The Hindu Business Line : Go for new growth windows

Industry captains, thought leaders, business strategists and analysts put on their thinking cap and debated the future of the sector from four different perspectives.

THE more important the cheese is to you, the more you want to hold on to it - From the best selling book Who Moved my cheese by Dr. Spencer Johnson, drawing on the metaphor that resistance to change is common. If the cheese happens to be an outstanding winning formula as the Global Delivery Model has been for India, with its cost and quality advantages, the resistance to change can prove to be even greater.

The vibrant software sector, however, has never been the one to rest on its laurels. Recognising that the cost and quality advantages that India enjoys can be ephemeral, S. Ramadorai, Chairman, Nasscom, called upon the Indian industry to create "an innovation ecosystem where industry, academia and government are equal stakeholders."

`Innovation' was the underlying theme of the recently concluded three-day Nasscom 2006 summit. The record turnout of 1,200 delegates, with over 300 overseas delegates, was clearly the culmination of a triumphant decade for the Indian software industry.

After all, the optimism within the industry continues to be on a high, especially on the demand side: Unbundled outsourcing deals such as ABN Amro, General Motors and DSG International have been rolling in and playing to the advantage of the Indian vendors; client visits are at an all-time high; new windows of opportunity from infrastructure management to BPO and consulting have been opening up; and margins for at least the top-tier Indian companies have remained stable and were double that of their multinational peers.

But it is also an opportune moment to stop and ponder over the future of the Indian software industry from the supply side. Clearly, offshoring is moving away from being a wage arbitrage play, with clients demanding either greater productivity gains or defined performance outcomes from vendors; multinationals such as IBM, Accenture and Sapient have got their India act together and are beginning to pose a challenge to the top-tier Indian vendors, leading to an intense war for talent; servicing the new offerings is likely to throw up skill set and execution challenges in the coming years and finally, the diversity of workforce across different geographies is at a nascent stage for most Indian companies. Obviously, India stands at a potential inflection point in the offshoring wave. Instead of being lulled into a complacent state, industry captains, senior executives, thought leaders, business strategists and analysts put their thinking cap on and debated the future of the sector from four different perspectives:

Drive towards IP

People who create an innovation, called market pioneers, are not necessarily the ones that make all the money from it, according to W. Chan Kim, Insead professor and author of the best-selling book, Blue Ocean Strategy: How to create Uncontested markets and make competition irrelevant.

Drawing a parallel from three different industries: computers, electronics and FMCG, he asked the audience if they remembered the creators of the PC, VHS tapes and baby diapers. Obviously, the answers varied from Apple to IBM for PCs, Sony to Philips for tapes and Procter and Gamble for diapers. Not only were all the answers wrong, but the surprising fact is also that innovative products are remembered more by the companies/individuals that made money on them rather than their creators (MITS for PC; Amdocs for VHS Tapes and Johnson & Johnson for diapers).

There is a lesson there for the Indian software majors, who are riding the wave of the global delivery model. Wage arbitrage, quality processes and talented manpower are fine, but the challenge is to create a new curve of innovative growth at the right time. Riding on high growth rates, since offshoring is sufficiently mature, it is said to be the time of great confusion, says Frances Karamouzis, Research Director-Strategic Sourcing IT Services, Gartner.

She goes on to add "they (Indian companies) will have to invest in reusable frameworks (or tools and components) if they have to ensure that their fundamental underlying business model is not linked to revenue from labour hour. Most of these companies have 50,000 employees and they are $2 to $3 billion now. For them to be $10 billion, you are not going to scale it to three hundred thousand employees." (See Interview)

Unless the IP (intellectual property) driven culture is encouraged across the entire software segment, it is likely that the benefits of the offshore model may get diluted over time.

x New service offerings

Since the early days of Y2K, the software sector has managed to open newer windows at every stage.

Starting with e-commerce in the late nineties, the entire sector has comfortably progressed beyond application development and maintenance towards packaged implementation, remote infrastructure management, testing, transaction-based BPO and consulting.

The latest offering to join this bandwagon is Engineering services. Touting it as the next big wave in an exclusive session titled `India: a Global Hub for Engineering Services', companies such as Neilsoft, Infotech Enterprises highlighted that the outsourcing opportunity that is pegged at $3-4 billion has the potential to scale up to well over $10 billion in the next three years.

Looking at new offerings from another angle, Michael A Cusumano, Distinguished Professor, MIT Sloan School of Management, made out a case for a hybrid business model that encompasses both products and services. Using global product companies as a case study, he says that most product companies will ultimately collapse, but there is still a business case for using the `subscription' model to sustain these companies in the long run.

As a celebrated author of The Business of Software and an astute consultant for global software product companies, he says Indian service companies will be able to build differentiation with a greater focus on services R&D and by `productising' their existing service offerings for greater productivity gains for clients.

Innovative deal structures

While the deal structures will revolve predominantly around time and material and fixed price contracts to a lesser extent in the near term, over the next couple of years, this is poised to undergo a change.

As Mitchell Habib, CIO, Citigroup North American Consumer Business, said in a presentation on `Co-creating Value with Customers and Partners', collaborative long-term partnerships would be the way forward for the industry.

Called `Take or Pay', engagements of this kind will bring in scope for long-term partnership and risk-sharing between clients and vendors and the end-consumer (in this case, the consumer finance customers of Citigroup) will dictate the value of the deal. In his view, since the success rate of outsourcing projects has been tough to measure, traditional pricing models will change over time. Similar innovative deals will also be struck in the BPO side of the business.

Consolidation

In a roundtable held on Mergers and Acquisitions, there was broad consensus that the momentum of outbound M&As (of Indian companies acquiring an overseas company) will continue.

Indian companies are expected to follow the `string of pearls' strategy by either acquiring to fill up gaps in their portfolio or strengthening their offerings in certain verticals. But the panellists seem to concur that big bang acquisitions from the Indian side will not happen anytime soon.

Asked about big-ticket acquisitions from top-tier Indian companies in another session, Francisco D'Souza, Chief Operating Officer, Cognizant, said "the track record of IT service organisations globally in successfully managing large acquisitions has been very poor."

But as far as inbound and domestic M&As are concerned, the view of the investment bankers differed from the companies on the panel. Ranu Vohra, Chairman and Managing Director, Avendus, a boutique investment-banking firm, expects at least one deal of this kind in the $500-million range over the next year or so.

maverick@thehindu.co.in

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