Is This The End Of India's IT Services Success Story?

I’m currently working on a report entitled “IP-Based Solutions Will Transform The Global IT Services Industry.” In a nutshell, I believe that the business model of IT services firms (consulting firms, systems integrators, and outsourcing firms) will transform from a traditional human capital-intensive model to a software capital-intensive model over the next five years. As I will detail in my report, I believe this transformation will have far-reaching implications on the IT services firms’ organizations, including their sales, marketing, portfolio management, and delivery capabilities.

As I’m based in India, I also see this change as a major disruption for India’s export-oriented IT services industry (AKA “offshore services”). I believe that the growth model for India’s IT/ITeS industry’s in the next 20 years will be much different than it has been for the past 20 years. Software assets — what I also call IP-based solutions — will become critical to the competitiveness of the Indian IT services industry. The recent investments of companies like Infosys, HCL, and NIIT Technologies in such IP-based offerings are strong proof points.

This means a couple of things for the Indian industry:

  • The Indian IT/ITeS industry will create far fewer jobs than in the past. This is what some Indian firms refer to as “non-linear” business models.
  • The skills in this new model will be very different from traditional IT services skills. In particular, the new model will call for skills that are closer to product engineering than to application development. And India does not seem ready for this: A recent report showed that less than 3% of engineering graduates are employable by IT product companies.

In order to be successful in this IP era, Nasscom and other IT trade associations in India will have to work collaboratively in order to:

  • Invest in skills development, especially around software product engineering, business analytics, domain (industry) expertise, consulting, and program management capabilities.
  • Foster innovation and level the playing field for smaller organizations to succeed — in particular local software organizations around cloud, mobility, social networking, and business analytics, but also as pertains to business process management and automation capabilities.

The Nasscom Industry Leadership Forum (NILF) celebrated its 20th anniversary two weeks ago in Mumbai. With a 19% growth rate expected in the fiscal year ending in March 2012, we cannot say that the industry is going through a “youth crisis.” Still, during my interactions with executives from IT services firms there, I felt that the industry is getting more anxious about its future, as its main value proposition — labor arbitrage — is slowly but surely losing traction. At the same time, it received four amazing anniversary gifts: big data, cloud, mobility, and social computing. I am curious and eager to see how it will leverage these gifts on the road to adulthood and IP-based solutions.

Comments

Spot on

Your closing statement on the potential of big data, cloud, mobility and social computing is a spot on, and i share the same curiosity about India's IT.

Any success stories yet?

I agree with your overall reading of the situation, but just wondering if you seen/heard any instances of these companies tasting success with these new offerings yet?

Adoption is still low – although this is changing fast

Early successes are there and IT services vendors have started communicating about them (as a matter of fact my next blog post will be about one of this recent wins) – but the key question is “will these offerings scale”? As opposed to traditional approaches where the IT services firms sell a dedicated project for a specific client, the successful vendors in the IP era will be the ones able to sell the same IP to multiple clients AND make this IP continuously evolve and provide incremental value to these clients.

Too early for IP-led solutions to have any impact

While I agree that emerging trends like big data, cloud, mobility and social computing will be key focus areas for IT firms going forward, they are unlikely to change the way things work even in the next five-ten years. Maybe 20 years hence, their contribution may be more meaningful.
1: Barely 3-4% is the contribution of products and IP-led solutions as of now and this has been so for several years now.
2: Like you mentioned, Indian IT companies have never had a 'product' culture, and lack such skills as of now. What could possibly bring about a radical shift in that to cause a 'disruption' in the business model? Training? Change in the way education is imparted in engineering colleges? Tough task.
3: Moreover, one cannot simply do away with routine commoditized IT maintenance activities that form the bread and butter of Indian IT. 60-70% of a firm's expenditure still goes on these and will continue to form the larger chunk even 20 years hence.
The Indian IT industry, especially the top 5 or 6 will continue to survive largely on the traditional work that they have been doing, with a few cherries on top in the form of IP solutions.

Rather, emerging trends are giving rise to a new breed of IT companies in India. Young, creative and smart entrepreneurs setting up software firms focusing on areas like big data, IaaS, SaaS, mobile apps etc. High fragmentation. While there is a lot of innovation happening, only time will tell how many of these will achieve any scale and sustainability.
Meanwhile they will continue to coexist with the big maintenance vendors.

Relevance is the main driver

Hi Priya,

Thanks a lot for this very interesting feedback. I believe all the points you are making are valid. However, I think that the change will happen much sooner than you think. Here is why: MNCs and Indian IT services firms understand that the labor arbitrage is not sustainable in the long term. The margins of the top Indian players have been steadily decreasing over the past few years – driven by salary increases in India, increased investments onshore, and the fact that clients are not ready to pay a premium for commodity services like Application Maintenance. On top of that, I believe that IT services firms are concerned that their current offering will not be relevant to their clients in the long term. This is the #1 challenge for global and especially Indian IT services firms going forward – and that’s why I believe Indian firms will lead the IP revolution charge – even though companies like IBM and Accenture are now well prepared for this IP game.

To come back to your points:
1- Yes you are right. Although I am expecting this to change fast over the next 2-3 years. As I explained above, clients approach to external IT services is changing. Second, the IP discussion is now led from the top. As compared to 2-3 years ago, IP initiatives are now among the top priorities of any CEO in the industry and this will make a big difference going forward.
2- This change will not be easy and/or happen overnight. To go even further, I believe this is a complete transformation that companies need to operate internally (how they are organized, how they sell, the skill they recruit, how they deliver…) and externally (how they engage with their clients and partners – including educational bodies, how do they communicate to their shareholders…). But companies will (and some already are) take the necessary steps. The risk to see their competitive advantage fade away is just too important. Some of them - of course - will fail along the way.
3- Agreed. Companies I am talking to usually mention that the goal is to have 30% of their revenues coming from IP based services. They believe they can achieve this through 2015-16. So it is safe to say that the traditional IT services are not going away anytime soon.

Your final point on new software companies is also valid. In particular, this is really exciting to see that the software vendor ecosystem in India has been jumpstarted over the past few years with a lot of innovative approaches to Cloud (especially PaaS) and mobile. They also are important agents of change. One element that I have not included in my blog is that I believe large IT services vendors have a key role to play in the future development of these companies. Strong partnerships with these software players and even merger and acquisitions should be on the strategic roadmap of large IT services companies in their efforts to strengthen their IP portfolios.

Too early for IP-led solutions to have any impact

While I agree that emerging trends like big data, cloud, mobility and social computing will be key focus areas for IT firms going forward, they are unlikely to change the way things work even in the next five-ten years. Maybe 20 years hence, their contribution may be more meaningful.
1: Barely 3-4% is the contribution of products and IP-led solutions as of now and this has been so for several years now.
2: Like you mentioned, Indian IT companies have never had a 'product' culture, and lack such skills as of now. What could possibly bring about a radical shift in that to cause a 'disruption' in the business model? Training? Change in the way education is imparted in engineering colleges? Tough task.
3: Moreover, one cannot simply do away with routine commoditized IT maintenance activities that form the bread and butter of Indian IT. 60-70% of a firm's expenditure still goes on these and will continue to form the larger chunk even 20 years hence.
The Indian IT industry, especially the top 5 or 6 will continue to survive largely on the traditional work that they have been doing, with a few cherries on top in the form of IP solutions.

Rather, emerging trends are giving rise to a new breed of IT companies in India. Young, creative and smart entrepreneurs setting up software firms focusing on areas like big data, IaaS, SaaS, mobile apps etc. High fragmentation. While there is a lot of innovation happening, only time will tell how many of these will achieve any scale and sustainability.
Meanwhile they will continue to coexist with the big maintenance vendors.

The change that I see is in

The change that I see is in HOW part of the service delivery. Each of the service providers will need to think on building own solutions which will ADD VALUE to the customer's business process. To retain customer hence forth is a big challenge even for BIG companies. They need to build solutions which will help them beating the continuous challenge of the service industry "Today's value addition will become a hygiene factor tomorrow".

and how?

All current players can become service brokers for one or another IP based solution and add value to customer's business process. Big data, cloud, mobility, and social computing are creating fair amount of disruptions and customer experience is becoming an important part of overall delivery. Providers and consumers are so much hyperlinked today that we are going to witness exciting conversation business has ever engaged in.

IP is dead - Long live IP!

Hi Umesh – thanks for your comment!
I like your comment- "Today's value addition will become a hygiene factor tomorrow". Like any other asset, IP has a lifecycle. This will force vendors to put the right portfolio management processes in place to keep on innovating. Only this continuous innovation approach will generate differentiation for the IT services vendor and make clients keep on coming back.

It depends on the IP maturity level…

Hi Yogesh – thanks for your comment!
In theory, All current players can become service brokers for one or another IP based solution and add value to customer's business process. I would argue that it all depends of the level of maturity of the IP. I believe this model will be true once the IP has reached a certain maturity level – almost becoming a stable product. Before this stage, IP will remain close to the IT service vendor.

Fred you are right ... The

Fred you are right ... The need of the hour for Indian IT / ITeS industry is to provide solution or product based services or strategies service delivery on the RE-USE basis. This will help them increasing the PRODUCTIVITY per dollar spent and help forth coming challenges of executing more FB contracts in a profitable way by sharing profits with the customer. Rather I will call it as Customer Centric Productivity. The only way to achieve this is strategies your business around KNOWLEDGE ... its high time to build KM practices to beat raising costs of people and their productivity.

Founders not employees have to change first

Yes, the model will change to IP based economy. But it is a function driven by the founders and not necessarily the engineers. Upon graduation, most engineers are not baked into a single line of thinking and are open to work in different models. There are after all several product based MNCs who have hired the fresh grads to write new products.

The change will come as the industry matures and there is more VC funding available.

Four Essential Components Of Successful Innovation Initiatives

Hi Manish, thanks for your feedback!

My fellow analyst Chris Andrews has written a very interesting piece of research some time back detailing four of the fundamental components of successful innovation. Strong innovation programs have: 1) a strategy that senior leadership supports; 2) a dedicated management function; 3) contributions from individual employees; and 4) a connection with the community.

I believe all of these elements need to be present to help IT services vendors innovate on their journey towards IP based services.

Excellent article. There are

Excellent article. There are two forces at work here. Most sectors are looking for solutions that allow an uptick in revenue. Cost Reduction is old hat - expense management isn't but cost reduction is. This will reshape the services industry into more asset based services. The other force is on the supply side. With labor costs and currency markets taking the cost proposition away, value has to take prominence.

Cost is never a sustainable advantage. I would submit that you will see this into asset based services a lot sooner than people expect.

Thanks!

Thanks Sanjay for your feedback – This is highly appreciated!

We are currently consulting

We are currently consulting and developing solutions for IT organizations' productivity improvement. our approach is based on software engineering principles.

Software will drive way you

Software will drive way you do things - that's right. More you want efficiency - more you will use software solutions to automate things. But even when you are fully automated - you need people to do work. In case of consulting - you can automate gathering of needed information, but you cannot replace human for making report and recommendations. That means your nutshell "traditional human capital-intensive model come to a software capital-intensive model" is wrong. You will get both factors (human capital and software" as a critical.

Money is valuable than biting on Slevary

I see the future as death of clients first.. then transformation of Services industry.. It should have happened long ago.. however due to wrong maths & culture which got so much go in.. it would take decades for people to start even seeing the problem & roots for it..

Some of the cultures, which is leading to this fate are

1. Count Bugs as the way to show the complexity - Clients feel so good about having some numbers.. show them in the form of bugs
2. Show lower hourly rate as the way to win the client - Clients are fancy about lower hourly rate and unrealistic commitments and fail to realize that, total cost of the solution is not unrealistic estimates
3. Create complexity, so that one could continue to add bodies - Clients have to feel the pressure of not able to see the deliveries happening, even after people working 24x7 when they are paid only for 8x7 hours..
4. Make sure we add people on the name of improvement of bad results.. - So process had to work on managing bad results.. than focused on doing thing right first time

It me Product & Services are not different in their natural state, if either of them have strong respect for their last mile..
However mutual greed on either side has created this mess.. Share holders are happy to see their virtual currency grow..
In all good to see this ar

I agree to many points author

I agree to many points author has mentioned. But how i see the whole IT spectrum is a bit different. Lets rewind ourselves back a bit. 15 years back we even did not have any application development skills. Now Indian's are decent at it ( if not experts ). If the world over market is moving toward product development as a nation India will adapt itself.

The point am making is we need to do the activities as author suggest but don't ignore the ability for the race to adapt itself when there is need.

We are conulting IT companies

We are conulting IT companies in improving IT productiivty. Some of our observations are

1. In several IT companies (we are engaged with) do not have non linear growth, productivity improvement, and innovation on their agenda.

2. Top and middle management is busy with day-to-day operations and do not have time for strategic but not urgent initiatives.

3. IT service providers (that we have observed) are happy in working on time & materail rate contracts and engagements in coding, testing and application maintance.

4. Quality certifications are for compliance and there are hardly any effort to gain effective software engineering practices to improve productivity and quality.

5. While moving towards IP based working Asset Based Development strategies can be the first step, but we do not find focus and priority for this strategy.

Is your report out yet?

I would love to read it. Thank you!