Indian IT undergoes transformation as nimbler startups take over from larger rivals

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New Delhi | December 15, 2016 6:21 AM

Nimbler, domestic-market focussed start-ups are taking over from large, export-focussed services companies

Even today, IT services sector is externally focussed, with just 20% of the revenue coming from projects aimed at the domestic market. Even today, IT services sector is externally focussed, with just 20% of the revenue coming from projects aimed at the domestic market.

In the 1990s, when Infosys, TCS and Wipro invented the “global delivery model” of software development and set up development centres in India, the way the world saw the country changed. Since then, the IT services sector has come a long way, contributing to $75 billion in revenue. The number of employees in the sector has also grown to about 3.7 million. There have also been multiplier effects in other sectors of the economy including education, telecom, transport, realty and hospitality.

However, even today, the IT services sector is externally focussed, with just 20% of the revenue coming from projects aimed at the domestic market. The industry traditionally focussed on a business-to-business model, and that had its own challenges, including building reputation as a reliable outsourcing partner, protecting intellectual property and providing clear cost arbitrage for the foreign clientele. The industry took up these challenges and produced world-class organisations that have excelled in software process maturity, quality control and assurance, project and programme management. The sector is characterised by cost arbitrage, pyramid model of resourcing, economies of scale, process efficiency, and offshore development centres. Today, there are more than 60 CMM Level 5 certified firms, and India continues to be rated as the number-1 IT outsourcing destination.

Today, however, this labour-intensive sector is facing a number of challenges. Software professionals in India are getting more and more expensive. So are the overheads of running operations in cities such as Bengaluru, Delhi and Mumbai. Employee attrition has led to high recruitment and training costs. Then, there is the automation villain, with the application of artificial intelligence and machine learning. Although software tools for automated testing have been around for decade, today’s automation tools have the cognitive ability to undertake a number of manual interventions in software engineering, namely, software testing, infrastructure management, etc. This is likely to substantially reduce manual tasks and, hence, the demand for engineers. The industry has to move along the trajectory of high-value consulting and technology-intensive services to compete with automation and robotic tools.

Over the last decade, there has been a debate on whether the Indian IT sector should continue to be driven by services-revenue or should it just actively be in the products business. Though global product companies such as Microsoft, IBM and SAP Labs have been shifting some of their product augmentation to their India centres, Indian software companies have not been active in product development.

There are inherent risks to developing software products in India; this explains the lack of product development activity. A key determinant in product development is the location of the user. Since Indian firms have been mainly involved in exports and are away from the market for which products need to be developed, they lack the necessary vision on comprehensive product requirements/ specifications. Moreover, until now, the Indian markets have not been IT-ready to absorb the products and services provided by the Indian firms. To bridge this gap, industry associations such as NASSCOM and iSpirit have been advocating product-thinking, marketing and management.

In its recent avatar, the IT industry in India is witnessing the emergence of many start-ups that are developing IT platforms. Thanks to modularisation of software components, these start-ups have been able to deploy their platforms quickly, without much upfront R&D and investment. In contrast to the large, export-focussed IT companies, these nimbler start-ups address local markets in diverse industry verticals such as healthcare, transportation, hospitality, education, financial and e-commerce. These platforms reduce market inefficiency, enable better use of under-used resources, reduce information asymmetry and enable dis-intermediation. Such platforms are characterised by scale economies and network effects. India, with its multitudes of problems and inefficiencies, coupled with a potentially huge user base, provides a grand field for experimentation of these platforms. A recent research published by the National Bureau of Economic Research, US, indicates for each dollar spent by Uber consumers, about $1.60 of consumer surplus is generated. They also suggest that the overall consumer surplus generated by the UberX service in the United States in 2015 was $6.8 billion.

Moreover, unlike the yesteryears, when only engineers could directly benefit from the IT revolution, today’s start-up revolution is benefiting largely the blue-collar workforce, including cab-drivers, delivery boys and girls, cooks, maids, plumbers, and electricians alike, bringing a semblance of organisation to the hugely dis-organised sectors of the economy. We have also seen for the first time, the need for not only engineers who code well, but also for economists, sociologists, data analysts, marketers, legal professionals, finance specialists and management professionals, who work together to deliver these IT enabled platform services to the local populace.

This has resulted in many “ups”, including cities such as Bengaluru entering the top 20 cities of the start-up ecosystem, increased venture capital infusions, billion-dollar unicorns touching double digits, and increased use of IT in various sectors of the economy, including in the government.

Never before has India attracted the attention of multinational platform companies such as Amazon, Facebook, Google, LinkedIn, Microsoft, Twitter and Uber as now, thanks the large digital literate population of India and the associated huge network effects!

The author is professor, IIIT-Bangalore. Views are personal

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