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Software: Inflection point

Jun 11, 2002

One of the biggest success stories of India is the stride that Indian software companies have made on a global scale in the recent past. A number of companies have spread their wings in the international markets and are now catering to the Fortune 500s of the world. This is quite an achievement considering the fact India was yet to make its mark as an industrial economy. India Inc was able to spot the potential of software and related activities earlier. However, it seems that we might miss this revolution also if things move the same way as it has been in the last two years with Indian software companies. Before going any further, consider the size of the global software sector. Market size of the software sector, on a global scale including hardware, software and services, is estimated at US$ 1,200 bn in FY01. Of this, software alone accounts for as high as US$ 389 bn. India's market size for software alone is around US$ 8 bn (roughly 1.5% of global market size).

What do the figures above tell us? Indian companies are still very small when visualised on a global scale. Given the fact that we are still small, should a fall in tech spending affect at all? If the Indian software companies have been affected, why is it so? Probably, due to the fact that majority of the Indian companies are not providing mission critical applications, which are essential for smooth functioning of an organisation, and are at the lower end of the software value chain.

Thus, despite of being very small in size, they are facing pressure from all sides (be it, billing rates, new contracts etc). This is due to organisations cutting their IT spends to keep costs down. And it makes more sense cut on smaller tech budget as opposed to installation of a SAP system, which could save millions in the long run for an organisation. Though Infosys is ranked as a top rung software company in India, when viewed on a global scale, with revenues of about US$ 613 m it is miniscule compared to IBM that had around US$ 38 bn in revenues in 2000.

But this is not to undermine what we have achieved over the last decade. Bear in mind the infrastructure constraints that these firms have been facing. Bare necessities like bandwidth have been scarce. However, the potential of the Indian software sector is now being recognised world over.

But after rising to the occasion, they are faced with a new challenge of moving further up the value chain into domains that have been traditionally the strong hold of Western consulting and services companies. This is an uphill task, which of course is easier said than done. Value chain graduation does not necessarily mean just moving one step ahead from body shopping to call center business.

The competitive edge of Indian IT sector, as of now, is lower labour costs. But how long can we sustain such model? This cannot be a sustainable unique selling proposition in the long run. As Deepak Ghaisas, CEO of i-flex Solutions puts it "the IT industry, in the last three decades of its growth, has been constantly arbitraging labour costs. That needs to change now..." Read more

Companies like Check Point of Israel, global leaders in security software, are able to circumvent the slowdown to a certain extent because of a strong product portfolio. The company spends around US$ 7 m per quarter in research and development (7% of revenues), whereas Infosys' R&D spend in FY02 stood at US$ 3 m per annum (1% of revenues). Companies like Intel and IBM thrive on R&D and one can see the size and magnitude of operations. Therefore, R&D is imperative and only that could provide long run competitive advantage.

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