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Software: Moving up the value chain…

Sep 7, 2002

The Indian software success story began with the demand for existing software to be made Y2K compatible. The job on hand was to modify codes for existing software. Though it was not very intellectually demanding task, nevertheless Indian companies took up the race against time and did a very good job. Not only was the job well done, it was done at a very low price. Consequently, clients began to explore these companies for more and more work. Thus, began the Indian software sector’s dream run. As time went by, the Indian software companies began to move up the value chain. Moving up the value chain is to take on tasks that have a higher element of ambiguity and are more complex in nature. For example, the software companies in the past were given specification on which they had to write the codes for software and now the more mature software companies have migrated to writing specifications themselves. The clients already having worked with these companies began explore the possibility of giving projects that were more complex in nature.

Today the top-rung software companies like Satyam and Infosys have a significant amount of their revenues coming from package implementation. Wipro proved its mettle by winning a huge US$ 75 m systems integration contract from Lattice group in FY02. Further, Indian IT companies today are capable of creating IT solutions for clients (IT architecture development).

However, a the fact is that one of the major reasons for the growth of the Indian software industry has been cost arbitrage i.e. its ability to offer services at a much lower price (sometimes as low as one fourth) as compared to their western counterparts thanks to the to availability of cheaper manpower. However, going forward the competition is getting tougher. At one end is foreign competition offering competitive prices by adapting to the model of offshore development i.e. they are setting up shop in India. At the other end, the same competition will try to attract quality talent and thus, competition for talent will intensify.

Increased foreign threat
Company No of employees in India
IBM 3,100
Cognizant 2,712
Oracle 2,000
Hewlett-Packard 1,489

As the foreign competition makes inroads into the traditional stronghold of the Indian companies, its time for the Indian software companies to dent their areas of business. This can be done only by graduating to even more complex service offerings. Some are dreaming of breaking into the traditional forte of western companies, IT consulting.

Venturing into consulting makes sense for Indian IT services firms, since the role of technology has in business has changed. In the past, the role for technology firms was limited to automating certain processes. However, the technological advance has made IT central to a company’s business strategy. The Internet has fundamentally changed the way business has been done across several industries and created a whole new set of possibilities in terms of new business models.

Consequently, IT services firm also have to evolve from merely implementing technology to understanding how technology has changed their clients business and provide a solution that helps the business leverage on technology the best.

Source : Infosys

In the past, IT spends were driven by paranoia. Firstly, there was the race to be Y2K compatible and second was the fear that they would miss out on a new world that was revolutionised by the e-commerce. Their fears were unfounded. Though e-commerce bubble has collapsed but their businesses are very alive and doing well. However, to quote Louis Gerstner, Jr, ex-Chairman IBM “The collapse of dot-coms was not a failure of e-business. It was the failure of an overly narrow approach to e-business”. Undoubtedly the Internet has opened a vast set of opportunities. And the future of IT services lies in realizing these possibilities and translating them into solutions for their clients.

Quite a few software companies suffer from the marketing myopia that they are in the business of software services (building custom applications), while the smarter ones realize that their business is to help clients leverage on technology to do business better and smarter. Not many software companies are talking about moving into the consulting domain. But those that are, know their business well. As an investor it would be wise to stick with companies that have a view about how their business will evolve in the future.

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