Choices before the IT industry

The massacre of weaklings in the infotech industry is over.

It has not been so spectacular in India as in the Silicon Valley. There anyone one talks to has stories of friends having lost jobs, reneged on mortgages, taken jobs as waiters and so on.

Two years ago, restaurants in San Jose used to write on bills: 'Come and work for us'; now they no longer do so.

In India, many IT firms that were flourishing three years ago have died or become skeletons. But one does not hear stories of mass unemployment amongst software professionals.

This is because the slowdown in the industry has been less severe in India.

Revenue growth slowed down to 23 per cent in 2001-02 from 49 per cent in 2000-01; the fall was entirely in software services, both at home and abroad.

The growth of the volume of work must have been greater; if the billing rates fell by 18 per cent, the growth of volume would have been the same in both years.

There was, however, a considerable change in the distribution of work; the biggest firms survived the slump much better than smaller ones. And since productivity in the big firms was higher, employment elasticity of output also fell.

But considering all factors, it is unlikely that total employment in the industry fell much. Some of those who left probably found places in IT user firms such as banks and insurance companies; a small number left the industry perhaps.

What happened, however, is that fresh recruitment fell heavily -- the aspirations of many youngsters who had expected to join the gold rush must have been crushed.

Still, even amongst surviving firms, the level of uncertainty is high. Many of them realise that a structural break has occurred, but few are sure where the future markets lie.

Many have strong views about this; but the basis of those views is weak. Let me enumerate the points of controversy.

Home versus overseas market: This question generates much passion, more amongst outside intellectuals than in the industry itself.

One often encounters the view amongst the former that the industry has somehow failed India -- that it should serve India before exporting, that it should work harder to develop the domestic market.

Academic articles -- certainly in economic journals -- focus disproportionately upon domestic, especially non-profit applications of IT.

Technologists have also worked on domestic problems. The industry has not shared this bias; the growth of its domestic sales fell more (from 31 to 11 per cent) than exports (from 38 to 21 per cent) in the past two years.

When questioned, industry people say that the domestic market is less profitable and presents more hassles. The industry, it seems, suffers from a serious handicap vis-à-vis its competitors.

The latter, whether in Ireland, Israel or China, have developed a domestic market and obtained considerable domain knowledge.

Indian firms have generally not done this; even when they needed domain knowledge, they preferred to employ professionals from the user industries.

The bigger IT companies sit on big liquid reserves; their most popular investment is offices and subsidiaries abroad. If they invested some of their profits in subsidising work for Indian clients who might yield rich domain knowledge, that knowledge could be leveraged in work abroad.

Products versus services: This issue also generates much passion. The general belief is that products pay more, and that by specialising in services Indian firms have missed a chance.

By now there are a few Indian product firms; they are run by committed enthusiasts. The rest of the firms do not bother.

Views in this area have been too influenced by the prominent examples of the great product firms such as Microsoft, Sun and Oracle.

They are not good models for the Indian industry. They have close connections with the hardware industry, which is largely absent in India; and they have set up strong entry barriers.

Indian firms would find it impossible to enter their markets. Few in India realise how small Indian firms are. In a BusinessWeek enumeration, Wipro and Infosys were No 25 and 28 amongst the top 30 software firms. The turnover of Wipro was $696 million; at the top, IBM's was $83.4 billion, Microsoft's was $27.7 billion and EDS's was $21.9 billion.

Indian firms have some way to go before they can compete with the giants. But the contrast between products and services is posed too starkly. If a service is repeatedly used, it approximates to a product; if a product requires much service, it is only partly a product.

The market for products is developing fast -- especially for products that automate programme writing and make it more reliable. The quality standards for products are very high, they require marketing, and they need capital while they are being developed.

Despite these difficulties, Indian firms are entering the product market, and more will. At the same time, a more continuous process is converting near-services to near-products: services firms are taking on jobs in a certain area and reusing parts of work done earlier in new contracts.

This is easier for bigger firms; that is one reason why they have grown faster. In general, Indian firms are aware of the higher profitability of product markets, and are moving towards them.

Fixed-price versus cost-plus contracts: Indian firms commonly work on a cost-plus basis. Since their costs are lower, so are their returns.

Firms in industrial countries more often take on an entire job for a fixed price, and consequently make profits. That fixed-price contracts give a higher profit is a correlation: more complex and larger jobs are done on a fixed-price basis, and there are fewer firms doing them, so they earn more.

Indian firms broke into a market dominated by fixed-price contracts by offering to work on a cost-plus basis; not having a brand name or track record, this was the best thing they could do.

Even if they enter into fixed-price contracts, they will charge less; that is their competitive advantage. In any case, the dominant pricing model is changing.

The new norm is contracts that involve sharing of savings. CIOs of US companies are under pressure to cut costs, so they are engaging firms that can promise the greatest cost-saving.

Thus, it seems that most criticism of the IT industry is not well founded. The industry is aware of the options, the choices it has made are largely rational, and it is moving in the direction of maximum advantage.

But despite Nasscom, and despite industry fairs, there is not much open discussion within industry, and not much information sharing; these are the directions in which it needs to move.