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Will this derail Indian IT's biggest advantage? - Views on News from Equitymaster
 
 
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  • Dec 7, 2011

    Will this derail Indian IT's biggest advantage?

    Companies in the Indian software sector (Information Technology or IT) have come under strict scrutiny in recent times. They have been facing problems such as slower demand environment, currency risks, visa issues, attritions, intense competition and rising employee costs. However till now, the IT majors were able to manage these challenges well. But now there is a new threat to them. A threat so big that it could derail the industry's biggest advantage. What is it? It is called artificial Intelligence or humanoid. To those who think we are taking a page out of a sci-fi movie, well we are not.

    Artificial Intelligence (AI) is not a new concept. In simple words it is the Intelligence of a machine or a manmade system that perceives its environment and takes actions accordingly. Similarly, concept of humanoid is not new either. In earlier science, the term was used for a machine that had an appearance resembling a human being. However, now the term is used in a more general sense. It refers to anything that has unique human characteristics and/or adaptations. You may wonder as to how something so technologically advanced pose a threat to our IT industry. Well it does.

    AI and humanoids are now being increasingly used in the Information Technology (IT) services business. How? Let us try and explain this to you. Most IT companies in India derive a part of their revenues from infrastructure management services. What they do is to use IT tools to maintain and manage the infrastructure of the client company. The implementation of this service is done by the IT company's employees. Now IPSoft, an IT infrastructure management company, uses artificial Intelligence to do the same work for its clients. Instead of using people, it uses artificial intelligence to take care of the client's infrastructure management needs. The system provided is a self-healing and self-managing intelligent system that helps the client company with single-point accountability for the entire infrastructure under management. This development is helping IPSoft to do the same work that our IT companies do but by employing lesser number of people for the same.

    And this is where the threat comes in. So far, our Indian IT companies have thrived on account of labour arbitrage. They have established their business models around the concept of off-shoring. However, advance automation like AI will challenge the very core of their existing business models. Just to give you a glimpse on the numbers involved. As per a leading financial daily, IPSoft employs just 1,400 people to generate revenues of US$ 700 m. At this run rate, it would need to employ 2,000 people or may be slightly more to generate revenues of US$ 1 bn. On the other hand, Indian IT companies typically employ 15,000 employees or more to generate the same level of revenues. Hence, revenue per employee is more than 7 times in the case of IPSoft. This is the kind of effect, automation can generate. What is more, it does not need any off-shoring. This system can provide service to its clients on a 24x7x365 basis from anywhere in the world. Hence, labour arbitrage and off-shoring are going to be challenged in the field of Infrastructure management service.

    Interestingly, it is not just infrastructure management where companies are trying to use automation. Companies like IPSoft are trying to develop a virtual service desk employee which would able to interpret voice inputs to investigate, diagnose and resolve IT problems. Many companies are trying to develop a system which can develop software applications autonomously. Though this development seems a distant at this point of time, but when it happens, it would challenge the 'Application Development and Management (ADM) Services', which is the bread and butter of most of the Indian IT companies.

    Source: Company's data

    Now you may state, that such automations are expensive. Of course they are. But even we were surprised to know that the cost advantage to the client is actually more than what it is through simple offshoring. The clients using automation systems for their IT infrastructure management are witnessing lower cost of operations. Therefore, clients are gradually shifting their IT infrastructure contracts to companies like IPSoft. And this would definitely ring alarm bells for companies like Infosys, Tata Consultancy Services (TCS) and Wipro. True, that this would happen sometime in the distant future. But, one should never forget, that in the field of technology, things become obsolete overnight. History is ripe with examples of several extinctions such as floppy discs and video cassettes.

    Similar examples are there in the services field. Just recall how hegemony of Bombay Stock Exchange (BSE) was challenged by the National Stock Exchange (NSE) when the latter started providing an online trading platform. BSE lost most of its business to NSE. This is why we feel that it would be good for Indian IT industry to wake up and smell the coffee. Though it is early in the day, but it is still not something to be ignored completely. What IT companies need to do is to concentrate more on innovation rather than just concentrating on increasing headcount. While it may be said, that the last decade belonged to labour arbitrage in the Indian software sector. But it can no longer be the only driver for the future. Would this decade belong to advanced automation arbitrage? Only time can answer.

     

     

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    8 Responses to "Will this derail Indian IT's biggest advantage?"

    Satish Chalapati

    Dec 30, 2011

    automations or artificial intelligence are not that easy as it looks like.. there are many challenges.. most of the ADM projs are automated to the optimal level.. where as the remaining level need to be taken care by human.. its obvious that AI codes are being written by human's and u can't guarantee that it covers all scenarios... and some times we may have to use lateral thinking and new concepts.. :) ... and world is changing everyday and u may not use the same s/w again and again... simple logic is very few like to use the same thing again and again.. for e.g author how many times did u change your mobile equipment :) ...

    Like 

    aab

    Dec 10, 2011

    This is not a new development - tools, process and technologies have been around for several years already
    acceptance by clients is low - hence medium term impact is considered negligble.

    Like 

    govind

    Dec 9, 2011

    Like mentioned in the article, there are several examples around us which time and again proved that it is not the strongest who survive but those who are ready to change and adapt.software companies need to change to retain their leadership position

    Like 

    Unknown

    Dec 9, 2011

    Well said about autonomous computing, It has great potential and looking forward to the future where systems will manage systems. But still long way to go.

    Organizations like TCS, Wipro & Infy might be in trouble as they don't have automata which will keep poking their engineers even at mid night when they are not working.

    Like 

    narayanan

    Dec 9, 2011

    Sunrise industries need to play the innovation game if they need to be relevant over a period of time. Key will be bringing up efficiency improvements in each process step. Even earlier case tools were attempted for fresh development and could not succeed because of poor response from the consumers. With economies going through difficulties, smarter responses will rock the established practices. This is a good wakeup call for the large players and for small players to wind up or specialise

    Like 

    amit kumar

    Dec 8, 2011

    Well nice article looking into the future. I have already seen this in my life here. If you know what justdial.com is you will understand that it has a number 69999999 where you can call and get answer to any business address of anywhere in India . Now justdial also has US subsidiary where they used people in India as answering machines such that a US person in US can call a toll free number and a live person from will india will answer it. But the whole business model has failed now that SIRI of apple is there. AI or voice recognition has completely destroyed advantage of Justdial . Same would happen here in indian software companies as rightly said by you .

    Like 

    navin

    Dec 8, 2011

    example of NSE and BSE was really great and that put things in real perspective. I too believe that in this kind of business space, one can not go with the same business model and i think our software biggies will understand this soon.

    Like 

    Prakash

    Dec 7, 2011

    Very nice article, an eye opener for IT industry. Investors too should be looking for the company who are more prone to innovation.

    Like 
      
    Equitymaster requests your view! Post a comment on "Will this derail Indian IT's biggest advantage?". Click here!
     

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