Pottery in the Indian It Supermarket...

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.

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.

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.

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.

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