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Software: Survival of the fittest! - Views on News from Equitymaster
 
 
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  • Aug 25, 2005

    Software: Survival of the fittest!

    India's software sector is a showpiece of the country's prowess in knowledge-based industries. In industries like software and pharma, India is clearly moving up the value chain. Indian companies also carry out high-end design and development in industries like automotive, aerospace, high-tech and defense. It can be correctly said that, while China may have its strengths in mass manufacturing, India's comparative advantage lies in the knowledge-based industries, where 'brain power' is the driver. What is more, this 'knowledge' comes at a much more reasonable cost than in other countries. Thus, this unbeatable combination of 'brain power plus reasonable cost' makes for a compelling proposition indeed!

    This has been the major factor behind the strong growth of the Indian software sector in the past. However, one has to understand that, in order to survive and be a long-term player, a software company and for that matter any other company in any other sector has to have the ability to foresee trends, build a sustainable competitive advantage and constantly re-invent itself.

    Move up the value chain is on!
    The top players in the software industry continue to make efforts to move higher up the software value chain. This is in part due to increasing competition in the application development and maintenance (ADM) space, which is prone to easy commoditisation due to the lower level of skills required to provide these services and partly due to the fact that the companies themselves aspire to become global players of significance and make a difference to their clients and their businesses.

    If any Indian software company wants to be around, say, 100 years from now, what will it have to do? Quite clearly, building competencies in higher end services is a priority that it will ignore at its own risk of survival. Companies like IBM have been around for so long because they have built up strong competencies in areas that are not easy to master and compete in. The company has also been able to re-invent itself as and when the need has arisen, depending upon business conditions. The recent hive-off of the company's PC business to the Lenovo Group of China is an example of this. Thus, despite being an elephant in size (CY04 revenues: US$ 96 bn), the company has still shown the agility of a deer!

    Therefore, a rapid move up the value chain is a positive. These companies are building competencies in services like package implementation, consulting, systems integration and infrastructure management, which will definitely help them to grow revenues and build long-term relationships with their clients, as through these services, they can make a bigger difference to their clients and the way they do their business. The major factor to note is that, Indian companies are becoming more proactive in dealing with their clients, as opposed to a reactive approach. It is like saying that, "I understand your business and I have developed a set of technological and business solutions to all the possible problems that you might face in your business in the future", as opposed to "Oh, you have a problem? I will develop a technology solution for you!"

    Examples of this are Infosys Consulting, an organisation set up by Infosys specifically to cater to the consulting space. This unit provides best-of-breed consulting and business solutions to clients at competitive costs to help them transform their businesses. Other examples are i-flex solutions, which, through its services business, aim at providing proactive solutions to its clients, rather than just the ADM work.

    To put this in numbers, Infosys' share of revenues from high-end services stood at a significant 35% in FY05. Satyam earns as much as 35% of its revenues from package implementation services. i-flex solutions, on the other hand, is at the highest end of the value chain. Its core banking product, Flexcube, has been ranked as the largest-selling core banking solution for the last three years in a row by IBS, UK. The client metrics of these companies are improving with every quarter and a greater number of clients are giving increased business to the top tier companies. The million dollar clients are increasing and the levels of engagement are also going up, as they show more confidence in the ability of the Indian companies to scale up to meet their ever-growing and more complex requirements.

    So, where do we stand?
    Clearly, all these trends point to the fact that Indian companies are, slowly but surely, moving higher up the value chain. Of course, they will have to face competition from the likes of IBM and Accenture, going forward. But, no doubt, there is a long way to go. Companies like IBM, Accenture and EDS offer the full range of services to their clients and it is going to take a while before Indian companies can reach that league. We claim that we are a software superpower, yet our software industry is barely 3% of global IT spending. Therefore, the road ahead is long and arduous.

    Mr. N.R. Narayanmurthy, the Chairman and Chief Mentor of Infosys, has said that his heroes are companies like IBM and Levers, which have continued to grow over a long period of time and have survived for such a long period of time. Thus, his intentions are very clear. He wants Infosys to be a company that will survive the long haul and make a difference to the world. Undoubtedly, the other software companies will also have to show this kind of a vision if they want to be around, 100 years from now.

     

     

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