THE HOT VERTICALS: The Great Indian Software Revolution

The software industry has come a long way. And like all big events of

history, it happened part by design and part my accident. In the 70s, not many

people in India understood the word "software" and there was no

separate software industry. Throughout the 70s, multinationals like IBM and ICL

(UK) were the largest providers of hardware to the industry–and it came

bundled with the operating systems and a few basic packages. Larger enterprises–including

the Indian defense and public sectors–which needed customized applications,

had their own large EDP teams that did everything from installing systems to

writing software.

In

fact, when specific software applications began to get popular, stand alone

boxes were made for them. Few will remember now but at the Manufacturer’s CSI

Exhibition in 1983, there were 21 different "word processing machines"

on display. The concept of a standalone word processing software did not exist.

Later, when local companies bloomed after IBM’s exit, they too had their own

proprietary operating systems–which ran a few of their own programs.

SW exports: All a question of forex



At the time, software exports as a concept was still way below the horizon.

Though India was among the first developing nations to recognize the importance

of software, the key concern then was foreign exchange.

The nub was this–if companies wanted to export software, it had to be

written on and designed for systems that were standard worldwide. That meant the

most recent IBM systems. But IBM in India was selling old, refurbished and

antiquated machines. Software exporters, therefore, needed to import specific

hardware to be able to write software they could export. DoE grudgingly allowed

exports–on the condition that the exporters recover twice the value of the

foreign exchange spent on importing computers within five years. Later, that was

changed to an export commitment equal to the price of computers imported.

...But it wasn’t easy



In that climate, however, there were a few software companies that dared to

set up shop. The first was Tata Consulting Services, in 1968. After a few local

orders, TCS got its first big export assignment five years down the line. In

1973-74, it did a stores and inventory control software solution for an

electricity generation unit in Iran. The same year, it developed a hospital

information system in UK along with Burroughs Corporation, at that time the

second-largest HW company in the world. These were the nebulous beginnings of

the Indian SW industry.

The cost connection



Despite the tough policy environment, by 1981-82, India was the only

developing nation to have any significant software exports–$12 million–a

substantial leap over the 1979 level of $4.4 million. Though 30 companies were

registered as software exporters (most operating out of the SEEPZ Mumbai), the

two Tata companies–TCS and TBL–accounted for 67% of all exports.

The main USP for Indian companies at that time was cost. The cost of a

developer in India varied from $17,000 to $25,000 annually. The cost of sending

the same developer to the US came to about $32,000-42,000 per annum. Compare

this with US developer rates of about $60,000-140,000 yearly–the cost

proposition was clear.

There were significant challenges, though. The first was the lack of

availability of hardware–importing systems was neither easy nor cheap. The

second–a shortfall in trained manpower. Although the education system was

churning out enough engineers, only a handful of colleges offered computer

courses.

So there it was–a budding industry with a large array of problems. To deal

with them, the first ad hoc committee of software exporters was formed on 23

April 1983, with industry stalwarts like Nirmal Jain of TCS, Lynette Saldhana of

ICIM, Adi Cooper of Digitron and Prakash Hebalkar of TBL at the helm.

Eventually, Nasscom would be formed as the industry’s representative body.

But in 1984, the software industry found its first and unexpected ally–the

Toshiba laptop-toting Indian Prime Minister Rajeev Gandhi. Within 19 days of

coming to power, he introduced the New Computer Policy that simplified import

procedures for software and reduced software import duties from 100% to 60%.

Locally, software was recognized as a separate industry, licensing procedures

were simplified and access to foreign exchange for software firms made easier.

This was the decade of churn, marked by three distinct phenomena–India’s

metamorphosis into a ‘Unix country’, the rise and fall of the local packaged

software market, and the beginning of the outsourcing era.

The Unix revolution



In 1986, the Rangarajan Committee on the modernization of the banking sector

(set up by the RBI) came out with its report. Among other things, it recommended

standardizing banking systems on Unix, then an unperfected operating system

compared to MS-DOS. The government floated a tender for 400 Unix systems and set

off a scramble among Indian companies to come up with a Unix platform. Though

the local part of the contract eventually went to Sunray Computers, the report

led local vendors into the Unix arena and eventually saw India’s

transformation into a ‘Unix country’.

But the transition was not smooth. There were three main issues. One, the

lack of an existing base of trained manpower on Unix and C. Two, computing

requirements in India had been limited to batch-oriented jobs, and as a result,

the capability of Unix, which is essentially a multi-user OS, was not fully

understood. And finally, importing Unix at source from AT&T was not easy. So

each company came up with its own version–none of them worked too well. Add to

it the fact that Unix systems were also far more expensive–and there was a

real problem on hand.

Driven by the banking sector, policy changes in 1986 enabled the import of

the Unix source code and by 1988, Unix was emerging as the de facto standard in

the super micro and the mini markets. According to an IDC study, 1,400 Unix

systems were shipped in 1987-88, compared to just 480 the year before–a

whopping 191% growth.

Anand Iyer country GM, APC India In 1989, when I was working with a computer company in Delhi we had won a large order. The customer had placed an order for UPS systems along with computers. No one in the office had any clue about a UPS then or what it looked like or why it was insisted upon by the customer. We wondered why a customer needed a UPS with the computer and hoped a stabilizer would suffice since we had no idea where we could procure UPSs then. We spent some time trying to locate a manufacturer who manufactured a UPS since they were not easily available those days. Finally, we managed to locate some vendor in Bangalore who could deliver them. UPSs for computers was any alien concept those days. I had no clue at that point in time that I would end up working for the world’s largest UPS company a few years later

Software packages:

The rise and fall



In 1986, other norms had also been eased. Anyone could import software now

at a duty of 60%. Indian firms could become distributors of foreign packages.

And SW EOUs could import hardware without duties. The rationale was that by

"flooding in" software, Indian firms over a period of time would gain

the competitiveness and ability to "flood out" software.

Meanwhile, the PC had come to India. Within a couple of years, a price war

triggered by Sterling Computers led to vendors slashing prices. By 1988, there

were more than 70,000 microcomputers in the market. The PC and compatibles

market boomed–alongside, local SW packages grew.

By December 1988, more than 500 software companies were churning out packaged

software–a major chunk of them cheap accounting packages. New Delhi-based AK

Saxena Software Consultants sold a series of accounting packages called

Khazanchi, Munimji, Naazirji and even Lalaithaji. Most of them were priced at

around Rs 490 and were targeted at PC/XT/AT users of small and medium

enterprises. At the higher end were companies like Wipro (Easyacc), TCS

(Business Management Series), Softek (SIMS), Radix (Finman)–all priced between

Rs 5,000 and Rs 10,000. Despite the burgeoning domestic packaged software

market, Indian players initially lacked the funds and reputation to penetrate

markets abroad.

Eventually though, the local software packages industry died a natural death,

with a few exceptions like Tally and Fact–alive and well to this day. The

package industry had thrived on the PC boom but was killed by the import of

foreign packages. Meanwhile, communications technology was silently maturing in

India and another era was set to begin.

The birth of outsourcing



Till now, the export of software had meant a physical transfer–either of

the programmer himself (bodyshopping) or of software on floppies. The first

glimmers of a change appeared in 1985, when TI set up an office in Bangalore

with a direct satellite link to the US. In 1989, VSNL commissioned a direct

64-kbps satellite link to the US. It was a new gateway switching system which

operated through Intelsat and was directly linked to AT&Ts earth station at

Coram on the US East Coast. It offered software exporters a completely new way

of functioning.

Around this time, US policy changes forced Indian SW exporters to look beyond

the body-shopping model. In 1993, the US Immigration and Naturalization Service

proposed changes to the regulation that made it difficult to get B-1 visas. The

new H-1 visa required a certification from the US Department of Labor that

prevailing market wages were being paid to immigrant workers.

Its direct impact–clients would have lesser incentive to hire software

engineers from India. Also, Indian SW pros were brought under the ambit of the

Immigration Act and had to pay social security taxes (amounting to 21%) to the

US. Eventually, what came to pass was a watered-down H1B visa. But combined with

the changes in communications technology, a new way of doing business was born

in the SW export industry–a mix of onsite and offshore. Exports boomed,

growing from $128 million in 1990-91 to $485 million in 1994-95. A new era had

begun.

Boom time



The last half-a-decade of the Indian software industry can easily be called

its ‘Golden Era’. For a change, just about everything that could go right,

did. Surviving Indian software packages began to receive international attention–Infy’s

Bancs 2000, TCS’ E-X and Ramco’s Marshall (endorsed by Bill Gates, no less)

came to the fore. According to IBS rankings,



i-Flex’s MicroBanker was the topselling international banking solution in the
world in 1995.

Year 1995 also marked the beginnings of Linux in India. PCQuest, the leading

personal computing magazine, began giving out free Linux CDs in March 1995 to

expose readers to "the other side of computing". By 1999, more than

70,000 CDs of Linux had been put out in the market and Indian Linux user groups

were thriving on the Net. Then came the ERP boom. SAP, the worldwide ERP market

leader, set up a 100% subsidiary–quickly, India became its fastest-growing

market. In 1996, SAP was growing at 160%, with 40 customers in India. It

forecast a growth of 150% for 1997.

And then, of course, was Y2K–the biggest bogey in software history that

triggered off a chain of events. Exports grew on the strength of Y2K and never

looked back. The local training industry boomed partially because of it. Aptech

grew from 27 centers and a turnover of Rs 10 crore in 1991 to 850 centers and Rs

202 crore in March 1997. Locally, full-page government ads in leading dailies,

asking companies to become ‘Y2K-compliant’, helped the paranoia along.

By the end of 1999, the industry was on an all-time high. IPOs of software

companies were getting oversubscribed several times. Sonata was oversubscribed

by over four times, KPIT 40 times, Satyam 19 times... This gave rise to a minor

scandal that rose and fell–fly-by-night operators who often had no business at

all started putting IT in their names and entering the IPO market. They made

money; a lot of investors lost their’s.

Meanwhile, the venture capital phenomenon began to take off. According to

figures released by the Indian Venture Capital Association, VC investments grew

from Rs 70 crore in 1996-97 to Rs 2,162 crore in 1999-2000. A substantial amount

of that investment in the last years went to dot-coms.

Getting closer to the bust



The bust? Or maybe not. This is recent history. By end-2000, the slowdown

set in. The dot-com bubble burst. VCs began demanding sounder business models

from start-ups, while earlier, they’d been willing to settle for an idea and a

sparkle in the eye. Software exporters saw enterprise IT budgets slashed and RoI

becoming key. They had hired in a frenzy in the boom times. By 2001 they were

trying to fire quietly. For the first time, the industry witnessed lay-offs–and

on a scale never witnessed before.

Going forward, there’ll be one word that will define the software export

industry in the next few years–offshoring. At the moment, a good 60% of all

software work happens onsite. It is more expensive for the client and offers

thinner margins for the exporters. As a result, last year saw a greater push

toward moving as much work as possible to India. At the same time, after the DoE

allowed 100% FDI in the IT industry in 1999, a lot of MNCs set up development

centers in India as their own offshore arms, most of them doing really high-end

work.

This phenomenon and all the issues it generates in host countries will

determine the shape of things to come in the next few years.

TEAM DQ