How can IT be sustainable?

Product development is vital for long-term sustainability of software industry

The Indian IT industry has crossed $15 billion in revenue with an increase of about 30 per cent in software and services export. It now employs more than 650,000 people and contributes to about 3 per cent of the country's GDP. A critical examination of the growth figures is needed to find out whether this momentum can be sustained.

Although India continues to make an impact in software services, revenue from products contributes a miniscule 3 per cent of total exports.

Product development is fraught with risks, but it is a high value-added activity and necessary for the long-term sustainability of our software industry. Products such as FlexCube by i-Flex, Marshall by Ramco Systems and Quartz by Tata Consultancy Services (TCS) have earned their accolades.

It is now time the biggies such as Infosys and Wipro devote part of their energy in product development. Unlike Indian companies, multinationals such as GE, IBM, Intel, Oracle, Philips and Texas Instruments are increasing investment in their India development centres (IDCs) and are focusing more on product development.

This is evident in the number of patents filed by IDCs of Philips (102), Cisco Systems (120), Intel (125), Texas Instruments (225) and IBM (120). Although the revenues of multinational IDCs contribute to just about 19 per cent of the total software export revenue, they have started giving tough competition to Indian companies.

Another important caveat is that the domestic market contributes to only 15 per cent of the total IT industry revenue. Even this small domestic market is being dominated by products of multinational companies, while in China 33 per cent of the domestic product market is held by local firms.

The collaborative effort by Indian software companies has resulted in computerised passenger reservation system and online rail ticket booking, two of the greatest IT and e-commerce success stories in a developing country that benefit millions of people across the country.

The huge, untapped domestic software market needs the attention of the software industry. If Indian companies want to beat multinational firms in the product space, one option could be to concentrate on developing niche low-cost products based on open source operating platforms such as Linux.

These can compete on both quality and price with products from foreign companies, not only in India but also in other developing countries. It is time our software companies spread their presence outside India.

Currently, over 65 per cent of our software export revenue comes from the North American market. Companies such as Infosys, TCS and Wipro have spread their presence in the European and Japanese markets, but the dependence of our software industry on the US market cannot be underestimated.

Although margins will be squeezed in the short run, Indian companies should actively engage themselves in product development for domestic as well potential foreign markets for long-term sustainability. The government, on the other hand, should devise policies and expedite e-governance initiatives to give a boost to domestic IT spending.

The sunrise industry in the business process outsourcing (BPO)/IT-enabled services (ITES) sector has been booming lately. It grew at a rate of over 50 per cent over last year and contributes to 23 per cent of IT export.

The sector employs close to 170,000 people. A real benefit is that companies are setting up units not only in Bangalore, Gurgaon, Mumbai, Hyderabad and Chennai, but have spread their wings to smaller cities as well, thanks to improvements in infrastructure quality, especially telecom.

For example, GE Capital International Services, one of the largest multinational captive BPOs employing more than 12,000 people, has recently opened a centre in Jaipur.

Ahmedabad, Bhubaneswar, Chandigarh, Goa, Kochi, Mysore and Pune are also in the radar of some BPO companies. This leads to more employment in these cities and consequently, promotes economic development of these areas.

But the sector has also been affected by a politically-unfriendly climate, especially in the US and the UK, which has resulted in some closures. A notable example is American state Indiana's withdrawal from a $ 15 million contract with TCS.

The Omnibus Spending Bill, which was recently approved in the US senate, bans US companies, which are in charge of executing federal projects in certain departments, from sub-contracting the work to overseas companies.

Though currently the effect of this ban on Indian companies could be minimal, it might have long-term implications on the growth of the country's BPO industry.

With China climbing up the BPO ladder, the quality of service will be a critical differentiator for Indian BPO companies. The recent walkout by Lehman Brothers and Dell from their projects in India is just the tip of the iceberg.

The Indian software industry deserves kudos for having almost quadrupled the revenue base in the past five years. But now it is time to think seriously the long-term sustainability.

(The writer is a professor at Management Development Institute, Gurgaon)