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.
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