The next step for Indian IT industry

Indian IT industry has made rapid strides and in the last 10-15 years, has reached a status wherein IT contributes a whopping 11% to the Indian GDP with revenues of around US$ 70 Billion for the financial year 2010-11 (NASSCOM). Several well known and well understood factors have contributed to this growth such as availability of a large pool of technically trained humanpower (manpower sounds too gender specific!!!) that could converse in English, labour wage rate vis-a-vis west, currency conversion factor, low capital expenditure involved in setting up a small IT company (therefore high returns could be expected), lack of interest in manufacturing related jobs among the graduates etc. Year after year Indian IT companies played to this strength of labour arbitrage, favourable Government policies and not much of a competition on a global front especially in terms of the scale that Indian companies could offer. No doubt Indian companies have established themselves as credible players in the global delivery related models. Top 3-5 Indian IT companies boast of size and scale that is second to none in their respective fields. Today more than 80% of revenues generated by IT firms comprise customized software development and maintenance (NASSCOM). However, they have reached a critical point and since last 3-4 years there has been consistent debate on moving to the next level on the ladder of evolution.

Question is what are the next layers and how does one make a transition to the more evolved layers? Answer to the first question is strongly context specific. A well diversified IT company like the big three in India have many options to look forward to. For example, they could make a transition from services to software product development in a much greater way than what they do today (less than 10 % of revenue is through software products). These firms could start with India specific products and then move to more customized ones through various development centers that these firms have created across the globe. When I say India specific products, possibilities are infinite, for example we hardly have a product that can help us plan a balanced Indian diet. Indian population is at greater risk of suffering from diseases like diabetes, cardio-vascular diseases as well as other life style related diseases. A product with loads of data about calorie related information about Indian food products could help people plan a wholesome diet on a daily basis. If this could be integrated to existing desktop/laptop/smartphone applications this would go a long way in promoting healthy lifestyle. Similarly there could be applications related to readymade analytics packages, e-governance and m-governance packages that could be potentially market winning. As I said earlier possibilities in this sphere are infinite.

The other more technical option is moving into high end research and development related to new paradigms in computing and networking, computer and network security, hardware design and manufacturing, especially customized embedded systems. Robotics and artificial intelligence related work could offer great prospects. However our technical workforce is ill equipped to deal with this kind of development work and only a few companies have the wherewithal to move ahead in this direction. There is requirement of substantial investment as well if a company wants to really make a difference on this front. However, a success on this front could have potentially high gains. This direction essentially leads to where several IT/technology companies of west stand today. Filing of patents forms an integral part of work accomplished by such firms. A logical step to make transition in this direction might include strategic acquisitions abroad, essentially niche firms focusing on high end technology.

A third direction is moving to the more conventional side of business consulting. With wide experience of having worked on a plethora of projects with different industries, most IT companies have gathered knowledge and skills that could be utilized for business strategy consulting. This in house skills could be a goldmine that could turn these companies to potential competitors for larger consulting companies.

However, to make this transition companies need to look beyond their existing business models. Companies should no longer be satisfied by getting newer and larger outsourcing projects . Today they are a staple but in the coming future labour arbitrage will not work and might lead to serious social consequences given the size of large Indian IT companies. Before market forces you to change by leaving no option at all it will be much better to start self evaluating various options including the ones mentioned above for a long term strategic fit. Up coming companies across Latin America, Ireland, Eastern Europe, Russia, Israel have the potential of disrupting the business of Indian companies, similar in many ways to what Indian companies did to some of their western counterparts. Like succession planning is so integral to businesses, similarly transition planning to move to the next level should be thought through by careful planning.

In their path to the next level firms would have to be patient and realise that such initiatives would be cost centers to begin with. IT industry in general has been looking at quick gains without much capex or time delays and this will be a fundamental shift in their operating model. Initially say around 10-15 % of funds need to be allocated to new initiatives and these initiatives may take 3-5 years to reach a level of maturity wherein they will start earning revenues. All in all complacency of Indian IT companies by over persistence with their existing business models might lead to their decline and now is the time to act to prevent this from happening. Although some comapnies have taken small steps in this direction, this needs to accelerated to maintain the competitive edge of Indian IT companies.