Where old methods don’t match up to new challenges

The Indian software services sector is undergoing a makeover of sorts, partly due to the prevailing economic climate in developed markets and newer ways of outsourcing.

Management gurus would call it a perfect storm — a convergence of events that impact business. On the one hand, developed markets like the US and Europe, which contribute close to 80 per cent of its outsourcing revenues, are under severe stress, causing huge business volatilities. On the other hand, companies in this sector are still nascent (when compared to manufacturing or retail) and are struggling to come to grips with newer ways of outsourcing that clients demand from them.

When companies originally got into software exports, life was relatively simple. Hire an army of software coders, put them in client locations and charge the clients per hour, depending on the kind of skill-set on offer. Whether or not the client saw coding impact its bottom-line was immaterial.

Pricing concerns

Yes, the cost reduction was an obvious advantage, but companies who outsourced never had to figure out what exactly was wrong with their business and how IT could improve it.

These concerns are now being increasingly raised by outsourcers in the US, according to analysts and the companies themselves. Project flows are not like in the past, according to A.K. Prabhakar, VP - Research, Anand Rathi.

Pricing renegotiations for projects are another area dogging Indian IT. Companies like Infosys and Wipro are coming under a lot of pressure with regard to pricing. Mid-sized companies like Mindtree are having to do more to keep their margins intact, according to industry watchers.

Products to the fore

The Indian IT industry went for services, the low-hanging fruit. In the process, it overlooked software products and missed out on an opportunity to differentiate in the face of competition and shed the tag of cost arbitrage.

Earlier this year, Infosys founder and Chairman N.R. Narayana Murthy, as a part of a Nasscom committee, pointed out the need for Indian IT services companies to build products, and the need for them to add value by strengthening their existing areas and looking at new ones. This urgent call from him is starting to resonate amongst others in the industry at a time when winning deals and getting Fortune 500 companies to open up their technology budgets are getting harder.

Analysts and industry watchers that Business Line spoke to are of the view that despite an impressive growth — the industry contributed 7.5 per cent to the GDP in fiscal 2012, against 1.2 per cent in fiscal 1998 — the sector surely could have done better.

The two most-often cited areas are software products and the ability to go beyond body shopping and cost arbitrage. “When I look at Indian IT services players, I can’t distinguish one from the other,” said a US-based outsourcing advisor, “and that has to change if they have to sustain in the long run.”

What’s going wrong

The differentiation, industry watchers opine, can come by working closer with outsourcers and identifying new ways in which those companies can improve their top- or bottom-lines. They add that methods that worked in the past will not work in the future. “Customers round the world complain that Indian sales people continue to confuse aggressiveness with inquisitiveness. In other words, instead of trying to understand, anticipate and proactively shape customer issues that can drive future demand, they assume that the answer to sales growth rests in simply calling upon a customer more frequently,” said Peter Schumacher, CEO, Value Leadership Group. This, in effect, sums up the sector.

Typically, software products involve a longer gestation time and a different way of thinking as compared to tradition support services. A few companies, like i-flex, Infosys (Finacle), Polaris and Tally, have had some success in the products space. However, products are still a miniscule part of their business. Successive governments, over the past two decades, have done little via favourable policies to encourage products. For example, in the latest budget, payments made to purchase software are considered royalty, attracting 10 per cent TDS. Since margins at the distribution level are in the range of 2-4 per cent, it puts a lot of pressure on young software product companies.

Nasscom council

Software industry body Nasscom predicts IT product companies will reach revenues of $10 billion by 2020. It has set up a council to that will be spearheaded by Ravi Gururaj, Chairman of Frictionless Ventures, to promote products. The council will include members like Sanjay Parthasarathy, former Microsoft executive who is heading Indix, a Chennai-based start-up, Manav Garg of Eka Software, Girish Mathrubootham of Freshdesk, Rohit Bhat of Robosoft, Hanuman Tripathi of Infrasoft and Kishore Mandyam of Impel.

Revenues from Indian product companies (around 2,400 in number) in FY 13 were estimated at $2.2 billion. “Since the launch of the 10K start-up initiative, we have got 4,500 registrations,” said Nasscom Chairman Krishnakumar Natarajan.

The most crucial part in this ecosystem, people, is a concern area for the companies. Despite Bangalore’s claims to be India’s answer to Silicon Valley, the success rate of start-ups in the city, compared to the Valley, paints a different picture. From schools to colleges to workplaces, entrepreneurship is barely tolerated, more or less reflecting the nature of the industry at large.

According to the National Skill Development Corporation, a public-private partnership, approximately 12.8 million people will join the job market every year in the coming decade but industry readiness is a concern. Couple that with IT companies pruning workforce, deferring joining dates and maintaining a large number of people on the bench, and the IT industry is staring at problems galore.

Infosys CEO S.D. Shibulal calls this the new ‘normal’. Whether the industry will ride the tide and reach supernormal heights is yet to be seen.

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