Playing to Win

Date:   Monday , July 07, 2008

THE STUBBORN PERSISTENCE of our software exports is a source of some embarrassment to our armchair intellectuals who have been regularly predicting their crash. Instead, they have kept growing by an amazing 50 per cent a year for more than a decade, and even in this worst year in the industry's history they will grow 30 per cent. Any other industry would die for this sort of constancy, and so would our cricket team.

Critics of the industry contemptuously described its work as “body shopping” and surely how could such lowly activity last? Then, it was the Y2K bug that was keeping it afloat; well, the bug went away, but our software industry refused to slow down. Next, they said, the American recession will surely stop it; the recession has hurt, but not to the extent that everyone predicted. Finally, September 11 would be its death knell, but the industry seems to have quickly recovered from this crisis as well.

What accounts for its resilience, I think, is that India has emerged as the only serious candidate for outsourcing software. Philippines is not an option. Ireland has out priced itself. Israel competes in a different segment. China is at least three to five years away. The only thing that could stop India is a war with Pakistan, which would raise the risk of outsourcing to unacceptable levels in our customer's eyes.

The major American companies have doubled their outsourcing budgets, reports the latest Forrester survey. Another report says, “185 of the Fortune 500 companies are now doing offshore work with Indian companies.” Giga expects offshore outsourcing to grow 23 per cent in 2002.

All the major software suppliers in the U.S. (including Accenture and EDS) have recently announced that they are coming to India, which raises the prospect of fairly vigorous acquisition activity.

All this, however, does not convey the pain suffered by the industry in the past year. The best companies have seen their benches grow, prices and margins diminish, engineers laid off, empty buildings, expansions delayed and hopes destroyed. But from the pain is emerging a stronger and more sophisticated industry. What are the lessons it has learned?

First, larger, brand name companies will do better in tougher times; weaker, smaller ones will not survive. Second, it is paramount to stay close to the customer. Some CEOs of the software companies have physically relocated to the United States. Where they haven't, they now spend much greater time there, supported by a strong white American head of sales.

Both Wipro and Infosys have increased their physical presence in North America. The pay-off too has been immediate—they are getting their best ideas for new products and services from their customers.

Third, while it is important to target new customers, the bigger rewards come from harvesting existing ones. Hence, “key account management” has become a powerful tool. Companies are placing teams of engineers at the customers’ disposal to show them newer ways to save costs, improve returns from existing investments, introduce newer applications.

Fourth, vigorous interaction with customers allows a company to demonstrate “domain expertise.” Infosys has hired a medical doctor to enhance its credibility with its health care customer. An airline customer feels more comfortable talking to a former airline employee, who now works for NIIT software. The customer feels that my software supplier understands my needs, and this removes some of the pressure from the sensitive subject of pricing. It leads to longer-term contracts and dedicated offshore centres. Domain knowledge, if captured and retained is wonderfully aggregative—what you learn from one customer adds value to the next.

Fifth is the power of alliances. For example, Mastek, a software company in Bombay, has formed a 50:50 joint venture with Deloitte Consulting, which has close to $ 2 billion in worldwide revenues. A Deloitte executive runs this joint venture, and Deloitte's customers derive comfort from outsourcing their work to someone they trust. Thus, our companies are becoming sophisticated. They are rising in the value chain by offering enterprise resource planning, applications maintenance, and Internet services. They have broken into retail and distribution, professional services, communications and utilities. They have come a long way from the “coolie days” of Y2K. Those companies who sneered at Y2K work now realise that they lost an opportunity because it opened the door to many large customers.

It seems to me that the export of software and IT services are to India today what textile exports were to Britain in the early 19th century. If you were a Londoner in the 1820's you would have seen lots of textiles going off to India, but you wouldn't have seen an industrial revolution. Similarly, I think we can see these technology exports, but we cannot see a services revolution that is transforming India.

Gurcharan Das was the former CEO of Proctor & Gamble, India and went on to head the international strategy group for P&G’s health and beauty market. He is a venture capitalist, residing in New Delhi. Das is an author of repute, with two plays and a novel to his credit.