The Hindu Business Line : Software and the road ahead

The response to my last piece in this very supplement titled Software in a Baggy Green has been enthusiastic, to say the least, even if the praise has not been unqualified. It is debatable whether the Australians are hated more or software is respected more, but here is a smattering of comments on the article in my blog which led me to think of this piece. In my typically modest (!) way, I have excluded the ones that have been very positive and stayed with the critical points of view and tried to address them.

“The decline of the baggy green and the demise of the software industry are vastly exaggerated. The big ones are clearly moving up in the value chain.”

“I wish you had stated that there were very few product software companies and they were not brought into the limelight appropriately. They (product companies) could be compared to Rahul Dravid who does all the great work and has no sound bytes.”

“Your article is good in patches. You know your cricket better than your software. You have not dwelt on the cure.”

While I am flattered at the faith of some people in my ability, I am a bit diffident about offering cures to the software industry, an industry that I admire so enormously. I deal with perceptions, not so much about industry strategy, but I had the good fortune to meet Michael A. Cusumano, Sloan Management Review Distinguished Professor, at the Massachusetts Institute of Technology’s Sloan School of Management and the author of The Business of Software, a path-breaking book. He has also authored eight other books, is a recognised expert on the global software industry and a person several times more qualified than I am to offer solutions and the way forward. So here is what he had to say to me before he delivered the first of the leadership series lectures organised by SDM_IMD, a premier management institute at Mysore on February 9.

The dreaded ‘R’ word

Is there a recession around the corner and is that a big challenge to the software industry was the question uppermost in my mind. The recession as per him would have a definite, if limited, impact as it is largely consumer-oriented, but in his view the US economy is strong and should sustain this blip on the horizon. Yet, the other threats to the software industry in India are perhaps far more serious — from rising wages, the shortage of skilled manpower and competition from regions as diverse as the Caribbean, Latin American countries, Eastern Europe and the Philippines, not to forget China. All these regions are realising the business potential of outsourcing.

Former partners becoming competitors

In the not too distant past, product companies such as SAP and Oracle were partnered by Indian companies who were doing the implementation, customisation and maintenance for the customers of product companies. Now as product prices have been collapsing, the former partners have become adversaries and competitors, fighting for the share of the same services pie. Throw in a wage rise and you have a scenario of the competitiveness of the Indian software industry that is steadily declining as per the expert. He urged companies to be ahead of the curve and reiterated that there is a crying need to research the future from a technological perspective and he was glad to note that companies such as IBM and Infosys are aware of this and are gearing themselves up to meet the challenges of the hour. However, in the same breath he mentioned that many others are not yet there. Clearly, an area of concern.

Products or services?

Today, as per Cusumano, the key choice is not simply whether to be a services company or a products company, but how much emphasis to place on one type of business over the other. History also suggests that which part of the business to emphasise more than the other should change at different times in the evolution of a software company’s customer base and product lines. Business models may need to change with the economic situation of the times as well. When times are bad for technology, spending services can again emerge as a steady source of revenue. Niche applications and new platforms are the best places to look for new software products and service opportunities.

And what about service companies? There is a need for them to become more efficient in delivering services and automating services; an example could be the handling of micro payments on the Internet.

Moving up the value chain

There is the usual doubt in most people’s minds that Indian software is doing low-end work and has not moved up to doing high-end work. The actual reality is that customers want software companies to move up the value chain. The situation is changing but changing slowly, as per Cusumano, who maintains that companies such as Infosys may still be the exception as they have already moved up the value chain. The reality is that India is still largely providing high quality but low-end work. They can do more but are perhaps not being asked to move up the value chain, was his view. But he did make an important point and it is that there is no real choice for software companies; “They must either move up or ship out.” Once again, it is worth remembering that it is not a question of capability. Indian software definitely has the capability to move up and it has to be sooner rather than later. The answer lies in a greater emphasis on consulting, and the mix, as per Cusumano, has to shift more in favour of management graduates as currently engineers far outweigh MBAs in the industry.

A global view

The business world views software differently depending on which part of the world it is from, says Cusumano. In Europe, software is viewed as a science. In Japan, software is about production, while in India software is seen as a service while the US has always viewed software as a business. The future for software will have to rest fairly and squarely on research. The future leaders will have to lead in basic research and the next big step for Indian software will be its ability to bring engineering, science and management education, research and venture funding together. It is a big ask and India must do this on a war footing as its services currently are too labour-intensive and it is going to be hard-pressed to keep up the growth rates or wage advantages which are already under pressure.

Sum and substance

So, what are we saying between these two pieces on the software industry? There is no denying the fact that there is a recession or a downturn or tough times around the corner in the US which will have an impact on the software business. Of course, we all do know that these sorts of developments tend to be cyclical. The good companies are those that do well not only in good times but in bad times as well. In fact, the challenges of the recession may actually benefit the smarter companies who are prepared to view it as an opportunity and not as a problem. The stock market reaction has been swift, downward and far-reaching in its impact. But it is perhaps important to remember that the stock market can at best be one indicator and most certainly not the most important one.

A significant reality is that unlike before, software has to compete for investors and media attention with infrastructure, retail and telecom. It is important for software to invest in research and the more companies invest in research the better for the industry as a whole. The software industry in India has no choice but to move up the value chain and the sooner it does the better for its well being. A few companies are leading the way in high-end work but there are quite a few lagging behind and they must realise that they must “move up or ship out.” Industry and academics in India do not have the sort of traction that will make a difference and this is a big challenge for the future. The software industry must actively collaborate with education both technical and management as the way forward, as research could well be the key to future progress. The other issue that struck me was that software seems to be targeting the CIO as he is the customer. It would be worthwhile for the industry to build traction and visibility with the CEO.

Yes, these are probably testing times for the software industry perhaps more on the perception front and this is perhaps the right time for the industry to address some of its long-term issues that might well impact its future growth. But in my view it has the capability and the resources, not to mention the resilience, to take it to its former pre-eminence.

(Ramanujam Sridhar is CEO, brand-comm, and the author of One Land, One Billion Minds)

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