Friday, December 7, 2007

The Emergence of Web 2.0

Just this morning, I came across an interesting article in The New York Times. Dr Jerry Gordon, a dentist in Pennsylvania, had directed a 10-minute informational video on a root canal procedure that he had posted on YouTube so that potential patients could see how easy and painless it was. This video has been viewed more than 11,000 times in the two months since it was put up – a definite boost to Dr Gordon’s business and that of many other dentists.

Just last week, one of our senior executives used the break at our business session to bring up an enormously funny video spoof about Mr Bush and Ms Rice – again on YouTube. It had all of us in splits for the three or four minutes that it ran – a welcome break from the serious sessions. My own favourites, on YouTube, are the video clips of discourses by Paramahamsa Nithyananda, the young and articulate Master who brings tremendous clarity to matters of the soul, with such simplicity and lightness.

As many of you may be aware, YouTube is just one of the many applications of the next generation of web sites – collectively labeled Web 2.0. In this article, my attempt is to build a context around the emergence of this powerful new paradigm, which goes beyond IT and the Internet to change the way people will communicate, collaborate and create in the years to come.

Early Web (1989-95): The World Wide Web began in 1989 as an initiative of the European Council for Nuclear Research, as a way for researchers to share information electronically. It quickly evolved into a global information system based on the Internet. With browser technology gaining momentum, mainly due to Netscape, many business organizations started putting up their own web sites, mainly to disseminate information about themselves to the world – sophisticated ‘brochureware’. The first generation Web, therefore, was largely to facilitate unidirectional, one-to-many type communication.

Dot Com Era (1995-2002): With the emergence of HTML 2.0 and CGI, technologies that enabled two-way interaction, e-commerce became a possibility on the Web. New companies emerged, which threatened to fundamentally change the way business was done. ‘Brick and mortar’ companies found themselves caught off-guard and quickly scrambled to set up their own e-commerce sites.

Over time, this exuberance led up to a frenzy, with venture money chasing the flimsiest of ideas -- while the mainstream companies were desperately trying to catch up -- sinking money in several failed e-commerce initiatives. The crash of 2001 ensured that new funding virtually dried up, unviable ventures downed shutters, corporations did a major re-evaluation of new initiatives resulting in drastically reduced budgets, and the entire world slowed down a bit (post 9/11)! The focus shifted from innovation to viability and efficiency.

This level of exuberance and ensuing excess is not uncommon in any exciting new technology development. In the early 1900s, when automobile technology was looking promising, there were more than 100 automobile companies in the US. Within a decade or two, the figure was whittled down to a handful, with most companies going out of business. The only difference during the Dot Com boom was that this phenomenon led to thousands of startups, not tens; it was global and not restricted only to the US and the bust and clean-up happened in just a few years and did not need decades – as a result of the ‘Flatter World’.

Only a few companies that emerged during the Dot Com days could survive and cross the chasm to becoming large, mainstream enterprises – notably, companies like Amazon, Yahoo and eBay. However, the Web had a bigger impact than throwing up a few new players. Inspired by the Dot Com start-ups, all mainstream organizations evolved their own e-commerce applications. These Web 1.0 applications (as we can now label them) changed the way organizations, commercial or otherwise, interacted with their customers and suppliers. It improved service levels by making self-service available. It empowered customers by enabling them to transact business 24 / 7, from anywhere in the world. It brought down transaction costs and lead times on activities like travel, banking and shopping. It brought elements of Adam Smith’s ‘Perfect Market’ into reality by enabling quick, online price and feature comparisons. It started to increase the bargaining power of consumers.

Web 1.0 was characterized by bi-directional communication and interaction – a distinct improvement over the earlier generation of static web sites. The interactions, however, were still hub and spoke – with the web application interacting with many people and they, in turn, interacting with the application. While applications like Amazon brought some level of community and sharing of interests, it was under centralized control. The resounding success of sites like Google bears testimony to the continued relevance of Web 1.0 applications.

The Emergence of Web 2.0

I attribute the emergence of the Web 2.0 paradigm to three main influences – the evolution of interaction and community-building tools, the open source movement and peer-to-peer networking.

The rising popularity of instant messaging (in the US context) and SMS (in the rest of the world), chat rooms, bulletin boards and social networking sites have all pointed to an increasing need for people to form communities around their friends, their hobbies and their professional interests. It was only natural that these should evolve into more sophisticated interaction and community building-sites as the bandwidth availability increased and technology became more sophisticated. The result was the class of Web 2.0 sites like Second Life, MySpace and FaceBook. Sites that support Weblogs – blogs for short – provide a mechanism for every netizen to create news or share his views within his own interest group, as well as with anyone who is interested in it.

The open source movement, popularized by Linux, demonstrated that with strong leadership, simple rules for collaboration, and community-enforced participation disciplines, hundreds of programmers could come together to create and evolve world-class operating systems and tools, built in record time, leveraging just the labor of love! In contrast, organizations like Microsoft spend billions of dollars and many years to create the next generations of their base platforms and tools.

In my own experience, at Mastek, we have handled several large and complex IT programs and I know how difficult it is to get tens of programmers, let alone hundreds, to work in a synchronized fashion to create new applications. Therefore, I am always amazed at the sheer elegance and effectiveness of the open source movement.

The open source movement inspired Web 2.0 sites like Wikipedia, demonstrating the sheer magnitude of outcomes that could be achieved with true global collaboration. With a handful of employees, Wikipedia harnesses the efforts of tens of thousands of volunteers across several continents to produce an encyclopedia that is 15 times bigger than Encyclopedia Brittanica and almost as accurate.

Napster, on the other hand, proved that a simple site, with an efficient format for storing and sharing music (MP3) could be a boon for young people to swap music and thus save on their allowances. Unfortunately, this violated the copyrights owned by several music companies, who forced it to shut down. It took a Steve Jobs to capitalize on this opportunity, sign up deals with some of the major music companies and launch iTunes and the iPod, a multi-billion dollar market opportunity that brought Apple back into the limelight.

Although Napster died, the concept of peer sharing remained, leading to Web 2.0 sites like YouTube for sharing videos, Flickr for photographs and Digg for news stories. These sites tend to be minimalistic, extremely easy to use for the purpose they serve and provide more of a template that suggests best use rather than a rigid interface. They let users manage the tagging and classification and allow them to ‘vote’ by promoting positioning of items by popularity.

While I have cited examples under each of the influencing forces, it is obvious that each of these examples shares facets of the other influencing forces too. As Web 2.0 evolves, the tools will evolve, making global collaboration as easy as working with your own team next door.

At a deeper level, I see the emergence of Web 2.0 as a platform to support an individual’s quest for meaning. Many people are unable to find opportunities just within their personal and work lives to use their talents and are looking for new platforms to make a contribution and be noticed. People have an inherent need to collaborate and create something much larger than themselves. Some people use organizations like the Rotary Club and Lions Club to fulfill this need. Some others use industry associations to make a larger contribution. Web 2.0 is a global canvas where people find their unique niches in life, to make a larger-than-life contribution. Web 2.0 to me, therefore, is much more than an IT or computing paradigm – it’s the way people will communicate, collaborate and contribute to expanding our own knowledge and understanding of the world around us and to improve the possibility of living in synergy with our world.

Friday, October 5, 2007

Riding the Third Wave

The Indian IT industry needs to deliver complete solutions to become Third Wave companies and cross the $100 billion exports mark. Who’ll make the grade? We take a look.

The Indian IT industry has gone through two waves of growth and transformation. The First Wave made the Indian programmer a sought-after professional, while the Second Wave established India’s position as a destination for programming services. As a result, India’s exports have gone up to more than $13 billion. However, it is highly unlikely that we can make the next leap, going beyond the $100 billion mark, by doing more of the same. Labour arbitrage will not get us there. We need to move away from hourly rates to value-based pricing to be able to generate significant revenues with reasonable additions to the workforce. This can only happen when we transform ourselves into Third Wave companies, trusted by our customers to deliver complete solutions.

In my view, there is no single formula to being a Third Wave company. Such companies will come in different shapes and sizes. The only unifying factors are that they will be trusted brands, be able to charge for value delivered rather than efforts, and have the potential to scale in a non-linear fashion. I see four broad categories of Third Wave companies emerging in the next three to five years.

Category 1: IT Budget Owners

These will typically be large Indian services companies who graduate to owning the IT budgets of customer organizations and committing to business deliverables rather than providing capacity at a cost. While service level agreements (SLAs) may be adequate to manage uptimes, response times and turnaround times, these are inadequate to manage and monitor business alignment and business impact. In fact, large outsourcing engagements often fail for these reasons.

Over time, the outsourcing arrangements are likely to get more sophisticated and be broken up into distinct value streams. The pricing mechanisms would be similar to current practices for commodity-type services that provide availability, uptime, help desk support and bandwidth. However, customers will expect further pricing efficiencies driven by better purchasing power, higher automation and higher levels of offshoring, along with more personalised services.

The second stream of value will arise from providing insurance to customers against technology obsolescence – which becomes more feasible with underlying platforms stabilising and well-defined standards emerging. This would lead to vendors having to develop sophisticated pricing models as well some type of back-to-back arrangements with OEM manufacturers and bandwidth providers as ‘reinsurance’.

The third stream of value will focus on keeping the IT platforms and applications continually aligned to business. This would be where premium pricing will be available to companies that can deliver to business metrics and can drive productivity up with better domain capabilities, rich functional components and strong business alignment and program management capabilities. Since it would be virtually impossible for any single company to build these capabilities across diverse industry segments, each company would naturally gravitate towards a few industry verticals based on its base of customers and market opportunities.

Category 2: Software Product Providers

The software product model is pretty well-established internationally. Not many Indian companies have ventured into products in the past. However, I do see opportunities emerging in this area.

A broad set of opportunities exist for niche players focused on specific vertical applications. In many industries, we find one or two dominant players who have grown by acquiring several smaller companies but are today unable to invest enough to keep all their products up-to-date, leading to customer dissatisfaction. At the same time, there are a number of smaller players who lack the funding, the resources and the management bandwidth to grow beyond a particular size. The unique opportunity for Indian companies is the ability to provide two to three times the functionality and depth for the same R&D budget (capitalizing the lower costs in India). However, they need to be able to address the issue of local domain knowledge as well as market access. A viable option is for these product developers to align with larger Indian and international service providers.

Another opportunity for product companies is to focus more on emerging markets as some of the banking product vendors in India have done in the past. Considering the fact that India and China will be the growth markets of tomorrow, there are a lot of growth opportunities in building products specifically for these markets.

While the license fee model will still be relevant for many applications, a select set of applications will move into the `software as a service’ mode of delivery.

Category 3: Software Solution Integrators

Some Third Wave companies will take the route of becoming solution integrators. They will be focused on delivering complete solutions to end-customers through a combination of their own intellectual property and third-party components, combined with configuration, customisation and integration services.

Solution integrators who are willing to bear project risks and work on a fixed price mode could benefit from better pricing and margins. Further opportunities for value creation will emerge when the integrators are also willing to link part of their compensation to some specific business results / metrics. This will call for deep domain expertise and vertical specialisation among the integrators.

Solution integrators lost the discipline of managing projects within a fixed price because of the boom in the 90s, with limitless budgets; the bust reduced the amounts spent on new projects and initiatives. As a result, many US solution integrators have repurposed themselves to being outsourcing companies. This throws up new opportunities for Indian companies to enter this space.

Category 4: Platform-Based Services

I consider this the most exciting area of opportunity for Indian companies. One set of opportunities revolve around platform-based BPO services like credit card processing, claims processing etc. Here, the application platforms provide the differentiation, but the business revolves around the actual processing – a convergence of IT and BPO. This is similar to what First Data Resources provides for credit cards and ADP for payroll.

The other set of opportunities lies in leveraging the Web and the India presence to provide specialised services at an affordable cost. As an example, we could have a travel booking service aimed at individuals and families that could guarantee the lowest rates or the best travel experience. This would mean providing travel and ticket expertise from India at an affordable cost to a western customer, who may lack that expertise. Or even a personal accounting and bill payment service that ensures that the customer credit record is always maintained. These companies will target businesses – both large and small -- as well as individuals to provide exceptional service at an affordable cost.

There are plenty of opportunities for companies to transform themselves into Third wave companies. And for new entrepreneurs to create successful ventures that capitalise on these emerging trends. If India is to cross the $100 billion mark in IT, we will need thousands of companies venturing to take the market by storm. Some will succeed, while others will fail. And a few will go on to become the ‘Googles’ of India. Regardless of the outcome, the experience will be exhilarating. Are you game?

Third wave in Indian IT: Deliver Complete Solution

The software and services sector (not including Business Process Outsourcing, BPO) has had a phenomenal run in India. From a base of just under $100 million in 1990, it has grown to over $13 billion in 2006, a compounded growth rate of around 34 per cent per annum, constituting 2- 3 per cent share of the world IT services market. Assuming that we sustain a 20 per cent compound annual growth rate over the next decade or so, the IT services segment could grow into a $170 billion industry by the year 2020, garnering 12-15 per cent of the world market. This is difficult but not impossible. However, we need to make some fundamental shifts as an industry to make this happen.

This article provides an overview to the nature of these shifts by looking at how the industry has developed and by discerning the underlying waves that it has gone through. An understanding of these waves will help us plan the strategy for the next level of growth.

As we have seen in the electronic industry, first in Japan, then in South East Asia and now in China, the evolution goes through three waves. The first wave is typically as a component supplier to other countries that manufacture the complete product. In the second wave, the local industry gains enough expertise to provide cost-effective contract manufacturing services – of either the entire product or major sub-assemblies.

The third wave is when a set of firms start marketing these products under their own brand–initially within their own countries before going international.

The software services industry in India has had a similar pattern of evolution, going through three waves of development. Each wave has brought about a tremendous shift in the value proposition to the customers, the growth of the industry, the nature of work delivered and the firms that have succeeded. Let's look at each of these waves:

Wave1: Establishing Indians as software professionals

The first wave of the industry which started in the 1970's, was to establish that the Indian software professionals were good and could hold their own against the best in the world. This was the equivalent of being a component supplier. During this wave, Indian professionals were typically deputed onsite, to work along with customer teams, to deliver projects under customer management.

The value proposition to customers was that they could deploy competent programmers in a flexible and cost-effective manner, depending in project staffing requirements.

This wave started hitting its peak in the late 90's, during the heady days of the dot com boom, when money was being spent on technology as if there was no tomorrow, and competent professionals were in tremendous short supply, especially in the US. Estimates show that at its peak during the year 2000, staff augmentation would have generated around US$2 billion in revenues for Indian industry.

Wave 2: India as a programming destination

In the early 90's, a few visionary American companies saw the potential of India as a base for software development, in the light of the spiralling IT costs in their own parts of the world. Companies like Texas Instruments and Motorola started their own Research & Developmental centres in India to capitalise on Indian talent.

On the other hand, companies like Nortel and GE decided to partner with local Indian software services companies to set up offshore development centres.In parallel, Indian software companies were making significant investments in quality. Quite similar to the TQM movement in manufacturing in Japan, Indian companies realised that they needed to convert software development and maintenance from a craft model to an engineering discipline, if they were to be able to reliably deliver to their customers abroad.

It started off as a movement for ISO certification, an external seal of approval that the companies had a documented process of software development and that these were strictly adhered to in delivering software to the customers.

The ISO movement gave way to the CMM movement which was developed by the Software Engineering Institute of Carnegie Mellon, specifically catering to software development processes. Unlike ISO, the CMM saw software development processes as something that needed to evolve from a ‘Chaotic’ stage to an ‘Optimising’ stage–level 1 to level 5. Today, almost every firm in India considers CMM Level 5 assessment to be a hygiene factor, and almost three quarters of the world's level 5 companies are now in India.

New awakening

The next critical event that triggered the growth of India as a software destination, was the Y2K (Year 2000) bug. The late 90's witnessed a tremendous anxiety about whether software systems could handle the turn of the century, since many legacy systems (with a low expectation of their own life) had provided only two digit fields to handle the year instead of four. The estimates of what it would cost the developed world to fix this problem was widely varying, but usually in the tens of billions of dollars.

The fact that Indian companies were ready and able to handle the Y2K scare at a fraction of the cost using very systematic and mature development processes in their offshore centres was a turning point. While Y2K was the starting point, companies soon began to realise that if India could deliver Y2K programs reliably, why not all application maintenance and even some development. And that's how offshore development grew in India.

Today, offshore development and maintenance has dwarfed staff augmentation services, and probably generates around US$10 billion of revenues. It is my estimate that this wave is still at its growth phase and would reach its peak around 2010.

In many ways, this wave is similar to the contract manufacturing wave of the electronics industry–where the basic driver is cost-arbitrage and the basic value proposition is scalable capacity at very attractive prices.

However, the Indian firms are not perceived as adding value in terms of intellectual property or consulting and design inputs.

Wave 3: India as a ‘Solutions Brand’

Just as the industry grew by almost one order of magnitude by transitioning from being a provider of competent people to a provider of high quality service, the next quantum jump can only happen if we manage to make the next transition to India as a trusted brand for delivering complete solutions. Let's look at some of the facets of this transition:

nStrategic Impact: While India is perceived by its customers as a reliable provider of programming services, the value delivered is largely cost-arbitrage and not strategic impact. The next stage of evolution will be for Indian firms to come out from ‘under the hood’ to being perceived as a strategic partner by the C level executives in our client organisations.

Depending on the firm, the impact could be based on scale, or innovation support or both.

The larger Indian firms could follow an IBM or EDS model of creating a strategic impact by large scale outsourcing–where they create significant cost-savings, headcount reduction and free up management to focus on their core business. In the last couple of years, we have seen deals of this scale and magnitude coming to Indian companies.

The other way of creating the impact could be the Consulting model, where through consulting and thought leadership backed by strong deliveries, Indian firms help their customers in deploying new IT platforms that support innovations or new capabilities in product development, distribution and customer service.

In both cases, firms have to earn the trust of their customers and be perceived as strategic partners who can deliver substantial value.

nIntellectual Property Development: The other facet of being a solution provider is to create very strong differentiation through Intellectual Property (IP) development. This could be in a variety of forms - methodologies, frameworks, tools, platforms or packages - each calling for a different level of investment and a correspondingly different level of differentiation.

Till about a year back, I was convinced that Indian companies had no competitive advantage in building IP.

However, working in the US over the last year and a half has changed my mind. I do believe that India has a great future in products, especially application products, where our development predictability, quality and costs can constitute a significant advantage.

nBusiness Domain Expertise: While, for a service provider, domain expertise is nice to have, for a solutions provider it is a must. To make the transition to a solutions provider, Indian firms must invest in building a cadre of domain experts in their target industries or develop strong partnerships with firms that can bring in that expertise.

The domain experts will play big role in providing consulting inputs to the customer, as well as act as a bridge between the customer and the development teams in solutions development.

nTruly Global: Another major shift the firms need to make is to move away from an India centric approach to a truly global approach. This transition is a lot more than hiring local talent in each country. It is in being able to operate as a network across countries and harnessing the full power of the global capabilities in serving every local customer better.

There are huge pay-offs in being able to make the transition to Wave 3–the industry can grow form its current levels of $10 billion to $100 billion or more. However, making this transition requires concerted action among many industry players as well as the government. There have been many cases of countries not being able to make this kind of a transition.

The purpose of this column is to encourage dialogue and debate among all the participants in the industry so that Indian industry can actually capitalise on this enormous opportunity. The payoffs are enormous when Indian Software reaches the same stature as French Wine, Swiss Watches or Japanese cars.

The Rising Rupee

An opportunity for Indian IT companies

Over the last few months, there has been much discussion about the negative impact of the rising rupee on the profitability and competitiveness of Indian exports in general, and IT companies in particular. There has been a demand from certain quarters for RBI intervention to keep the rupee down. In my view, this demand is short-sighted and does not take into account the enormous opportunity that the rising rupee could present to export-oriented industries.

Before launching into a discussion on the opportunities, I think some basic premises need to be stated. Firstly, as Indians, we should be proud – the strength of the rupee is an indication of the underlying strength of the economy. Secondly, in today’s global economy, any attempt to tamper with natural market mechanisms driving currency values is likely to lead to disastrous consequences as many countries have realized (and some countries will in the years to come). In the medium to long term, with global market mechanisms in operation, a rising rupee should lead to decreased costs and hence, a marginal impact on our global competitiveness.

The rising rupee, however, does throw up challenges in the short term and therein lie our opportunities. Being most familiar with it, I will present these opportunities from the perspective of the IT industry and let the readers draw the parallel to their own industries. In essence, the thrust of my argument is two-fold –

The rising rupee will force the IT industry to look beyond labour cost arbitrage to create value for its customers – what I call the Third Wave approach; and,

It will refocus the industry on driving new efficiencies and improving productivity to remain competitive.

The Third Wave – Beyond Labour Cost Arbitrage

When we look at globalization, specific industries in emerging economies typically go through three waves of evolution. The electronics industry, first in Japan, then in South East Asia and now in China, are good examples of this. In the first wave, companies in emerging economies typically act as component suppliers to developed countries that manufacture the complete product. In the second wave, the local industry gains enough expertise to provide cost-effective contract manufacturing services – of either the entire product or major sub-assemblies. The third wave is when a set of firms start marketing these products under their own brand – initially within their own countries, and then going international.

We can trace the evolution of the software services industry in India using a very similar paradigm. As shown in the table below, the Indian software industry has gone through two waves already – as a component supplier and as a contract manufacturer.

Wave 1 started in the 70s and 80s and peaked in the mid-90s; it established that the Indian software professional was competent and the industry got results largely through staff augmentation.

Wave 2 established India as a destination for low-cost, high-quality programming services. The catalyst was the Y2K bug and Indian companies’ success in delivering these projects in a cost-effective manner. Many Fortune 1000 companies discovered that moving their application maintenance and on-going
development activities to India was viable and attractive. The Second Wave of Indian IT started in the mid to the late 90s, and is at its mainstream phase today. Like all mainstream markets, this is characterized by the emergence of a few leaders, namely the Tier 1 IT companies, who demonstrate high rates of growth and profitability and increasing market share.

Wave 3, which is emerging, will be characterized by Indian companies moving up to high-value services that are strategic to the customer and hence command premium, value-based pricing. As we have seen, the industry is already facing a severe shortage of talent (as opposed to mere numbers), rising attrition levels and increasing salary costs. There are enough indications to suggest that the linear relationship between growth and headcount will not be sustainable for much longer. The future is in creating strong brands out of India – whether in services, products or solutions -- that command the respect and trust of large global customers and hence the appropriate value.

In my view, the Third Wave is not just about better margins. It’s also about true global scale. It’s about the industry achieving new heights – growing from the $20 billion currently to over $100 billion in the next decade, as shown in the graph below. It’s about moving up in value from an ‘order taker’ to a true strategic partner.

In many ways, the appreciation of the rupee has shaken up people and possibly a
ccelerated the Third Wave of Indian IT. I see the possibility of a similar phenomenon in many other export-oriented industries, given the right vision and leadership.

New Efficiencies and Increased Productivity

Another opportunity that the rising rupee gives us, as an industry, is the necessary impetus to take a fresh look at cost structures, productivity and financial metrics.

At the entry level, the IT industry has created a fair amount of pressure for the other industries in terms of salary levels. This has cascaded up to all levels. The rupee pressure will force all of us to reassess salary levels and maintain them at realistic levels. We are already seeing signs of this in the salary increases granted this year.

In terms of productivity, a large proportion of work carried out from India tends to be on a Time & Material (T & M) basis. In general, there are few incentives in T & M contracts to raise productivity. With rising costs and shrinking margins, I see the possibility of at least some of these contracts being renegotiated as fixed-price contracts, around work packages. This gives an incentive to the service providers to improve productivity and margins. I also believe that this will help in developing the competence of software professionals.

As regards financial metrics, the IT industry has so far focused on Returns on Sales as the basic metric. Given the shortage of talent and the high proportion of salaries in total costs, the industry has already started measuring Return on Talent through metrics like EBIDTA per employee, PAT per employee etc. This will help us generate the best value for the talent we have, rather than selling them by the hour!

In summary, while the rising rupee does create issues for all of us in the short term, rising to the challenge and generating value-based strategies will not only be beneficial to individual firms but to the industry as a whole. Let’s not forget that the US dollar was just around Rs. 13 in 1987 and Rs. 36 in 1997. As with liberalization, I am sure we will look back 10 years from now and see this as a landmark event that changed the basic complexion of Indian industry.