consultants. Requirement analysis and high-level design is typically done either in-house or by local consulting agencies, such as Anderson Consulting, which provide "solutions", which may involve some combination of custom developed software and commercial off-the-shelf software and hardware products.

According to NASSCOM-McKinsey report, annual revenue projections for India's IT industry in 2008 are US $ 87 billion and that IT Exports will account for 35% of the total exports from India. See table 3.


The picture sure looks rosy. But is it realistic? And more importantly, if at all it is feasible, how should the Indian firms go about making a success out of it?

Should India take the plunge?

The big Indian firms are right now posed in a very precarious situation. They are stuck in middle of three forces.

On one hand they face competition from second rung Indian firms, which have forced prices down.

On the other hand it's the entry of a few consulting companies, such as Ernst and Young, in such areas as application development and call centers, which is a cause for concern. The growing presence of firms like IBM, EDS and Accenture is putting the squeeze on Indian vendors. These U.S. companies not only have the ability to lure the best talent away from the Indian majors; they also have deeper pockets and can undercut Indian prices.

Lastly the software industry is facing Aggressive Competition from countries like China, Ireland and the Philippines for the outsourcing space.

According to Gartner Inc., by 2007 China will pull in $27 billion for it services including call centers and back-office work, matching India. In a possible threat to India's prowess in the information technology field, China is fast rising as a service outsourcing hub and could catch up with India by 2007.

The value proposition in the outsourcing model we currently follow is that of the cost effectiveness coupled with a technical resource pool, which is in short supply in most markets. But as predicted, that will not a sustainable model 7 years from now.

So what is the solution?

In such a situation, a well-managed IT services entity has no option but to ascend the value chain and provide such higher value-added services as consulting, product development, R&D, and end-to-end turnkey solutions.

Another compelling reason why this makes sense is the revenues. Apart from getting mindshare as well as brand enhancements for the company, consulting engagements are executed at higher (10-20% higher) margins, so they also result in large downstream work and revenue.

And the unique advantage which India enjoys regarding this fact is that even after raising its prices for the consulting assignments, it will be a cheaper off shoring destination for the clients when compared to the other competing countries. See Table 4.


Therefore India with its established low cost advantage coupled with proven technical competencies is placed in a very unique position, and should leverage this advantage to its full potential. For which the most obvious route is moving up the value chain.

Is India poised in "Moving up the value chain"?

After establishing the legitimacy and inevitability of the need to ascend the value chain, comes the big question- Can India do it? India surely is in an advantageous position, but does it have the intellectual and technical acumen to pull this off?

The higher value-added segment is characterized by high risk and high return, and requires high brand equity, interface skills between management and IT, and domain knowledge.

Therefore, the existing software service exporters face two major challenges that are closely related.

    1. Lack of domain knowledge.
    2. Lack of credibility.

Going into details, one of the most important roadblocks which can be seen is the shortage of talented professionals, as seen from the table 5 below.


Table 5: Major problems for Indian firms.

According to Nasscom reports, the demand already exceeds the supply.

Due to entry of foreign firms face a lot of difficulty in recruiting project managers with four to six years of relevant experience, even though 40% of the workforce is said to be in that category.

Other than job shifting, immigration to US through H-1B visa is also responsible for the current state of affairs.

Indian software exports, unfortunately does not require a great deal of knowledge about the customer's business domain or specialization in specific technologies.

Therefore most overseas clients believe that Indian firms could not work on high level specifications or project definition stages of a project.

A reason could be the Indian system of promoting software programmers to managers based on seniority rather than on proven managerial ability, which gives the impression of a weakened project management system.

In addition, there were is the cultural issue which could make overseas clients hesitant to trust Indian professionals with high end tasks. For example, apparent unwillingness of Indian software professionals to point out potential problems up-front, and unwillingness to say no for fear of offending the clients. Another could be the lack of familiarity of many Indian firms and professionals with the work culture and work norms in the West, though this problem has been tackled by the big Indian firms through training et al.

To move up successfully…

First of all, know thy partner. The most important thing is to understand clients and their value chain. Requirements analysis and design, requires that one understand what the client wants and to translate that into a design for a software system. This requires both greater technical capability as well as greater knowledge about the business processes of the client. Also software professionals need to have a solution orientation, not development orientation. Indian companies are strong in software development and maintenance but not so strong at understanding the business needs behind IT projects.

Unfortunately, this is easier said than done. Indian vendors typically don't see business users as a client; they see the IT organization as their client.

Having a PCMM certification is not enough to make that transition to upper echelons of the value chain. Domain expertise and marketing ability is needed to materialize it successfully.

To tackle the problem of domain expertise, the key is the retention of experienced personnel, which is very challenging given the high employee turnover in the Indian software industry.

Some firms are trying to embody some of their knowledge in software tools that a firm can use to provide better service to its clients, or reusable software code that has to be customized to the specific requirements of the client, but knowledge management – an effort at insulating the organization from employee turnover is very much in infancy.

Indian firms can and a lot of them are responding to the problem of employee attrition in a number of ways.

One popular way is by providing opportunities to work in the US. Others include stress on quality of life, ability to provide a career path for their employees, wherein they could move to being managers and would not have to remain programmers, something valued by Indian professionals.

As far as building credibility and brand equity is concerned, that can only happen gradually. The market perception of Indian companies is still that of low-cost and, hence, low-value service providers.

To explain further, consider the process of selecting Indian firms to outsource work across firms. Generally, an Indian employee of the client firm plays an important role. Otherwise, the US firms begin by outsourcing a fairly small, and in some cases, redundant project to the Indian vendor, with the objective of gauging the capabilities of the vendor and assessing whether to proceed or not.

The existence of long-term relationships is very important here. Generally the most important export contract involved work for a company they knew earlier or was part of an ongoing relationship with the client.

Companies can gradually build credibility by distinguishing themselves from the pack by not providing the typical code conversion or porting services, and instead are trying to operate in specialized technical or industrial niches, and a few companies like TCS, Infosys and Wipro have already done that.

The point to be made here is that even though Indian firms have the roadmap to rising through the value chain ready, executing the same is not easy.

It needs first of all a commitment from the top management, a great deal of investment in hiring, training and retaining their employees, as well as in acquiring the technological and business expertise needed.

Furthermore, such investments will have to be made for long periods, possibly well in advance of any return on the investments, which makes Indian firms wary of trying it as they are used to high profits and fast returns.

The experience gathered, along with the feedback received during maintenance, can be well utilized in the process. This will curtail the cost involved in experimentation with different designs. Indian companies should concentrate on new segments, such as system integration, embedded software development, bio-informatics and biometrics, security solutions and in the engineering domain.

What are discussed above are the basic steps which need to be taken by the industry players to make the transition to the next league. The next level of decision making comes when firms decide whether to grow into the high end business organically like Infosys or inorganically like Wipro. It would be unjustified to deal with this issue in short, given its importance. Therefore it has been left owing to the word limit.

Conclusion

Given the external and internal environment of the Indian software industry today, it is a given thing that unless firms try to move beyond providing low end services, the competition (both domestic and international) is going to catch up, making them lose their edge.

It is important to distinguish the industry as whole and individual firms. Even if most of the established firms may fail to do it, at least some of them must succeed in moving up the value chain. These firms should be able to execute large, complex projects on their own with little or no supervision from US clients, and in time should be able to anticipate the business needs of their clients and offer them solutions. Unless this happens, the industry will have to give ground to competitors from China, Philippines and Eastern Europe, in which scenario, there is a real danger of the industry actually shrinking.

But since the road to treasures is never easy, there are quite a number of issues which the firms have to tackle before they are on the fast track to high end consulting. What firms need to remember is that being in a unique position of being low cost provider, all they have to do is iron out a few issues (namely retaining talent), leverage their potential, and slowly but surely build credibility in the eyes of global customer.

References

    1. Now or never by Mary Modhal, Harper Collins, 2001
    2. Nasscom.org
    3. CMU software dataset
     


Rashmii Sharma
PGP 2
Xavier Institute of Management
Bhubaneswar
E-mail:
nimi_sun@yahoo.com / u104095@ximb.ac.in
 

Source : E-mail November 18, 2005

 

   

 

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