The IT industry was experiencing a slowdown by the end of 2002. There were fierce debates about what should be done. In this column in Business Standard of 21 January 2003, I discuss the options before the industry.
INFORMATION TECHNOLOGY - WHAT NEXT?
The massacre of weaklings in the
IT industry is over. It has not been so spectacular in India as in the Silicon
Valley. There anyone one talks to has stories of friends having lost jobs,
reneged on mortgages, taken jobs as waiters and so on. Two years ago,
restaurants in San Jose used to write on bills, “Come and work for us”; now
they no longer do. In India, many IT firms that were flourishing three years
ago have died or become skeletons. But one does not hear stories of mass
unemployment amongst software professionals.
This is because the slowdown in
the industry has been less severe in India. Revenue growth slowed down to 23
per cent in 2001-02 from 49 per cent in 2000-01; the fall was entirely in
software services, both at home and abroad. The growth of the volume of work
must have been greater; if the billing rates fell by 18 per cent, the growth of
volume would have been the same in both years. There was, however, a
considerable change in the distribution of work; the biggest firms survived the
slump much better than smaller ones. And since productivity in the big firms
was higher, employment elasticity of output also fell. But considering all
factors, it is unlikely that total employment in the industry fell much. Some
of those who left probably found places in IT user firms such as banks and
insurance companies; a small number left the industry perhaps. What happened,
however, is that fresh recruitment fell heavily – the aspirations of many
youngsters who had expected to join the gold rush must have been crushed.
Still, even amongst surviving
firms, the level of uncertainty is high. Many of them realize that a structural
break has occurred, but few are sure where the future markets lie. Many have
strong views about this; but the basis of those views is weak. Let me enumerate
the points of controversy.
Home vs overseas market:
This question generates much passion, more amongst outside intellectuals than
in the industry itself. One often encounters the view amongst the former that
the industry has somehow failed India – that it should serve India before
exporting, that it should work harder to develop the domestic market. Academic
articles – certainly in economic journals – focus disproportionately upon domestic,
especially non-profit applications of IT. Technologists have also worked on
domestic problems. The industry has not shared this bias; the growth of its
domestic sales fell more (from 31 to 11 per cent) than exports (from 38 to 21
per cent) in the past two years. When questioned, industry people say that the
domestic market is less profitable and presents more hassles. I personally
think that the industry suffers from a serious handicap vis-à-vis its
competitors. The latter, whether in Ireland, Israel or China, have developed a
domestic market and obtained considerable domain knowledge. Indian firms have
generally not done this; even when they needed domain knowledge, they preferred
to employ professionals from the user industries. The bigger IT companies sit
on big liquid reserves; their most popular investment is offices and
subsidiaries abroad. If they invested some of their profits in subsidizing work
for Indian clients who might yield rich domain knowledge, that knowledge could
be leveraged in work abroad.
Products vs services: This
issue also generates much passion. The general belief is that products pay
more, and that by specializing in services Indian firms have missed a chance.
By now there are a few Indian product firms; they are run by committed
enthusiasts. The rest of the firms do not bother. Views in this area have been
too influenced by the prominent examples of the great product firms such as
Microsoft, Sun and Oracle. They are not good models for the Indian industry.
They have close connections with the hardware industry, which is largely absent
in India; and they have set up strong entry barriers. Indian firms would find
it impossible to enter their markets. I do not think it is realized in India
how small Indian firms are. In a BusinessWeek enumeration, Wipro and Infosys
were No 25 and 28 amongst the top 30 software firms. The turnover of Wipro was
$696 million; at the top, IBM’s was $83.4 billion, Microsoft’s was $27.7
billion and EDS’s was $21.9 billion. Indian firms have some way to go before
they can compete with the giants. But the contrast between products and
services is posed too starkly. If a service is repeatedly used, it approximates
to a product; if a product requires much service, it is only partly a product.
The market for products is developing fast – especially for products which
automate programme writing and make it more reliable. The quality standards for
products are very high, they require marketing, and they need capital while
they are being developed. Despite these difficulties, Indian firms are entering
the product market, and more will. At the same time, a more continuous process
is converting near-services to near-products: services firms are taking on jobs
in a certain area and reusing parts of work done earlier in new contracts. This
is easier for bigger firms; that is one reason why they have grown faster. In
general, Indian firms are aware of the higher profitability of product markets,
and are moving towards them.
Fixed-price vs cost-plus
contracts: Indian firms commonly work on a cost-plus basis. Since their
costs are lower, so are their returns. Firms in industrial countries more often
take on an entire job for a fixed price, and consequently make profits. That
fixed-price contracts give a higher profit is a correlation: more complex and
larger jobs are done on a fixed-price basis, and there are fewer firms doing
them, so they earn more. Indian firms broke into a market dominated by
fixed-price contracts by offering to work on a cost-plus basis; not having a
brand name or track record, this was the best thing they could do. Even if they
enter into fixed-price contracts, they will charge less; that is their
competitive advantage. In any case, the dominant pricing model is changing. The
new norm is contracts that involve sharing of savings. CIOs of US companies are
under pressure to cut costs, so they are engaging firms that can promise the
greatest cost-saving.
Thus it seems to me that most
criticism of the IT industry is not well founded. The industry is aware of the
options, the choices it has made are largely rational, and it is moving in the
direction of maximum advantage. But despite NASSCOM and despite industry fairs,
there is not much open discussion within industry, and not much information
sharing; these are the directions in which it needs to move.
