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Pottery in the Indian It Supermarket...

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DQI Bureau
New Update

The year gone by saw a number of offshore software and services centers

entering Indian markets or expanding operations in India. A large number of

companies across industries today, have an India operation. They do software

development for in-house use and external customers, hardware design, provide

backend IT services. The range of work being done is as vibrant as India’s

colors (see box). This activity has existed since Texas Instruments set up its

development center at Bangalore many years ago. The huge acceleration in the

growth of such ventures last year brings forth some issues.

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Number One: As an increasing number of companies set up infrastructure here,

there is an increased impetus to the economy–though one must add that these

investments are hardly earthshaking in the context of the overall country. The

investments range from $100,000 for the neighborhood software development center

to a Cisco, which is looking at $200 million. These also provide employment to

an increasing number of professionals. Dataquest estimates that there are at

least 25,000 people employed by these off shore centers–not including the call

center numbers. This is not a huge number considering that there are 45 million

educated unemployed people registered with India’s employment exchanges. But

these 25,000 people produce a significant amount of rupee output. The billing

rates per hour for low end to high end IT related jobs vary from $8-25. Taking

an average of $15 per hour, each of these professionals generates $36,000 each

year. And 25,000 of them produce $900 million or around Rs 4,500 crore per

annum. That is huge money coming from a very small number of people.

“The actual wealth lying locked in the country’s human resources is really



mind-boggling. But are we tapping it, or even aware of its true potential?”

 Shyam

Malhotra

Data is scarce but it is clear that there is a huge ‘value’ that these

jobs bring to the country. If 10% of the unemployed could be harnessed, there

would be 4.5 million people generating $36,000 worth each year–collectively

$162 billion. Obviously what we have touched is the tip of the tip of the

iceberg — there is no copy mistake here. It is the tip of the tip.

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Number two: How and where does this value get accounted for? Not all

development and service centers are organized as independent organizations.

Therefore they do not declare revenues. Data available suggests that the

reported revenue per employee for some of these organizations ranges from Rs 5

lakh per annum per employee ($10,000) to Rs 25 lakh per annum per employee

($50,000). In many cases there is a real problem in ascribing a commercial

value. Consider the case of an automobile company that develops its design in

India. We are actually talking about three different numbers here. First is what

the international company spends on development in India — salaries,

infrastructure build up etc. Second is the amount that it bills for legal or

internal purposes. Third is what should be realistic billing based on the normal

rates for jobs of a similar nature. One more is the value of these jobs in the

eventual market. If the sample calculation done above is taken and the 900

million dollars are added to the reported revenue figures, the software exports

figures increase by a minimum of 10-15 %.

Number Three: There is a yet another number which is higher than those above.

It is the ‘value’ of India’s work, which in many cases is much higher then

1, 2 or 3 above. This is the price at which Indian services are or products are

sold to end customers. So if HP, Oracle or Microsoft does software development

here, what is the value that it realizes from the market for that work? There is

no easy way to ascertain this. But it is not a sigma factor of 10% or 20%. It is

more like the ratio of what the village potter gets versus the city supermarket

where his pottery is sold. If we started understanding this, over time we would

charge for the worth of what we develop i.e value based pricing instead of cost

based.

Number Four: As this outsourcing trend increases, it is bound to put pressure

on Indian software and service companies. The salaries of staff will go up.

Their customers may negotiate more by ‘threatening’ to set up captive

centers of their own in India. These are new challenges, which may have an

adverse impact on the growth of the indigenous software developers. The larger

players would remain relatively insulated but not the medium and small

companies.

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India simply has too much to offer for it to be ignored. What has to be

worked on is getting the right valuation for it and unlocking the latent human

wealth. The world (especially the US) understands valuation and wealth creation

well and, therefore, it shouldn’t object if we demand our due.

The author is Editor-in-Chief and director of Cyber Media India Ltd, the

publishers of Dataquest

Colors of Indian Software

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Intel India

Development Center
:  Lauched

in March 1999. When fully operational by end-2002, a $25 mn development in

Bangalore will house 1,500 engineers.
Arrk Limited :

Invested over

$120,000 in establishing a wholly owned subsidiary, Arrk Solutions in

Mumbai.
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GE :

The GE India

Technology Center is being set up in Bangalore with an investment of

Rs.1.76 billion ($ 40 mn to develop India’s first multi-disciplinary

research center.
Zygox Inc :

A team of 150

engineers with a dedicated development centers in India.
Oracle :

Plans to hire 2,000

engineers to boost its current development workforce in Bangalore and

Hyderabad, India.
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Erricsson :

Two R&D Centers

located in Bangalore (to work with strategic technologies) and in

Hyderabad (to focus on software product development based on open

architecture for Datacom applications).
ADC : Telecom equipment

maker ADC, will be sourceing software services from India’s Hughes

Software Systems and Kshema Technologies and will set up its research and

development centre in India within two years.
Cisco Systems :

Increasing its

investment in India from $150 million to $200 million. The company’s

investment would go into the 400 strong Cisco Global Development Centre,

Bangalore and promote five development centres, which Cisco had set up

with Indian IT companies.
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AOL :

This Internet

access provider has announced a $100-million investment in India over the

next five years.
Motorola :

Established in

1998, the Design Center dedicated to VLSI chip designing employs more than

60 design engineers. In 1999, it acquired another center.
Ford :

Investing about $10

million to set up a software development center in Chennai. A wholly-owned

IT subsidiary - Ford Information Technology Services of India - will

develop and implement an e-business strategy and provide customer

relationship management solutions.
IBM :

Has decided to make

India the hub for its Linux initiatives in South Asia. IBM’s Linux

Competency Centre in Bangalore - one of four such IBM facilities in Asia -

will get funds up to $100 million and employ 200 new IT professionals over

the next two years.
Xchange21 :

This

Singapore-based e-solutions provider, is investing $1 million in a

200-strong offshore software development centre in Bangalore.
Hongkong and

Shanghai Banking Corporation (HSBC):


  A $ 10 mn

investment in a development center in India for servicing global

operations.
Structural

Dynamics Research Corp
:  A

subsidiary for electronics and software activities. Initial foreign equity

amounts to $2.2 million. This will be raised to $4.7 million over five

years.
Rebus Group Plc :

A wholly owned

subsidiary under the software technology park scheme in Gurgaon. The

proposed foreign equity amounts to Rs 27 million that may increase to Rs

54 million. The UK company has given an export projection of over Rs 180

million over five years.
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