SOFTWARE SUPERPOWER: What Can Go Wrong?

What could go wrong with the Indian software industry? It’s a politically

incorrect question to ask, really. When everyone’s chanting "$50-billion

exports by 2008", every CA, architect, oil merchant and his uncle are

rushing to join the industry and software companies are making millionaires of

20-somethings, it might even sound like a silly question. More so since finance

minister Yashwant Sinha’s feel-good Budget has everyone reaching for the

bubbly. Somewhat like the damp-cloth syndrome.

But is it? Since the IT industry’s obsession with numbers is legendary, let’s

look at some figures:

• The Indian software industry has shown a
  
  significant compound annual growth rate (CAGR) of 565% in the last 5 years

• By the end of this fiscal, the industry is set to
  
  gross $8.34 billion

• Of this, software exports alone are expected to
  
  account for $6.24 billion

• According to a Nasscom-McKinsey study, by 2008,
  
  software exports should grow to a remarkable $50 billion and

• Sinha’s recent Budget has relaxed investment
  
  norms in foreign companies up to $100 million and allowed investment of $50
  
  million overseas on an annual basis without a three-year profitability
  
  clause.

All these numbers have mind share. There are spoken of and

written about constantly.

Now let’s look at some other numbers:

• By the end of 2000, the installed base of PCs in
  
  India was a mere 5 million. Or approximately, 5 PCs per 1000 people

• Internet connections stood at 1.8 million or less
  
  that 2 per 1,000 people

• Only 8 million Indian households owned a phone

• India’s market share in the cross-country
  
  customized software market is 19.5%. But its share in global software products
  
  and packages is less
  
  
  
  than 1%

• Despite the obvious proliferation of software
  
  companies in the country, only 37 companies have a turnover of more than Rs
  
  100 crore

• The Indian software industry has an attrition rate
  
  of close to 30%, almost half of which is due to migration to the US and

• The Budget did little for hardware. The sector had
  
  asked for reduction from 16% to 8% and abolition of the special additional
  
  duty (SAD) of 4%. These remain untouched.

To bring up these numbers is not to join the ranks of

doomsdayers and nay-sayers. It is to point out that these are not crises issues.

Not yet. But if left un-addressed, they could be a big concern for the software

industry in coming years. Usually, when a company or industry is growing as fast

as this one, there is little time, sometimes little inclination, to look at

problem areas of the future. But it is precisely at this time, before small

issues turn into major crises, that it makes sense to pause and ask, "What

if…?"

"What if…?" is actually the philosophy behind a qualitative tool

of forecasting called ‘Scenario Building in Futuristics’——a relatively

new field of study born in the 1950s which forecasts possible futures through

various qualitative and quantitative tools and assigns probability figures to

them. Which is what we will be doing here. Looking at different issues that

could be future roadblocks for the software industry and assigning a probability

figure to that scenario.

The Issue: What if the US Economy hard-lands?

Many

people believe US Federal Reserve chairman Alan Greenspan has lost it. Despite a

full percentage point cut in interest rates in January, the US economy remains

sluggish and Greenspan’s promise of a "soft landing" looks

increasingly difficult.

"It began to affect us about a month-and-a-half ago. First, there was a slowdown in new projects, now decision-making has almost come to a standstill" Anant Koppar, CEO and president Kshema Technologies

Hit by dramatic sales slowdown, by mid-February, most big-tech companies were

beginning to tighten belts and layoffs were spreading bad-cheer all around. Dell

Computers announced that it would be laying off 1,700 workers, or 4% of its

workforce, H-P was axing another 2% and Gateway is showing 3,000 people or 10%

of its workforce, the door. Similar downsizing by other companies is in the

pipeline.

Worse,

a Merrill Lynch survey of 50 CIOs showed that most companies had raised their

tech spending by only 6% this year, compared to 12% in 2000. And that is really

where the bad tidings for India lie. Not to put too fine a point on it, we’ve

laid too many of our eggs in the US basket: roughly 62% of software exports

(approximately $3.8 billion) from India are to North America. And any slowdown

there directly hits exporters in India. Says Darayus Bharucha, "We need to

reduce dependence on software earnings from the US and increase focus on the

European/APAC markets."

Jawahar Bekay, co-CEO, Planet Asia, concurs. "As a company and as a

country, we must have risk mitigation: we should not have more than 55% of our

business coming from the US."

But the effects have already begun to show. Anant Koppar, CEO and president,

Kshema Technologies, says, "It began to affect us about a month-and-a-half

ago. First, there was a slowdown on new projects, now decision-making has almost

come to a standstill." Inevitably, it’s the on-site work that gets hit

first. Says Koppar, "The first reaction during a recession is ‘Chuck out

the Contractors’. At one of our customer sites, there were about 400

contractors working, of which 398 people were sent out. We had 28 people

on-site. Only this group is intact, with another group that has 4 people."

That is bad news for India Inc, as currently the degree of on-site

development is very high: roughly 58% of all work is done at the client’s

site. Says Achyut S Godbole, managing director, Concio Technologies: "Yes,

we’ve kept fantastic targets. But we’ve started celebrating too early.

Around 60% of all our software exports are on-site development and that’s no

way to call ourselves an IT superpower."

The scenario

The US slowdown turns into a full-blown recession. Manufacturing is down,

unemployment is up to the old 7% figures (from about 4% now). Tech spending is

slashed. Recovery in the IT segment is slow as markets are a lot more saturated

than they were in 1993. Software exports to the US plummet from an expected $4.5

billion in the next year to slightly less than $4 billion. Software companies

try to accelerate their penetration into Europe and Asia-Pacific markets but

language barriers cause slow growth. Result: software exports grow less than 45%

for the first time in five years.

The Issue: What if there are negative visa policies in countries of demand?

"Companies will want more 



bang for their buck. It makes 


sense in such a scenario to look towards cheaper Indian software and programmers"

Jawahar Bekay, co-CEO, PlanetAsia

Some

people believe that a US recession could be a blessing in disguise for the

software sector. Says Beekay, "Companies will want more bang for their

buck. It makes sense in such a scenario to look towards cheaper Indian software

and software programmers."

But there are more sides to a recession than the bottomline.

One of these is rising unemployment and the political pressures that come

with it. The US is believed to have a supply shortage of close to 3 million tech

workers. However, even in a robust economy, there is a significant section that

believes this is a bogey used by American companies to hire cheaper Indian labor

or to outsource software development from cheaper centers like India.

If

unemployment figures rise, so will the pressure for strict rules for outsourcing

from other countries. A natural corollary will be greater pressure to reduce H1B

visas for immigrant tech workers. This is certainly not unheard of. The US had

imposed similar visa sanctions in 1989 and 1993…and it took seven years to

change that regime.

Nor is the US alone in this. Germany’s attempts last year to ease visa

restrictions for Indian tech workers had led to a huge local outcry and the

slogan: "Children, not Indians." In the early 90s, a huge influx of

Arabs to that country had led to a spate of attacks on Arab homes and hostels

that lasted two years before the government clamped down. A perceived threat

from immigrant Indian techies could evoke a similar outburst. This is not

unusual. In the early nineties, most of Europe witnessed massive popular

protests against immigrant workers. Though the situation has eased in the last

few years, it’s an issue that can never be put to rest completely.

The scenario

George Bush Jr cuts down H1B quotas to abysmal levels from the present

195,000 a year and puts a stop to Indian software programmers rushing off to the

US. He also forces companies to restrict their software outsourcing

requirements. Some of this is offset by MNCs setting up their own offshore

development centers in India, but not enough. Germany is unable to attract

enough software workers. The rest of Europe and UK seek out Indian programmers

but the transition takes time. Result: export earnings are hit.

The Issue: What if we don’t clear our infrastructure bottlenecks?

Dataquest

has been arguing all of last year for a 10 Gbps backbone and a 5 Gbps gateway by

the end of 2000. Well, that hasn’t happened. What we have instead is a

domestic backbone of 34 Mbps capacity (which is supposed to be upgraded to 2.5

Gbps by March–but ‘suppose’ is a big word) and an international bandwidth

of 800 Mbps.

Worse, connectivity is still not reliable. Even today, data rates on a 56

kbps dial-up connection from an ISP could still be as low as 6-7 kbps. Even if

you pay through your nose for a 2 Mbps Internet access from VSNL, you could

still actually get 128 kbps or less. Neither private ISPs nor VSNL give any

guarantee on either uptime or actual bandwidth experienced.

"What

we need is bandwidth on the tap–both Internet and point-to-point. When will it

become a crisis issue? I should say it already is. I need 10 times the bandwidth

available now," says Bekay. Amit Sircar, general manager, marketing, Wipro

Infotech, has another big concern. "Bandwidth is not the issue, pricing

is," he says.

On all three counts–availability, reliability and pricing–bandwidth could

become a major concern in coming years. First, because the star sectors of

tomorrow–ASP services, e-com, IT-enabled services, content development, call

centers et al–all depend on bandwidth. And second, if delivery models have to

shift from on-site to offshore development, then bandwidth could be the one

major bottleneck. Says Darayus Bharucha, "We need to have a far better

telecommunications infrastructure in place at much lower international tariffs,

particularly due to the emergence of m-commerce..."

…And this is only half the problem. The other half is penetration.

Bandwidth issues will remain confined to a small section as long as PC and

telecom penetration remains limited. It must be remembered that the US

leadership in software began with a large domestic market with a huge hardware

base. By the end of December 2000, India still had an abysmal installed base of

5 million PCs and 1.8 million Internet connections. According to MIT estimates,

only 8 million homes owned a phone. (Compare that with 70 million TVs and 35

million cable connections.) Yet, finance minister Yashwant Sinha’s budget has

done little for the hardware sector. The expected reduction in excise duty has

not come through and the hardware industry remains under pressure.

If India Inc, is in it for the long haul then it can’t ignore the fact that

a robust software industry will only be fueled by a robust domestic market. And

that means better numbers than these. According to one estimate, the nation

could lose $22.5 billion in IT-enabled services, e-com and software to other

countries and approximately 6 lakh new jobs. Says Gurbaxani, "Lack of a

significant domestic IT market hampers innovation...a vibrant domestic market

can have a significant rub-off effect on the international market."

The scenario

The broadband issue is not resolved by the end of the year and PC and telecom

penetration remains low. Fledgling e-com companies, call centers, ASPs and other

bandwidth-dependent sectors are set to go the dot-com way. Infrastructure

bottlenecks also cause trouble with out-sourcing and offshore development.

Communications software sector fails to take off in any major way. Combined with

a recessionary US market, software sector hit hard.

The Issue: What if we don’t have enough people, or the right kind?

"Let’s face it, learning takes time and our education system today does not give enough time to learn properly"

MG Subramanian, VP, strategic resource development, Tejas Networks

India

currently has an IT workforce of approximately 450,000 people. According to one

estimate made by Prof PV Indiresan, former director of IIT Chennai, it will have

to keep adding approximately 1 million people every year if the 2008 targets are

to be met. According to Nasscom’s estimates, over 200,000 IT professionals

will be required in the next two years while the total number of engineers and

graduates passing out in the same period will be about 77,000 per year.

A

demand-supply gap for IT professionals is a worldwide phenomenon. India has so

far not faced the storm as the industry base was relatively low. But as the

industry grows, so will the gap, unless steps are taken now to mitigate the

situation. Says Amit Sircar, "We’ve been talking of availability of

manpower for the last three years. It is still an issue and will continue to be

one." Prakash Gurbaxani, co-founder and CEO, 24x7, agrees. "There is

no concerted effort by the public or the private sector to ensure that basic IT

education is imparted in schools. In the long run, this will impact on our

ability to produce high-quality talent in large numbers."

MG Subramanian, VP, strategic resources development, Tejas Networks, has

another pointer, "I don’t think we will get quantitatively maxed out.

When has there ever been a shortage of bodies in the country? It’s the brains

I’m worried about. Currently, there is a shortage-based prosperity. MComs, CAs,

doctors, everyone is onto the bandwagon. We get 500-600 applications every

month. But there is a problem with quality. People just jump from one domain to

another without any thorough grounding in the subject."

Beekay agrees, "Everytime we give out an advertisement, we get

5,000-6,000 applications. The question is really of quality. To sift through all

of that and get to the good quality people is not easy."

And that really is the crux of the issue: quality manpower. Quality here has

two components——quality of technical education itself; and quality of

management skills, specially project management skills.

Says Subramanian, "Big companies deal with the problem through intensive

training. But 100-people companies cannot afford to do that. Efforts are being

made to mitigate the problem through tie-ups between the industry and

educational institutes, but as Koppar says, "Right now, the

industry-institution relationship is ad hoc. Industry is taking some interest in

the matter but we do not go the full run."

According to Sircar, the other big problem is quality at the middle

management level. In addition, says Poddar, "Most of us come from a

technical background. But if we have to grow, we need a good set of project

management capabilities. Lack of formal training in project methodologies is the

reason most companies hesitate to take up conceptualization work." Add to

that the fact that most migration really happens at the project

management-middle management level and HR joins infrastructure as the next big

issue in the industry.

The problem today, says Subramanian, is that education is getting

vocationalized and tool-based. "Everybody is getting so practical. Lets

face it, learning takes time and our education system today does not give enough

time to learn properly and deeply enough." Vocationalization has its

upside, but "remember," say MGS, "that it is not the reason our

software industry is where it is today. What made our kind of software engineers

possible was an education system which allowed you to learn at a graceful pace.

A three-month crash course can’t make a Narayana Murthy of anyone. We are

quickly losing the ability to deal with first principles."

The scenario

Lack of sufficient investment in education widens the demand-supply gap in

the next few years. Migration at the middle-management/project-management level

affects value addition activity in the software industry. Education gets

increasingly tool-based. Higher education suffers as people move into jobs at a

much earlier stage and within a few years, India loses its "skilled

software" advantage.

The Issue: What if there is political instability in India?

A

few years ago, Russia was being looked upon as a potential software talent pool,

at par with India. Nobody hears of Russian programmers anymore. The

disintegration of the Soviet Union and the political instability in Russia took

care of that.

While nothing so drastic is likely to happen in India, political instability

can cause economic indecision in any country with drastic repercussions. Imagine

some anti-reform politician as prime minister! What will happen to government

support to the Indian IT industry, English medium education and foreign

relations? Kargil is still fresh in everyone’s minds. Imagine another war with

Pakistan. Imagine nuclear brinkman—ship. And imagine how the OECD, which

accounts for 80% of software exports from India, will react. Sure, the world is

not as centered around politics as it used to be. After all, the US continued to

maintain its MFN status for China even as it raised Cain over the Tiananmen

Square massacre. But local politics has always been the wild card in

international relations. As the saying goes: "With politics, you never can

say."

The Scenario

Actually,

multiple scenarios are possible here. But let’s sample one.

Laloo Yadav becomes prime minister…imposes Hindi-medium education in

schools across the country. The South rebels. Civil unrest and bandhs hit

industry. He also abandons economic reform. Among other things, he says the IT

industry is unnecessarily pampered and now it’s payback time. Heavy taxes

imposed. Margins fall and MNCs flee.

• The Issue: What if a quake hits
  
  Bangalore?

• REVENUE WARNINGS IN THE US AND NASDAQ: As Bad as It Gets

• The
  
  Issue: The China Threat

• The Issue: What if we don’t move up the value chain?

• THE
  
  CRASH on DALAL STREET: Heading for the 90% club?

Sarita Rani in Bangalore