Business Accent

Indian IT: Where to now?

The Indian IT industry is undergoing great turmoil. It’s not only about the dollar vs. rupee story; rather it is a time for deep introspection amongst IT players writes Yugal Joshi

Yugal Joshi

The US economy is slowing down; the growth story from China-based operations is already under stress. I had argued earlier that business in China would be a difficult proposition unless IT companies had some other ways to penetrate the market like what Tata Consultancy Services did. Infosys has accepted that it is having problems in doing business in China with that country’s unique bureaucratic and Government nexus, longer accounts receivable cycle of around 270 days compared to 30-60 days globally and cultural issues.

Therefore, the “chase the dollar” strategy used for an effective cost advantage seems to be fading. Companies have realized that they cannot simply start their operations in any part of the world and expect it to perform well, for there are and there will continue to be many cultural, political and technological issues.

Global giants have already made inroads into Indian Territory despite the fact that the top six Indian IT companies (popularly known as SWITCH) have less than four percent of the US IT services market and are unable to penetrate further. The primary reason for this is the inability of Indian IT service companies to offer large integrated solution suites. These companies are building capable sales forces as evident from their hiring across top B schools; however, they are forgetting that a sales force is only as good as the product that it sells. Selling IT products is not the same as selling FMCG where inferior products can be pushed using a large sales force or giving larger margins to retailers. It depends a lot on relationships as well as development capabilities.

The SWITCH has done remarkably well in developing delivery capabilities by leveraging the Global Business Delivery Model; however, these companies lack the fundamental foundation that has to be delivered to clients.

Innovation in technologies like SOA and SaaS is getting lip service from the top management and despite a few acquisitions to develop IPR, these companies are yet to attain critical mass in that sphere. Though the top management is well aware of the path that their companies have to take, they are unable to execute their vision due to pressure from MNCs as well as domestic players. They do not want to jeopardize their current earning streams for the sake of developing future competencies.

IT companies have done well by straddling both outdated solutions (such as those adopted by the Airlines industry) and modern ones (e.g. portal development). However, the pressure of cash flows and the stock market has not allowed them to invest significantly in building new capabilities. At the same time, the talent pool available in the country is not providing any solace either. IT companies can expand their global footprint to access regional markets and to tap talent to fill the offering gaps in their solution basket.

These companies have finally realized the importance of the domestic market and are now seriously targeting projects in e-Governance, Health care and SME domains. To penetrate the SMB sector, these companies have to understand the SaaS model. It appears that there is a lot of confusion about SaaS and its capabilities. IT companies must understand that not many companies have made significant money using SaaS technologies.

The Indian SaaS market is predicted to be a meager $165 mn by 2010 whereas the current adoption level stands at less than 10%. However, it is supposed to grow over 75% in coming years. The small market size is due to the current offerings, which are peripheral outsourced systems. The SaaS adoption hurdle has more to do with the inability to provide customized solutions to SMEs than a shortcoming of the SaaS model.

Toning down a solution suite and having fewer features in it is not the correct way to penetrate the SME market.

This market would need considerable attention from the top management where the business houses which have been traditionally small, family-owned concerns that have to be educated about the value that IT can add to their businesses.

The perennial problem of aspirations of these SMEs must be countered, as they do not really believe that they can be big or global players and are satisfied with their smaller markets.

Therefore IT companies not only have to design solutions for the current needs of this segment, but at the same time they have to inspire them to achieve greater heights which, in turn, would allow IT companies to develop more comprehensive solutions for this space. This is what should have been envisaged by the industry leaders, viz. technology driving the business strategy. If IT companies were satisfied with catering to presently visible demand, they would not make much headway into this market.

It is surprising to see the mid cap IT service companies imitating their larger counterparts. Even a cursory look at most mid cap IT companies reveals that their offerings are similar to those of bigger companies. This is a dangerous trend, which does not leave any room for mid caps to differentiate their offerings. During turbulent times, these companies would not be an attractive target as fail to provide any strategic, gap filling capabilities or new geographical footprints to bigger companies and hence would be sold at lower valuations. Perhaps that is the reason why we see foreign MNCs acquiring Indian mid cap companies to tap the talent base in Indian markets but we do not see large Indian IT companies acquiring mid cap Indian IT service companies. These companies would do well to concentrate on fewer verticals and develop significant competencies in those. However, the potential of a vertical needs to be carefully analyzed and should be bereft of any hype.

Indian IT majors are interested in smaller, product-based IT solution companies than the vanilla mid cap IT service companies. A strong wave of consolidation is imminent and I believe long overdue in this industry. Mid Cap companies should concentrate on niche areas and build their capabilities there. The areas could be SaaS, Active Remote Infrastructure Management, Portal development, Supply Chain Management capabilities, AIDC, RFID technologies and mobile banking solutions. The mid cap companies have to be alert as big Indian IT companies have been unable to penetrate the lucrative IT consulting market which is dominated by foreign MNCs and hence would look downstream for their revenue, which in turn would lead to consolidation in the mid cap segment.

Yugal has done his Post-Graduation in Management from IIM Ahmadabad and he is interested in the business strategies of organizations, competence development and growth opportunities for various businesses. He can be contacted at yugaljoshi@gmail.com