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April - 2005 - issue > Editor's Desk
The next growth engine
Pradeep Shankar
Thursday, March 31, 2005
Looking at Indian IT professionals walk through the super malls and gaze at new age gizmos with awe, I often wonder when will India as a country witness a paradigm shift from a nation of “consumers of innovation” to “creators of innovation.”

Top three IT services firms in India—say, the TCS, Wipro and Infosys—today generate revenues of approximately $4 billion for an employee base of 120,000. While the top three software product firms in the world—Microsoft, Oracle and SAP—generate revenues of $60 billion for the same number of employees.

Imagine if India could generate $60 billion by building product companies. That would be like three times the size of the Indian IT industry and the country would possibly surpass its current state. The IT exports from India today are $17 billion, growing at a CAGR of 30 percent. Assume that TCS, Wipro or Infosys will increase by 50 percent in the next five to ten years. Even then, their combined revenue will be similar to the top two software product companies in the world.

Considering that margins are fairly high for product companies compared to services firms, which are typically 80 percent, much of the generated revenue would be profits. Adding $10 to $20 billion in product revenue will have significant impact on the exports adding up to the foreign currency.

But generating billion-dollar exports is not the ultimatum. For a similar base of IT services industry, the ecosystem that product companies create is four to five times bigger than what the services sector creates. This would mean increased employment and productivity.

Let’s examine Korean Chaebols. Car manufacturers sourced automobile components and together they flourished. The whole supply chain developed within the country, leading to a stable economy. Similarly, in a product-based economy, the ecosystem develops. Services firms become stronger because they deliver services around product. Smaller companies are created to provide services to large product firms. Enhancements or feature additions to homegrown products will spawn a new industry altogether.

One could easily visualize a similar situation in India. While we are known for delivery of low-cost service, we should consider Japan’s evolution, a country that moved from being a provider of lower-cost, lower-value manufactured products to high-cost, high-value products. As a result, they transformed their economy to the second best in the world.
Many in India firmly believe we can do the same. I think being able to play the game at the core of the value chain definitely gives enormous value and power to a nation as we move forward.

We should note that product companies provide the backbone for services players to integrate. For instance, if there were no SAP or Oracle, the concept of services would not exist. While talent exists, the ecosystem is void. However, that will soon change.

As a country we have competent software development, process skills and project management. It is important to synthesize the existing competencies and apply it to building real intellectual property. Delivering a particular service and disseminating others is limited by how much one can scale. In terms of IP, one can scale better than how services are delivered.

Any product innovation is monetized globally in a much faster fashion as compared to service innovation. Introducing a service innovation across markets will be more time consuming and requires increased effort. Usually if you have a compelling feature or product it is much easier to line up for market channels on a global basis.

The next big thing in the IT industry is not going to be a new category of products. Instead, it is going to be how products and services are designed and delivered using a global footprint. This new trend will change the landscape in the industry in the coming seven to ten years. We can already see early signs of this in the global IT services area. But there is more to come – not just in services but also in products.

Today, almost all multinational companies have their development in India. Although most of the benefit is being pocketed by the MNC rather than adding value to Indian GDP, at every step the employee added value is growing. In the next couple years we will witness increased MNC–owned integrated product engineering centers being setup in India. This explosion of product companies encourages the creation of product culture within the country. This will set the stage for an explosion of viable Israeli-style product startups in two years’ time, which would mean India GDP capturing the higher value-add per employee. They are also creating high-value jobs, an important ingredient of the ecosystem.

There will be radical improvements in productivity if our product and services foundation can combine to create value in a unique way not previously associated with India. By combining our emerging strengths in products with very demonstrated strength in services, India can offer solutions at better price-performance points compared to the West. This will not only open up new markets but also enable us to achieve sustainable competitive advantage, making competition difficult.
Is it possible to visualize that soon? Will we have Microsoft or Oracle or SAP success story in India? I think it’s quite possible.

The change has been set into motion; the trend is gaining momentum and it is the only time India becomes the most preferred location for IT professional around the world—be it services or product. Focusing on these issues we feature about the new career opportunities in India and why India is happening in this copy of our magazine!
With India gaining a sure foothold in IT globally, with Indians taking leadership, the day is not far away when the country produces leaders across industries. Recognizing leadership, we feature Shantanu Narayen, President and COO of Adobe.

The robust economy in India has led to many startups in the U.S. as well as India. We feature a veteran Jit Saxena, a successful entrepreneur who is taking the industry head-on with his company Netezza.

We look forward to your feedback to this exciting edition.

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