Smiling Faces Of A Winner

export.jpg (27125 bytes)The polarization of the Indian software ex-ports industry has finally
begun to happen. The picture that is emerging indicates a grouping with global ambitions
at one end and a gradual fade-out of those companies that are operating in the exports
market without building and developing core competencies or working around a strategy. At
the other end, one is also witnessing a proliferation in the number of small
techno-entrepreneur-driven companies functioning in leading-edge technology niches.

What is also becoming increasingly apparent
is the role of software and related services in the growth of companies which are not
classified as software developers. A case in point is HCL Corporation. Nearly 60 percent
of its 1997-98 group revenue is from software and services, a far cry from the days when
nearly 90 percent of its revenue was driven by hardware sale. In fact, its revenue from
software exports is a whopping Rs 989 crore.

Well, the ratio is not quite the same with
India’s other premier IT company, Wipro Infotech, as yet (it is in the region of 33
percent), but there is a possibility of the same happening, with a software workforce of
nearly 3,700, which is increasing by the day. Evidently, Indian IT companies have come to
realize the wisdom of going the software and services route instead of fighting out in a
low-margin, high-risk hardware business.

Consider TCS, India’s premier software
house which, with a turnover of Rs 1,083.63 crore, has captured the prestigious #1 slot in
the Top 20 ranking, beating Wipro at Rs 1,048.70 crore. Furthermore, this year also has
three other software companies which have made it to the Top 20 ranking-namely Pentafour
Software, Infosys, and Satyam at turnovers of Rs 291.5, Rs 260.4, and Rs 178.5 crore
respectively.

And coming up the ranks rapidly are DSQ
Software, Siemens Information Systems, Cognizant Technology Solutions, and IMR India. It
may not be altogether surprising to see companies such as CMC, Zenith, CMS knocked off the
Top 20 ranking next year. Not because of bad performance but due to near-three-digit
growth performance from the software companies.

Shift In The Landscape
Having said this, it is also important to take note of the shift in the software
industry-a shakeout would be far too strong a word to use. For instance, the companies
that led the pack in the early-to-mid nineties are no longer in the lead. Simply put, they
failed to take note of the changes in the landscape in time to effect a timely change. A
case in point is Datamatics. Those who continued to play the price card as a major factor
have had the misfortune of seeing their customers go to competitors offering lower prices.

Indeed, a vast majority of Indian software
companies continue to play this card as an ace. While their survival may not be in
question-after all, there is enough of coding work to last a decade easily-there is no
doubting that their profitability will be affected. That is because many US customers have
come to recognize this and play the price card effectively to negotiate a better deal for
themselves.

It is ironic that Indian software
companies, despite the awareness level, beat the basic economic theory which dictates that
in a sellers market, the price is dictated by the seller and not the buyer. We, for some
strange reason, play one against the other to win a contract despite the fact that quality
of work of Indian software professionals far outmatches that of those in other countries.

Heartening Realization
But what is heartening is a dawning realization by end-users that development companies
are now making critical value additions, making it unattractive for the user to switch
vendors. And this value addition is coming in different ways from different companies.
Some, like Siemens and L&T, are creating value around the core competency of the
parent company. Siemens, for instance, does more projects in telecom and healthcare than
in any other area. Thus, it is able to retain its customers and get the price it asks.

Then there are those into creating
Intellectual Property (IP) from the patentable point of view and vending the same in the
global markets for a premium. There is a difference, though. The focus of IP creation is
not on shrink-wrapped products but on encapsulating a given expertise-either from the
development of methodologies like in the implementation of ERP, or domain expertise
knowledge like in banking and finance-into a product. Similarly, leveraging on basic
software design strengths and creating ASIC designs-the way Wipro is doing it with its
1394 high-speed bus chip design-can be used by others as building blocks in their
product/service creation.

Interestingly enough, most of the serious,
long-term players (these are not necessarily big but those who are spending time and money
in creating brand recognition for the company) are already into such IP creation one way
or another. One will see a TCS, Infosys, Satyam, Tata Infotech or some such already into
this. The methodology and the route adopted by each, of course, vary.

In some ways, the small
techno-entrepreneur-driven companies have led the way-the professionals who have left
lucrative technology jobs in leading-edge companies in the US to come back to India and
set up technology shops here. The operations are small but highly focused on niche areas,
be it custom software development or products. The entry of these companies adds to the
groundswell in the creation of value-added solutions from India.

Wipro is going about it by setting up an
entity in the US (the idea is to give it the look and feel of a Silicon start-up) to be
closer to the market and to create such software design-oriented products. If Wipro is
leveraging on its R&D expertise, others are leveraging on their domain expertise.
Infosys and Satyam both have products that have come as a result of this. Satyam has just
launched a web-based product SearchPad-in the market.

Concern
Areas:

  • Focused on leveraging the low-cost labor
    advantage
  • The US continues to hold charm and allure
    for young software professionals
  • The relative absence of programmers with
    experience between three and five years
  • The lack of big ideas
  • Business models still based on short-term
    high-risk mode with: all eggs in one basket and one market, the US

New Vistas
The Web has indeed opened up vistas which heretofore did not exist. It has collapsed the
cost of reach and marketing by a factor of several hundred. These are early days for
Internet in India, but given the focus adopted by almost all the companies, products
around the Net is a sure bet. We already have in Aditi Technologies a company dedicated to
leveraging the Net. The company is building products around the Net and its web
technology-based customer care product is in the final stages of beta testing.

What do all these things mean? That the
Indian software industry is at last maturing? One would certainly like to think so.
Certainly, there are several indicators. The software industry has actually started to
talk in terms of net foreign exchange earnings as a means of judging performance, a
definite departure from the past where all one looked at was the overall revenue. This
invariably distorted the picture, as one never really got to know the actual profitability
of the company or the productivity measure.

Also, Indian companies are trying to be
global entities with local presence. Unlike in the past, companies are not merely putting
up sales and marketing front offices in the various markets they operate in. Wipro, for
instance, will be setting up a company in California as any other Silicon Valley start-up
with a mix of debt and venture capital, and eventually take it public.

Infosys became the first Indian software
company to announce its decision to raise $75 million through an ADR. Though it is yet to
get the nod of approval from the Finance Ministry, Infosys’ intentions are
well-documented. To finance, in part, its expansion in the global markets through
strategic acquisitions and to provide stock options in dollars to its employees in the US
and other parts of the world.

Performance
Indicators

  • Grew by 75 percent over 1996-97
  • Product revenue as percentage of export
    turnover still remains small
  • Pentafour Exports and Satyam Computers enter
    the Top 20 league
  • Tata Consultancy Services becomes the #1 IT
    company in India
  • HCL Group becomes the leading software
    exporter
  • Japan is the new market for export of IT
    services from India
  • With off-shore development at 55 percent of
    export revenues, small company operations continue to remain profitable
  • Revenue from client/server applications and
    mainframe services are neck to neck contributing 42.9 and 42.3 percent respectively to the
    exports

These steps would have been
unthinkable even two years ago. But the very fact that an Indian software company with a
turnover of Rs 140 crore (Infosys’ turnover at the time of announcing its ADR) planned for
an ADR of $75 million (Rs 300 crore, more than twice the company’s turnover) indeed speaks
for the worth that Indian software brings to the table. It also illustrates what good
accounting practices and transparency can achieve in the global money markets.

If Infosys pulls this off in its entirety
with no dilution in the total sum, then it is sure to have many followers. Which in effect
means we will see a lot more transparency and adoption of global practices in accounting
and management as well as many transnational software companies. And see more companies
competing on providing solutions to customers instead of merely doing what has been asked,
and going up the value chain.

Similarly, the TCS experiment of working
alongside small software firms in Chennai on the Year 2000 problem is an instance of a
leader tapping into pools of talent which otherwise may have gone untapped. It is the
first time ever that an experiment of such significance has been carried out, in India or
anywhere else in the world. TCS provided the location, computing resources, and datacom
links and helped small software companies to leverage on their knowledge base and
reputation to provide solutions for Y2K. In the development center at Chennai, called the
Y2K Factory, nearly 75 percent of the workforce of 800 are non-TCS employees.

Can this be duplicated? There are pros and
cons to this. But the point here is not to debate whether this is a long-term workable
solution or whether it can be replicated. The point is, given a situation, companies have
risen above themselves to look at how best they can use the resources on hand. Best
deployment of available resources was again demonstrated when companies started employing
women (housewives) to join the workforce on part-time basis.

Undoubtedly, India has a large percentage
of well-educated women, many of whom by virtue of societal and other pressures are not in
the mainstream. By providing them with a means of gainful employment without taking them
away from their families, Indian software companies are displaying a pragmatism not
witnessed before. Already, there are small companies which have begun tapping into this
resource. One is likely to witness not only more small companies getting into the act by
hiring women on a part-time basis, but also see women themselves getting into the act as
entrepreneurs.























Top 20 Software Exporters

Rank Company Turnover (Rs
crore)
Growth %
97-98   1997-98 1996-97  
1 Tata Consultancy Services 949.14 606.88 56.40
2 HCL Corporation 730.96
3 Wipro Ltd 388.94 252.56 54.00
4 Pentafour Software &
Exports Ltd
271.75 159.43 70.45
5 NIIT Ltd 258.38 161.25 60.02
6 Infosys Technologies Ltd 247.21 125.28 97.33
7 Satyam Computers Services Ltd 178.11 85.22 109.00
8 Tata Infotech Ltd 172.34 106.59 61.68
9 Patni Computer Systems 137.58 84.89 62.07
10 Tata IBM Ltd 120.43 66.36 81.48
11 DSQ Software Ltd 116.78 67.66 72.60
12 Cognizant Technology Solutions 113.17 47.39 138.9
13 International Computers India
Ltd
108.62 82.70 31.34
14 Mahindra British Telecom Ltd 99.24 62.78 58.08
15 Information Management
Resources
92.70
16 L&T Information Technology
Ltd
90.04
17 Mastek Ltd 85.98 57.75 48.88
18 Silverline Industries 77.89 72.02 8.20
19 Citicorp Information
Industries Ltd
75.12 53.26 41.04
20 Siemens Information Systems
Ltd
72.08 55.30 30.34

Surely, this must account for maturing of
the players. But yes, much more needs to be done. Working models of yesterday are unlikely
to reap the same benefits tomorrow, as witnessed so far. There is a need to keep changing
the model depending on the company’s directions and goals. There is no single right way.
While the Indian software industry may grow at more than 50 percent for the next couple of
years, it will still be only one sixth the size of the Microsoft empire.

Opportunities Galore
So, clearly, the industry has miles to go. While the big players get bigger it also means
that their leveraging into the top value-added league will leave enough and more room for
those at the middle and bottom to make good on other opportunities. Though the Y2K
opportunity is dwindling with the approach of the millennium, maintenance of application
software on all the legacy systems will continue to be a big opportunity and growth area
for years to come. The common European Currency (Euro) presents a big opportunity;
nevertheless, it would help to bear in mind that unlike the US, there is no one language
cutting across Europe. For India, its familiarity with the English language has been a
definite advantage. With that advantage taken away, it might not be all that easy cracking
into the European domain.

For those in the software industry, there
is no cause to worry for the middle-term. Predicting long-term would be adventurous. As
long as Indian professionals and companies continue to keep pace with changing
technologies and upgrade their skills, the Indian software industry will grow,
notwithstanding the new international sanctions. Having said that, one can only
reemphasize and reiterate the importance of training in the development of manpower that
will be required to cater to the rising demand for information technology across global
corporations.

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