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SOFTWARE
Just When You Thought
Software Was A Safe Business...

It's the charge of the pink brigade. Riding on the back of changing societal attitudes, and hiring and promotion policies focussed purely on skills, a clutch of professional women executives could soon stake claim to India Inc's most coveted corporate position.

By Ashutosh Singh & Pooja Garg

In a nondescript two-room office in Chennai, two twenty-something software jocks are working on a business model that will make their company bigger than Infosys, Wipro, and Satyam by 2005. In the next five years, obscure software start-ups no one has heard of, or start-ups-to-be that are, at this point in time, no more than a gleam in the eye of their founders, will upstage today's software majors.

Do India's Software Majors Really Need Products?

They do. And they don't. Products share the top rung of the software value chain along with value-added infotech services. But it isn't easy developing a product. Says Srini Rajam, 39, Managing Director, Texas Instruments India: "Companies need to create an empowered (products) division in which the returns are measured over a two-year period." With revenues from the low-end services that have hitherto constituted India's software boom drying up, products are a logical next step. Indeed, a clutch of small software companies is betting on products to catapult them into the big league. Bangalore-based Virtual Dynamics Software (VDS) is developing high-end products for the healthcare and insurance sectors. Hyderabad-based Visualsoft has developed products like VisualShift, a y2k tool for client-server application. And Bangalore-based iFlex, a Rs 200-crore company, has developed products like Microbanker and Flexcube, which are solutions for the banking industry. The caveat: few Indian companies have the resources to develop and market products. Agrees Partha Iyengar. Country Manager, India, Gartner Group: ''Ramco (Systems) could not make a marketing success of its product (Marshal, an ERP package), perhaps because it spread its marketing budget too thin.'' And the developed world's view on India's infotech-abilities doesn't help: Indians make good software jocks; India doesn't make great software products.

In a market infatuated with ice stocks, this is a sacrilegious thought. In a country whose already-burdened pantheon has been enlarged to include new-e dieties Narayanamurthy (N.R. Narayanamurthy, Chairman, Infosys), Premji (Azim Premji, Chairman, Wipro), and Raju (Ramalinga Raju, Chairman, Satyam Computer) it is a blasphemous argument. Still, let us be profane: there won't be any familiar names in a listing of India's top five software companies in 2005.

If this intrepid prediction is to come true, the contours of the Rs 24,500-crore (1999-2000; Nasscom) Indian software industry will witness a radical re-configuration. To reproduce a few self-congratulatory lines from the homepage of the National Association of Software and Service Companies (Nasscom): ''India still enjoys an advantage over many other nations in software development, services, and exports. This is due to the fact that India possesses the world's second-largest pool of scientific manpower, which is also English-speaking (sic). Coupled with the fact that the quality of Indian software is extremely good with relatively low-cost (sic), it provides India a very good opportunity in the world market.''

It is this very cost-competitiveness that will change the shape of the industry. For, in 1999-2000, 60 per cent of the export earnings of the Indian software industry came from 'time and material contracts' that don't exactly pay very well. Says Ashok Narsimhan, 52, former Head, Software Division, Wipro: ''You cannot do brand pricing on time and material contracts.'' Only, the market for such low-end work is shrinking. The future will belong to software companies that boast either innovative business models-like Application Service Providers (asps), companies that do not just develop the software, but host it, and the customer's database on their own servers, offering an outsourced it service to companies-or the ability to offer critical add-ons like consulting services. It is this prognosis that is sowing the first seeds of alarm in the investment community. Says Pramod Gupta, 27, it Analyst, SSKI Securities: ''(Indian software) companies will not be able to sustain their huge valuations. Their growth will taper off in the next two to three years.''

The Next Step of India's Infotech Majors

TCS
Eyeing industry-specific products. Intends to focus on consulting services and end-to-end solutions.
Wipro
Emphasis on application development, ERP, SCM, and CRM. Also offers e-enabling consulting services.
Infosys Technologies
Boasts a cost-effective high-quality off-shore delivery model. Has forayed into e-biz solutions
HCL Technologies
Proposes to use M&As, value-added technology, off-shore development, and the asp model
Satyam Computers
Proposes to expand strengths in ERP, engineering services and legacy applications, to CRM, SCM, and e-Commerce
NIIT
Bullish on the Net with e-Solutions and e-Learning initiatives, coupled with e-Consulting and e-Strategy assignments
Cognizant
Emphasis on traditional projects. Plans a foray into offering e-business solutions
Pentamedia Graphics
Focus on multimedia applications and entertainment: graphics, films, broadcasting, and video
Pentasoft Technologies
Strong in legacy applications. Proposes to branch out into Web applications, and become an ASP
Patni Computer Systems
Plans to focus on application development, ERP, e-Commerce, and Euro-conversion projects

The Indian software industry grew from Rs 4,190 crore in 1995-96 to Rs 24,500 crore in 1999-2000 on the strength of its cost-plus business model. An Indian software company would win a contract from a client located somewhere in the First World; it would send a team of its employees to the client's site; charge hourly fees for the services rendered; pay part of the fees to its employees; and post the rest as profits. No business model could have been less riskier, no formula better. The profits and market valuations of the companies that adopted this model zoomed. And emboldened by the success of the first companies to adopt this model, a slew of other software companies-including many of today's majors-followed the same path. Today, though, the very business model that worked so well in the past, has turned into a death-trap: few software companies have been able to break free from the low-end service-provider tag. Agrees Partha Iyengar, 39, Country Manager, Gartner Group: ''Most Indian software companies are perceived as application development companies, not consulting or e-business ones. That's why they find it so difficult to go up the value-chain. There's too much complacency in the industry.'' Call it strategic tunnel vision. Call it an over-riding obsession with being the lowest-cost supplier of trained manpower required for low-end computing tasks. Call it the great thaw.

Are Things Really That Bad?

Actually, they're worse. Most Indian software companies boast a presence in the nether regions of the software (services) value-chain. The business opportunities touted by some sections of the software industry-medical transcription, call centres, coding, and programming-belong at this end. Success in these businesses, is a function of two things: the size of the workforce (the larger the better); and the cost of the operation. And the infamous time-and-material contracts belong at the same value-chain node as these. The typical Indian software company operating in these businesses charges its customers between $40 and $60 an hour, sometimes even lower. The top-rung of software industry, however, does not operate in these areas.

Slightly above medical transcription and coding, in the value-chain, are fixed-price projects. Almost all of India's software majors are comfortable at this level now. A few have even progressed to off-shore projects-where a contract is executed not at the client's location, but at the company's. Projects accounted for all of Infosys' and Satyam Computers' revenues in 1999-2000. The break-up? Nearly 51 per cent (of its revenues) from off-shore projects and 49 per cent from on-site ones for Infosys, and 76 per cent from off-shore projects, and 24 per cent from on-site ones for Satyam. Companies operating in the projects-node can charge more than their coding cousins: between $50 and $75 an hour. In comparison, a consulting assignment can get upwards of $200 an hour.

Software solutions and design occupy the next rung in the value-chain. Companies in this node require some knowledge of the industry in which their clients operate. Expectedly, their takings are higher than companies in other nodes. The software solutions and design business is also the run-up to a presence in the first of the two profit-zones in the software value-chain: products. The second is consulting. Software consulting companies boast an exhaustive knowledge of several business domains. Their revenues arose not only from consulting, but also from implementation: a process requiring them to call in their allied business units. Silicon Valley majors like IBM and Hewlett Packard have consulting practices that prepare an infotech strategy for an organisation and leave the implementation to their allied business units.

Clearly, India's best-known software names are nowhere near the top of the value-chain. That, by itself, should be no cause for alarm. Profits increase as a company moves up the value-chain. But all companies cannot expect to crowd just one node of the chain, leaving the others vacant. What is worrying, though, is the fact that the fastest-growing industry segment, consulting, is not being addressed in a big way. Worse, competition from countries like Philippines and China will soon blunt India's competitive advantage in low-end software businesses. Agrees Vineet Nayar, 38, Executive V-P, HCL Technologies: ''The cost-advantage India enjoys will soon disappear. That is when companies will look at value-addition.''

Call centres and medical transcription facilities, which fuelled much of the recent growth in the sector, are not high-end businesses. Nor can Euro-conversion projects-Nasscom lists 108 Indian firms working on them-be called that. Some analysts like Sandeep Dhingra, a 30-year-old Director at Jardine Fleming believe the growth witnessed in 1998-99 and 1999-2000 came from areas like medical transcription and call centres: ''Indian software firms seem to have no intention of moving up the value-chain. There's no reason for them to. They have certain skill-sets that are being put to use in services. Besides, the profits are super-normal.'' At this point in time, they are. But there are doubts about the future. The Gartner Group and the International Data Corporation (IDC) believe Indian firms still occupy the lowest rungs of the software business. Avers Ravi Sangal, 45, President, IDC India: ''The numbers suggest that revenues from body-shopping are coming down, but many still do it.'' IDC claims 20-30 per cent of the industry's $6-billion exports in 1999-2000 came from body-shopping. Dewang Mehta, 36, President of Nasscom, takes umbrage at these numbers: ''IDC and Gartner do not know what it (body-shopping) is. The figure is not more than five per cent.''

Attempts At Re-Definition

e-nabling is every Indian software company's term-of-the-hour. Companies like Wipro and Infosys believe that helping other companies e-enable their operations will help them acquire critical domain knowledge in the areas in which these companies operate. Domain knowledge that could perhaps help them break into the software solutions market. Claims S. Ramadorai, 52, CEO, Tata Consultancy Services: ''TCS is the world's sixth-fastest growing consultancy. It has built up a considerable knowledge in technology consulting and domain expertise.'' Still, e-nabling is not quite the same as offering e-biz solutions. Laments Arjun Malhotra, 52, one of the original founders of HCL, and CEO of the Valley-based solutions company, TechSpan: ''I do not know of any Indian company that has a significant presence in the Net business solutions market.'' And that is where the action is going to be.

Should Indian Software Companies Latch on to the ASP Bandwagon?

The latest buzzword in the software business isn't products or solutions. It is a combination of the two that goes under the term asp (Application Service Provider). An asp doesn't, in the strictest sense of the word, sell a software product. Nor does it work on a software project (like most Indian companies do). Instead, it develops a software, houses it in its own server farm , gives its customers space in the same farm to house the data they need to run through the software, and charges the customers a monthly retainer or a pay-per-use fee. Indian infotech companies like HCL Technologies, Eastern Software Solutions, IFlex, and Spectranet are attempting to carve up a slice of the asp pie (estimated at $10 billion in 2000). Says Sinthal Kumar, 36, Vice-President (Corporate Marketing), IFlex: ''Moving from a project-driven business model to an asp one is a logical approach for Indian software companies. And the business provides the right mix of product-development skills and service expertise." asps are also, to a large extent, insulated from the risk of having their products die (become technologically obsolete) on them. Their product remains with them, and can be continually upgraded, in contrast to shrink-wrapped software products where customers need to go out and buy an upgrade.

Circa 2000, India's software biggies seem to be in no hurry to rush into that market. Their approach is tinged with conservatism. Says Nandan Nilekani, 45, Managing Director, Infosys Technologies: ''Going up the value chain is not about the products versus services. It is about creating increasing value for the customer and getting paid for that value and products can be a dangerous proposition.'' He continues in the same breath: ''We do operate in the highest node of the value chain; that's end-to-end e-biz solutions." Indeed, most of India's software majors believe that they have the ability to succeed in consulting. Avers Rusi Brij, 45, Director, Corporate Initiatives Group, Satyam Computing: "Today, we can offer customers services like e-commerce applications to Customer Relationship Management packages; even, e-enable supply chains."

Nilekani could be right. Products aren't everything. Nor is it the logical ambition of every software company to create products of its own. That way, the ambition of every auto-components company in the country will be to manufacture a car. The only difference: Indian auto-comp companies do not have the wherewithal to make a car; Indian software companies have the Intellectual Capital required to develop a software product. Still, high-end services, like the Net business solutions that Malhotra refers to, are almost on par with products. Says Gupta of SSKI: ''With a growing market for services, companies do not have to worry about products.'' Seconds Ramadorai: ''The key drivers of growth over the next few years will be e-nabling technologies for e-commerce, mobile computing, re-engineering, and system integration, with focus on internal training, R&D, and the quality of services.''

Succeeding in high-end services, though, will not be easy. Indian companies that wish to operate in the high-end solutions market need to go global and hire first-world employees to man functions like marketing. Which could explain why HCL Technologies, Shiv Nadar's Ver 2000 dream of a company offering value-added services is headquartered in the US, not India.

The last word: there's quick money, not a sustainable competitive edge, in medical transcription and call centres; products are risky; and high-end services require today's software companies to re-invent themselves. And latch on to a different business model. Like tomorrow's software majors must be doing.

 

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