Why do you think India is viewed more as an “IT services” destination
than as a “product” destination?

For historical reasons, India started off in the services
segment. One factor could be revenues: the revenue stream
in the services business is good, and the margins are probably
better than in products.The other factor is that most software
products require large investments, besides being risk-prone.
For every product that succeeds, there are nine that fail. I am
not sure whether in the early stages of development of the
industry, Indian companies have the capacity to take this. But
the forecast is that India is going to focus on products. Over
$10 billion products are expected to be shipped out of India
by 2008.

What do you think would be necessary to make that projection a reality?

One is the marketing issue. Indians are very good at
marketing high-valued services. But mass marketing of
products requires a different skill-set. Also, it needs large
advertising budgets. The other issues are that it has got to be
economic, user-friendly, and virtually bug-free. This requires
a slightly different mindset.There is a learning curve involved
there, so it will take a while.

Given the issues you mentioned, do you think there is a perception
that it is not yet time for Indian firms to plunge into the products
business?

I don’t think so. Recently, Indian firms have grown. But even
as they grow, the largest firm is still in the order of $600
million, and that is not very large by global standards. Take,
for example, a firm that has $100 million in revenues—they
cannot afford to write off $50 million because of a product
that does not sell. It will impact the bottom line badly.You can
do these things only when you grow to a certain size, and
Indian firms are getting to that kind of size.

Why do you think venture capital (VC) funding in India has not
taken off, unlike in the U.S.,where you have venture-funded start-ups
going on to build products?

VCs did pour in a fair amount of money into India a few years
ago. Unfortunately, all the money went into dot-coms, which
got badly burned. Here, I reiterate that just three years ago,
the largest Indian firm was less than $400 million. But there
are many Indian firms, including Datamatics, which do a lot
of word-processing and imaging products. So, it is not that
they cannot develop products, but they lack the muscle to a)
market them—that is, they do not have the channels of
distribution, and b) they do not have ability to take financial
risks.

Is cost the only factor that drives firms to India?

The first motivation for any firm to go to India is cost. But,
what makes them stay and grow is quality. It is a fact that there
are more SCI CMM Level 5 companies in India than there are
in the U.S. A recent Price Waterhouse Coopers survey shows
that firms first came to India because of cost, but stayed and
grew because of quality. That is an interesting statement.

How do you see India competing with other low-cost destinations like
China?

It is not just cost—often time-to-market is also a factor.
Again, the Price Waterhouse Coopers survey shows that 86
percent of the respondents chose India as their destination of
choice. That is a significant statistic. Besides wage, the other
factor is language. Indians speak English like you and me,
while most other countries do not speak English fluently. I
would not underestimate the impact of English.
Indians have come to the U.S. and met with a lot of success. But, unlike
people from other countries (China, Taiwan) who have eventually
returned to their countries to start companies there, very few Indians
seem to have followed suit.Why do you think this is the case?
This is a sensitive issue. Untill recently, I think part of the
problem was taxation. Indian taxes are high and it is difficult
to create personal wealth. But now that Indian taxes have
come down to match world standards, there is movement in
the reverse now. A lot of Indians who lived here, that I knew,
have gone back to India to set up firms.The next 5 years will
witness significant change in that equation.

What kind of technology firms do you think will set up base in India?

All sorts will: products, facilities, support, BPO, and, of
course, service-oriented firms.

What role do you think organizations like TiE play in promoting the
spirit of entrepreneurship in India?

TiE is basically a funding organization. They are doing their
little bit, and that is a factor, although I am not sure how
significant a factor that is.

You have been part of the Indian IT industry for a long time. How do
you think it has changed in the last 20 years?

I come from an era when people did not understand the
terms “software” and “computers.” Obviously, a lot has
changed. When I started TCS, software was not even sold by
IBM; it was just bundled into the hardware. The world has
changed and so has India. Suddenly, India has discovered the
potential for providing “knowledge capital” to the rest of the
world. India is now a base to IT, R&D, biotech—everything.
So India has a chance to become the source of all knowledgebased
services. I think it is a great opportunity.

We often hear that infrastructure, especially telecommunications, can
pose a big problem when setting up base in India. How much of this
is true?

I can tell you this—there is no truth in that. In fact, I was the
Bell Labs. And I can also tell you, we used to monitor error
rates at both ends, and the error rate at the Indian end was
lower than at the U.S. end. As far as telecommunications
goes, it is the telephone system that is poor. But, when you
consider point-to-point communications, it is all digital,
optical fiber, and satellite-based.The quality is as good, maybe
even better.That is not an issue at all.

We read recently that you coined the term “IT-enabled services”—what
do you think about the BPO market and the opportunities there?

That is right. I coined the term and am happy that it has
caught on worldwide. Before, it was called “shared services,”
or BPO, and so on. I feel BPO has greater potential than even
software services. An estimate that I got says 38 percent of all
back-office operations can be outsourced remotely, and that is
a mind-boggling figure. I think that is the biggest opportunity
going today worldwide.

What opportunities do you think exist in the Indian domestic
products market?

PC penetration in India is very small—less than two percent
of the population have PCs. So, the absolute market is
minuscule as compared with the U.S. or any other developed
country.The product business in India is reasonably large, but
it is going to grow to significant numbers only about 10 or 20
years from today.

What about the business applications market in India, like for
railways, airlines, and so on?

That is happening. They are in spots—like the railways or
airlines or banks. But, if you are talking about mass
production and mass consumption, it is going to take a while.
I do not think it can be accelerated beyond a point.

A lot has been said about the hassles of bureaucracy in India. How do
you see that affecting business there?

As far as the IT industry is concerned, there is no
bureaucracy. The government is very supportive. One will
find that the licensing, permission, government control, and
so on are diminishing with time. In general, the news is good.

Do you have a message to the Indian IT community?

I must say that Indians owe a lot to the U.S. market for
success. It has been very open, adaptive, and adoptive. Also,
let us not forget the Y2K problem—that gave an impetus to
the Indian software industry, besides recognition. But, what
has really carried the IT industry forward is, I reiterate,
quality. Today, the Indian IT industry is considered to be as
good as, if not better than, those of other countries. In fact, in
a lot of meetings that I attend, the oft-asked question by
financial analysts is “Why are you not off- shoring to India?”
and not “Why are you off-shoring to India?” And that is a big
change.

Chairman of Datamatics, Dr. L. S. Kanodia, is often called the
"father and architect of the Indian software industry." Among
his numerous achievements, this MIT alumnus was part of the
team that designed and developed two of the first multi-user
operating systems, CTSS and MULTICS. Kanodia, who
founded Tata Consultancy Services (TCS) in 1967, moved on
to establish Datamatics in 1975. Today, he has garnered many
more firsts to his credit: Besides establishing the first direct
satellite link between India and the U.S., he has also been
credited for initiating the "offshore software factory"
concept.