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Innovative mindset can deliver great products
Sabeer Bhatia
Saturday, April 30, 2005
India is ready to take the next step in the software value chain–developing world-class consumer and enterprise products. A dose of professionalism, a stomach for greater risk, an eye for quality, an understanding of international markets and a culture of innovation is all it needs.

In recent decades, India has amazingly developed the outsourcing industry by acquiring and developing the necessary IT skills needed by global multinationals. The first wave of “outsourcing” some of the IT services of U.S corporations to TCS, Wipro and Infosys was followed by corporations establishing their own IT-services divisions in India. Companies such as Intel, IBM, Texas Instruments and Accenture are included in the latter. The marketing of India Inc. has been so phenomenal that any multinational today looking to outsource any aspect of IT first thinks of India despite its poor infrastructure and a labor market increasingly reminiscent of the dot-com days.

In spite of success in outsourcing, not a single Indian company has been able to translate this resident technical know-how into world-class products either in the consumer space or in the enterprise market. There are multiple reasons for this:

  • Indian companies are averse to risk and any new product development inherently is accompanied by a strong element of risk.

  • A culture of innovation or an entrepreneurial spirit in these organizations does not exist because these companies are geared towards “per hour” labor arbitrage business and do not have a product development strategy for new markets in their genetic makeup or in their business processes.

  • They generate high profit margins in outsourcing and do not have the drive to succeed that startups normally have.

  • They fear that they will lose customers if they compete with companies that are in the product development space.

  • They are not structured for success in the product space unlike startups, which have strong built-in incentives for founders and employees to succeed.

  • Organizations like Intel, Sun, IBM, Microsoft and Texas Instruments are doing R&D and new product development in India. I believe the time is prime for a new generation of entrepreneurs to consider tapping into this large pool of talented professionals and turn this intellectual resource towards world-class consumer and enterprise products. By doing so, companies will attract a large amount of wealth and jobs to India. To realize the potential of product-oriented companies, one has only to look at the revenue per employee of service companies, around $50,000/employee, versus product companies that have revenues
    per employee ranging in millions of dollars.

    While the revenue potential for product development companies is much larger, it is also risk-laden.

    First, not all product companies succeed. For every one that succeeds there are nine that fail. Take, for example, the search space – there were over twenty powerful search-related companies in 1999 with marquee names such as Excite, Infoseek, Yahoo! Inktomi and Altavista. Today, among them only one exists, along with many new entrants– with Google and MSN leading.

    Second, for India’s success, product companies need help from local markets to hone their product skills. Local Indian companies or subsidiaries are only beginning to accept the relationship between the investment in IT and improvement in productivity in the consumer space; broadband Internet penetration is in its early stages of growth.

    Third, Indian companies need access to VC funding. Indian VCs are helpful initially but they rarely have the financial or marketing muscle to enable Indian companies to market their software in international markets.

    Fourth, Indian companies must understand the needs of individuals or global corporations to develop quality products.

    It is reassuring that at least the basic ingredients for success already exist in India–a pool of talented professionals, a semi-developed local enterprise market and a budding consumer market. The aforementioned risks can be mitigated in a number of ways– aligning with an experienced VC, hiring management that has experience in selling in both the domestic and international market, and also by finding an experienced investor or mentor.

    In conclusion, excluding the external factors that I have discussed above, the most important change required in transforming India to become a potent force in software product development is a change in the mindset of individuals. I repeat: it starts with a mindset but has to be followed through with the hiring of the right management team, aligning with experienced VCs and finding an experienced mentor.
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