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.

“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.

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

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
$120,000 in establishing a wholly owned subsidiary, Arrk Solutions in
Mumbai.
GE:
The GE India
Technology Center is being set up in Bangalore with an investment of
Rs.1.76 billion ($ 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.
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.
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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