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July - 2003 - issue > In My Opinion
Cooperate on Value, Don’t Compete on Cost
Romi Mahajan
Friday, June 27, 2008
During the heady days of the bubble, I toured India, visiting software companies, giving lectures on the “value-chain” and preaching the need for Indian entrepreneurs and bureaucrats to think about the larger considerations of global macro-economics and to adopt a long-term view of technology and business cycles when creating the contours of their business plans and technology policies. I was not saying things particularly original to me—things like India needs to think about developing a robust domestic market, that innovation rarely stems from hermetic pockets of “brilliance” but instead emanates from planned concatenations, that we must strive to move up the value chain towards product development, that products and not services give one recurring revenue and control over margins, that competing solely on cost is myopic, that equating information-intensity with high value-addition is a mistake, and that depending on footloose MNCs is a sure recipe for difficulties in the medium and long term. Embedded in each of these points was the need for strong government involvement in technology—in everything from education policies to creation of a domestic market for software—and, unfortunately, the vast majority of people I spoke to were not disposed to hearing my message. Pollyanna and the mantra of “markets not governments” had taken over and both even a glimpse of Cassandra and the mere mention of the “state” was considered intolerable. After all, share prices were booming and Azim Premji was suddenly the second richest man in the world. The press was full of stories about “India: the next Singapore” (whatever that means) and prognostications about the hundreds of billions of dollars of yearly exports India would be able to achieve.

Six months later, at a U.N. conference in New York, I had the opportunity to meet some U.S.-based Bangladeshi entrepreneurs who were looking for strategies by which to shore up the fledgling technology sector in Bangladesh. They were emboldened by India’s success and wanted to establish Bangladesh as a leading node of technology innovation and export, hoping to at once to create a new industry for the country and to gain foreign exchange. While they didn’t come out and say it, I knew that their entire notion was predicated on beating India on cost. I told them to not simply compete on cost, to not simply attempt to commoditize “offshore talent,” and to not erect entire industries based on the currently articulated needs of corporate giants in the U.S., EC, and Japan. Find an area of domestic economic expertise, I told them, and develop a domestic market for software that confers value to that sector. Use your learnings, project management skills, newly found marketing expertise, and your stable domestic base to create export platforms in niche areas where your expertise is unmatched. I urged against inter-developing world competition. Some of the folks agreed, others were skeptical.

Why am I revisiting these experiences three years later?
I do so for two reasons. First, the technology slump and slowing economy in the main developed markets have created enormous pressures on the export-oriented technology sectors in the developing world. The pressure to cut costs and to increase profitability in an era of stagnant or declining top line revenues is creating negative—albeit entirely predictable—outcomes for the Indian software industry. MNCs are beginning to favor lower cost locations for low-end off-shored work and are simultaneously using their economic power and clout to set up their own captive offshore delivery centers, thereby undercutting indigenous companies. Companies do what is in their interest and will play entire countries against each other to create an overall regime of declining cost. And, increasingly, these pressures are being highlighted in the press and in discussions as simply “a result of the downturn” as if this downturn is unique, as if downturns were not an eminently predictable part of economic cycles. In short, I am writing to say in part to tell the cheerleaders that their hubris got in the way of rationality.

Second, and more importantly, I do so to outline yet another opportunity we have to think in a broader perspective, to forge supra-national links, and to demand of ourselves that stop selling ourselves short. A recent article in the Financial Times speaks of a “Dhaka IT park” that “aims to rival India.” The first paragraph explains is clearly, “Bangladesh aims to build the country’s first information technology park near Dhaka…in an effort to capture some of the programming market India has developed in the last decade.” I ask the Bangladesh technocrats not to steer their sights on undercutting India—why commoditize our talent and subject ourselves to competing for the attention of large MNCs, which like any profit-driven enterprises, continue to demand low prices? Why not concentrate on the creation of a domestic market and compete in areas that Bangladesh has a natural advantage in? In other words, a more sustainable and ultimately judicious approach would be to locate a niche areas of expertise—which would undoubtedly emanate from the specific economic ecology of Bangladesh—and to exploit it. Be the best in the world at something not the “cheapest.”

I ask the Indian technocrats, entrepreneurs, and NRIs not to simply think about short-term profit, not to compete on cost alone, and to actively create trade reciprocity with other developing countries. Why do we continue to steer our collective sights on the metropole? Why be played against other countries? No one who keeps even marginally abreast of the technology world can avoid the preponderance of articles on call centers and low-end “transcription” centers populated by thousands of young Indians for whom “education” means learning to speak English with an American accent or learning how to make small talk about baseball? Is this how seriously we take ourselves?

Of course, one must not create too grim a scenario. Some good trends are appearing. A recent article in the Wall Street journal described the planned off-shoring of 500,000 financial-services sector over the next 5 years. While the main consideration was cost, mention of doing “Wall-Street researcher-”type jobs was made, indicating that not only taking order and back-office jobs would be off-shored. In addition, some incredible work is being done in the BPO area that is fairly high on the value chain. But this is the exception and not the rule.

The key here is to understand the issues in a larger, global context. Competing on cost and concentrating on exports only, while creating pockets of excellence and wealth, is not tenable or sufficient for the long-term. An export-orientation makes one completely dependent on an external demand profile that is protean, subject to the changing tastes, whims, and even legislation (witness the New Jersey bill), in the market country. An orientation towards low-end services creates a static economic model that holds no promise of recurring revenue.

Even expertise gained and codified cannot ensure increasing margins since cost competition undercuts revenue predictability. Concentration on domestic markets, however, allows us to find areas of unique expertise, to use our own economic impulses to ensure steady and predictable demand, and leads to more equity. It also allows us to keep our educated people in their home countries, ending the age-old subsidy that the governments of poor countries give the private sectors of rich countries.

Some developing countries have come a long way in the technology arena. I wish countries that are making plans to incubate their technology sectors the best of luck. But only careful planning and taking the long-view will allow developing countries to prosper over the long term. That’s how we’ll really unlock the potential in the Indias, Bangladeshes, Pakistans, Brazils, and Indonesias of the world.

Romi Mahajan is a Marketing Manager at Microsoft and has been a consultant to Indian technology companies. Educated at UC Berkeley and UT Austin, he has written and spoken extensively on innovation in general and the Indian software industry in specific. He can be reached at romimahajan2000@yahoo.com

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