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?