By Mukta Malhotra

It is not that the Indian software industry has nothing to cheer about. Probably, no other industry has contributed so much towards global competitiveness and created so many Indian millionaires in such a short span of time. Of the 19 companies in the world that have acquired SEI level-5 maturity, 12 are from India. With a compound annual growth of more than 50 per cent between 1990 and 1999, the Indian software industry has expanded almost twice as fast as the American software sector during the same period, albeit on a smaller base. True, Indian software industry has consistently grown by more than 50 per cent annually.

Consider market capitalisation of listed software companies in India. It was pegged at US $42 billion as on 30 December 1999. Just a year ago, the figure was a mere US $4 billion. Top 25 Indian software companies have been able to attain critical mass, both in terms of revenue and market capitalisation. What more, the Indian software industry has the ability to become a world leader. According to the National Association of Software and Services Companies (Nasscom), by 2008, software and related services could contribute over 7.5 per cent of our overall GDP growth and there could be over 10 large software multinationals with revenues of over US $2 billion each.

Major obstacles
Over the past decade, the Indian software and services industry has been able to rake in heartening gains in terms of growth. "The next ten years would be the years of consolidation, spread, leadership and creation of original technology. All these will lead to creation of wealth, jobs and of course better quality of life. It is going to be the industry's second tryst with destiny. India should reset its aspirations for the information technology sector. It should be able to increase revenues from US $5.7 billion in 1999-2000 to US $87 billion by 2008," says Dewang Mehta, president of Nasscom.

Good enough. But that high road to growth is also littered with daunting challenges and thorny issues. Exhausting the H-1B visa limits has been adversely affecting some of the onsite projects. Continuance of physical bonding in units based in software technology parks, export-oriented units (EoUs)and export processing zones (EPZs), lack of global parity in telecom tariff and inadequate telecom infrastructure are major obstacles for growth in the Indian software industry.

What needs to be done now? There should be reduction in tariffs for international connectivity. Such tariffs should also be discounted as volumes rise. Today, the cost for an 1-MB link is about US $ 35,000 per month in India against US $4,000 per month for an 1-MB coast-to-coast link in USA. According to Nasscom, adequate bandwidth needs to be provided. Over the next five years, Nasscom has estimated that there will be a 1,000-fold increase in bandwidth demand. If bandwidth is not provided, India could lose the opportunity to earn as much as US $22.5 billion and the opportunity to create as much as 6,50,000 jobs.

Emerging opportunities
Adequate bandwidth is the most abiding problem facing the Indian software industry today. But, quite a few opportunities are emerging for the industry, both in traditional and new areas. Consider: India has been identified as a major source for IT-enabled services such as credit cards, call centres, medical transcriptions and insurance. The software training market is likely to grow at over 30 per cent annually and here Web-based models will have the highest growth potential. And there are exciting opportunities emerging in multimedia. Says Gul Tekchandani, chief investment officer of Sun F&C Asset Management: "Only 15 per cent of the world is computerised. So, there are a lot of growth opportunities. Intranet and Internet are going to be big growth areas."

Old generation-services might continue during 2000-01. But, it is the breed of new generation web-enabled services such as application service providers (ASPs) and interactive architecture that are going to dominate the scene. So, Indian software companies should not only leverage on current capabilities, but also foray into rapidly-growing new service areas such as e-commerce, knowledge management and convergence applications.

The biggest drivers of the e-commerce solutions market are going to be supply chain management optimisation and customer relationship management (CRM). For, these drivers spur B2B transactions. Consider: more than 68 per cent of Indian software houses have expertise in supply chain management and CRM solutions. "There are growth opportunities in anything related to e-technology, be it a back-end tool or a front-end tool such as CRM. Moving your current applications to an Internet-base is a high-growth area," says Kumar Subramanian, vice chairman of Silverline Technologies.

The bottomline then: emerging customer segments such as ASPs and dot-coms need to be fully exploited. The Indian software industry has been undergoing transformation in a major way by retraining its employees in new areas such as e-commerce, Euro solutions, CRM, ASPs and IT-enabled services. But, greater efforts are needed in these areas. Another major challenge before Indian software companies is to seed options for future growth in areas such as software products. And they will have to extend into new service lines such as Web-enabled legacy applications and middleware-based legacy systems.

Value chain demands
There is more in the pipeline. With the convergence of telecom and information technology, there will be increased demand for software to support WAP-enabled phones. Players are going to demand more vertical and cross-industry-packaged applications. There will be demand for telecom software for providing higher functionality to switches and for functions such as network management. "Software is being written for enhancing the function of existing networks and devices. If, in the years to come, the ratio of hardware to software becomes 20 to 80 per cent, one should not be surprised," says Dipankar Choudhury, vice president of ICICI Securities and Finance Company.

Alongside, smart packs such as bundles of intelligent devices, personalised connections and digital content will emerge over the next five years. These will drive the growth in the Indian software sector. Software for delivery of multimedia information on mobile devices will also be required. Software companies will then have to get into complex applications. The Indian software industry will also have to acquire expertise in vertical or domain areas. Domain expertise on health and insurance also need to be developed. Interactive integration services is an emerging IT service that should be explored.

Needless to say, the Indian software sector needs to ascend faster on the value chain ladder. The sequence of steps in the hi-tech value chain is: information, knowledge, ideas, innovation, product development and marketing. Basically, India is still at the knowledge level. The Indian software industry will need immense capital and infrastructural requirements to move up the value chain.

Considering limited infrastructure, low foreign investments and other transitional problems, venture creation becomes crucial for sustainable growth in the sector. And that should help the industry to maintain India's competitive edge in the global markets. Though venture creation is happening in India, thanks to the ongoing boom in dot-coms, it is still in a nascent stage. Venture creation in India suffers on several counts: scarce management talent, paucity of risk capital, few high ideas and no exit options. And above all, no policy support.

What should be the plan of action now? Central and state governments should support non-profit incubators who provide value-added advisory and information services and certain support infrastructure, including a productive office environment, finance and complementary resources. Here is a suggestion from Nasscom: "In the USA, even city governments have promoted several incubators to capture a portion of Silicon Valley's high technology business. Statistics indicate that about 25 per cent of incubatee firms are successful. The Government of India should catalyse this process by creating Israel's Yozma-like funds. To help ramp up growth, Israel has set up the Bilateral Industrial Research and Development (BIRD) Foundation to encourage technology co-operation between Israeli companies in the USA."

In a bid to move up the value chain, Indian software companies should move away from maintenance to development to strategic information technology consulting, architecture development and research and development (R&D)."R&D is important. Indian software developers should graduate from services to research. This should be their key focus driver," says Tekchandani of Sun F&C Asset Management. The Indian software industry should also go in for an early adoption of emerging technologies. It should in fact lead the customer to newer technologies.

Strategy needs
Indian software companies should focus on developing deep technical skills that would in turn facilitate creation of intellectual properties. "This intellectual property should be leveraged to create proprietary solutions that blur the boundary between services and products," says N K Patni, CEO and director, Patni Computers. Indian software companies should acquire business consultancy skills such as system integration process skills.

Usually these jobs go to the big six consultancies which have business knowledge and outsource software. This business fetches high rates. Outside the realm of these big six consulting companies such as Mckinsey and Arthur Anderson, there are companies such as Siant, Viant, Proxycom, Agency.com, Whittman-Hart and Keane in USA which offer this facility. "To get to that level, it would take a lot of time. But we can progress. Internet consulting can fetch 20 to 200 per cent more," says Choudhury of ICICI Securities.

That is hitting the nail on the head. According to Nasscom, India's objective should be to create at least five diversified IT-service MNCs ranked among the top 20 global players and over 25 niche players with significant shares in target segments. For that to happen, not just technical quality but process orientation in all activities will have to become the order of the day.

And Indian software companies will need more focus, strategic planning and investments in right technology. "Indian software companies should identify the right business tool. They should ramp up skills, create expertise and search for projects," says Subramanian of Silverline Technologies. Adds Patni of Patni Computers: "Significant cultural changes will be required to drive innovations in the global context."

Not just that. Indian software companies will have to grow in size through mergers and acquisitions, setting up development centres, recruiting local sales forces in other countries and striking strategic alliances. Cautions Tekchandani of Sun F&C: "Indian software companies should take care and go through the expansion process step by step."

Penetrating markets
In a bid to become MNCs, Indian software companies need to beef up existing markets, penetrate under-developed markets and explore new markets. All those players who have attained critical mass need to expand their geographic contribution markets. Says Tekchandani of Sun F&C: "To become competitive, Indian software companies should concentrate on relationship building. They should get repeat orders from the same customer." Indian software companies need to be close to the business and functions of their clients. They should also be close to systems and get to the roots of functionality of their clients. They should try to be an important part of the R&D process of their clients.

For deeper penetration, Indian software companies will have to list themselves on overseas stock exchanges. The government should assist the Indian software industry lead brand equity promotion overseas. "We feel a special fund of Rs 100 crore should be provided by the government towards building a global brand equity for the Indian software industry. Let the industry run this programme," says Mehta of Nasscom. Branding is another pre-requisite for penetrating markets. "As we move from services to solutions, we will require branded solutions. Branding and overall corporate identity will become extremely important," says Patni of Patni Computers.

The Indian software industry has carved a niche for itself overseas. It should now leverage that niche-status and push up the industry's global marketshare. Says Marzban Patel, chairman and managing director of the Mediascope Group: "More global thinking is required. It is time India ran a Made-in-India campaign. We should follow the eight-year old Made-in-Taiwan example."

The plan of action
Now is the time for the Indian software industry to think and act big. We need to encourage hi-tech habitat centres, create islands of world class infrastructure and establish development centres in countries having surplus skilled manpower.

Most successful software companies are American. The reasons: deep penetration of computers, a strong legal framework with enforceable intellectual property rights, competitive environment fostering innovations, interventions and self- mandated standards, strong infrastructure and telecommunication network, rapid technological changes, new software at every change and a vigorous export growth. These are the factors that have been driving software companies in USA and elsewhere up the growth trajectory. In comparison, the Indian software industry fails on several counts.