The Hindu Business Line : IT can learn from the air force

Recently I met a senior MNC executive who was visiting India in search of suitable IT suppliers. According to him, most IT firms he interacted with looked and sounded rather similar, and it was a struggle differentiating among them.

Later I wondered to myself whether Indian IT industry had become commoditised and if yes, then what is the new paradigm needed to sustain its competitiveness?

But what is competitiveness? According to Adam Smith's classical economic theory, a nation exports a product if it is a low-cost producer. David Ricardo's theory of comparative advantage introduced the concept of industry productivity and postulated that market forces use relative productivity to determine which industries get access to a nation's raw materials. In both these theories, however, favourable access to key raw materials has been identified as a key source of competitive advantage.

In the flattened world circa the 20th century, access to technology is becoming a key source of competitive advantage. In the context of Indian IT industry, favourable access to skilled manpower has been a key source of competitive advantage. Increased outsourcing demand has been met with increased recruitments levels and there is a close linearity between the industry's revenue and employment growth rates. While the industry has also created other sources of competitive advantage such as adherence to high quality levels and strong processes maturity, access to a large pool of skilled workers continues to be the single most important competitive advantage.

It doesn't take a Nostradamus to predict that IT industry's halcyon days of unlimited access to skilled workers would soon end. Global IT companies are firmly established in India and competing for the same pool of skilled technical manpower, which is not expanding fast enough. The other threat is the emergence of numerous offshore locations that claim `cheaper than India' as their USP.

To be fair, Indian IT industry is cognisant of these threats and companies are launching new initiatives ranging from consulting to remote infrastructure management, platform based BPO and so on. Unfortunately none of these initiatives is truly game-changing and are predicated on the same labour and cost arbitrage paradigm, that is, we can do it cheaper.

Let's imagine a hypothetical scenario where an Indian IT firm cannot increase its employee base. How can it maintain the growth rates achieved when it had access to an unlimited skilled labour pool?

The firm will have to bring about a step change in its productivity level. In other words, if a firm achieves output of 2X for every X of input, what needs to be done to achieve a 10X output?

While productivity does receive attention among Indian IT firms, the scope of productivity is defined very narrowly. The focus is on task-level efficiency instead of overall firm productivity.

The thinking has to shift from incremental improvements to step changes. Can a project executed with 50 person-years effort be executed with 25 person-years effort? Can the revenue per employee be changed from X to 5X? Can cost-of-quality be made zero?

Let me digress momentarily and introduce the military concept of force multipliers, which refers to a factor that dramatically multiplies the combat effectiveness of a military force or weapon system.

An example of a force multiplier is the midair refuelling capability, which enables an air force to keep its fighter jets (and other aircraft) operating for a longer time and over larger distances from the airbase, thus dramatically increasing its productivity without any changes in the weapon systems. Other relevant examples of military force multipliers are night imaging, laser guided munitions, AWACS and so on.

Indian IT firms similarly need to identify force multipliers, which can bring about a step change in productivity and reduce the linearity between employment and revenue.

Transform customers to partners: The lack of vertical industry domain expertise has been the Achilles' heel of Indian IT firms. Not only does it obstruct product development but also limits ability to work closely with the client's business users and win business transformational contracts. The situation has been further exacerbated in the case of BPOs where domain knowledge is sine qua non. Developing such skills organically takes time and acquisitions run the risk of integration.

Transforming supplier-oriented relationships into partnerships with carefully selected customers is a possible way to acquire deep industry domain skills. However this entails more than mere semantics. A partnership model will require the IT firms to invest upfront in the relationship as compared to the traditional work-for-hire model.

Rather than merely looking towards western customers for such partnerships, IT industry should also consider Indian firms, especially in sectors where Indian firms are globally competitive. The TCS joint venture with SBI to develop core-banking solutions is a good example of such partnerships.

Increased investments in applied R&D: Technology industry norms typically involve investments of 5 per cent of annual revenues in R&D. Given the $22 billion annual revenue of Indian IT industry in 2005-06 (excluding BPO and hardware), annual R&D investments should be about $1 billion. The real figures probably fall far short of this. R&D here refers to applied research rather than basic research.

As in-house R&D capabilities take time to develop, IT firms should collaborate with research institutes and leverage existing R&D capabilities in India. The collaboration can include funding university research in areas of interest to the firm, funding scholarships for post-graduate and doctoral studies, investing in start-ups incubated in the university and so on. These initiatives however call for patience and sustainability to bear fruit.

Focus on emerging skills: In the shrill hype surrounding the current shortage of skills, little attention is being paid to skill needs in emerging areas. These emerging skills include technology (DSP, embedded software, bio and nano technology, wireless and so on), management (IT services management, enterprise technology, large program management, change management and so on), and specialisation in domain skills.

Looking at the numbers required, internal training efforts will not suffice. IT industry will have to work closely with academic institutions to develop the courseware, faculty, pedagogy and infrastructure. Some `quick solutions' could include funding the creation of `finishing schools' and specialised modular courses at existing institutes.

Effective knowledge management: Leveraging employee knowledge capital to increase productivity is probably one of the most pressing challenges of the modern firm. Effective knowledge management and a collaborative organisational model are critical for Indian IT firms as they aspire to move up the value curve. Unfortunately a majority of the current knowledge management efforts are nothing more than document management and tool deployment. Development of a collaborative enterprise predicated on leveraging internal (employee) and external knowledge will require a new organisation structure, employee incentive models which encourage `we' instead of `I' accompanied by relevant investments in technology.

Creating standards: While Indian IT industry has embraced standards with gusto, it has been painfully shy in defining standards. Given the global stature enjoyed by Indian IT industry, there is no better time than the present for the industry to take the lead in defining standards for both technology and processes. Choice of technology could be those relevant to India such as wireless, e-commerce, open standards or emerging technologies such as RFID, Optical ID, bio-technology and so on.

From the process perspective, standards can be defined for offshoring processes including quality and security standards. Given India's pole position in the global offshoring industry, these standards are likely to become globally acceptable.

The writer is Vice-President, NASSCOM. These are personal views.

Delivering IP enabled services: While Indian IT firms deliver IT services with remarkable efficiency, productivity at the firm level has not changed substantially over the past five years. A project completed with 25 person-years five years ago will probably require similar efforts today. With the growing shortage of talent, Indian firms must invest in developing and deploying proprietary IP and technology throughout the service delivery lifecycle to bring about a step change in productivity. Examples of such IP enabled services include radical increase in testing automation, use of code generators and debuggers, use of case-based reasoning tools using artificial intelligence technologies as part of application support, and contact centre services.

New markets: Asia, Africa and South America are home to three-fourths of the world's population. However these markets represent approximately 10-15 per cent of Indian IT revenues. While it is true that the G8 group of countries represent a significant proportion of the global economy, these markets are also fiercely competitive. There is enough evidence to highlight the growing role of the emerging economies of Asia, Africa and South America in the global economy over the next 5-10 years. Therefore this is probably an opportune time for Indian IT firms to enter these markets and build market-share and brand awareness. This is especially relevant for Tier II firms, which are beginning to find the going tough in the traditional markets. A good example here is the Tata Group's success in South Africa in multiple industries including telecom, transportation, IT and so on.

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