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More IT Services Bashing

March 31st, 2007 Posted in Indian Economy, Offshore Services, Startups, Technology

Sujai Karampuri in Need Product Companies for India’s Growth makes an unconvincing case for encouraging the high tech industry in India. On the way he quotes data on the IT Services industry to prove his point that

“No matter what we do, contribution of IT-ITES will be marginal in contribution towards Indian GDP unless something dramatic happens.”

The primary conclusion of his data analysis is that the Indian IT Services industry has a low average revenue per employee ($22,000 per employee in 2005) versus Microsoft (over $600,000 per employee). And therefore

“Only a technology product company can add the right kind of money into India at a faster and quicker pace using smaller manpower.”

Here is my rebuttal:

What economic objective are we solving for? Let’s say that is GDP growth. Why then is revenue per employee (RPE) a metric we should care about? Are industries with higher RPE, higher growth industries as well?

Then there is this befuddling argument that since Microsoft (US software industry) has a much RPE compared to the Indian services industry, that India must have a stronger high-tech industry.

On similar lines, here’s my logic for why India must forget about retail banking and have a stronger investment banking industry - Goldman Sachs has an RPE of $1,317,000 while ICICI Bank’s is only $139,000. I think the analogy is apt. But the argument is wrong.

It is not necessary for a country to have a large and growing high-tech industry to grow. Countries like Singapore and Australia haven’t needed a strong high-tech industry to get wealthy. The software industry is actually highly concentrated in the US. Can you think of any software company headquartered in the UK?

The case for the high-tech sector in India being vastly more important than other sectors isn’t strong. Sectors like Financial Services provide the infrastructure for the economy to grow. Retailing, Infrastructure, Airlines – all serve objectives beyond just growth. When it comes to growth, IT Services is an industry where India has great comparative advantage. Software has that too, but less so.

Having said that, the fact is that this argument is immaterial. Software companies in India (IP based companies) are anyway sprouting like mushrooms (Gridstone Research, my company, is one of them). Not because of exhortations from bloggers but because there are people who have the skills and the aspirations to build businesses.

So, folks let’s stop bashing the IT Services industry. If you find the software business sexier, start one. Or join one. We’re hiring.

Tags: India, IT Services, Technology

This entry was posted on Saturday, March 31st, 2007 at 1:37 am and is filed under Indian Economy, Offshore Services, Startups, Technology. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

Comments to “More IT Services Bashing”

Krishna Says:

March 31st, 2007 at 11:42 pm

I think what prompted Sujai’s post was the constant ascension of other Asian entrepreneurs with Chinese / Israeli origin in the global IT product landscape.

For making any serious dent in Product landscape, we need to focus more on (a) improving quality of higher education by establishment of more number of colleges on the lines of IIT / REC (b) improving the working conditions of faculty in those colleges so that teaching is considered lucrative enough with advanced research facilities thrown in (c) development of full fledged incubators with a good supply of mentoring assistance by trained faculty (d) accelerating the employability of engineers by refining and upgrading the course syllabus with high end subjects as are currently in demand.

I frankly don’t think attaining the above is difficult, if we have the necessary will. Even in IT Service sector, we hardly have any all round dominance. Can we say we have really arrived ? We just need to shed our illusion of control (of the global IT services market) fueled by the success of Infosys,Wipro,HCL Tech in ADM segment. Now what ? In other areas like System Integration, Network Security, Remote Infrastructure Management etc., we are way too behind and not even considered as serious contenders by US companies that are looking to outsource these services. India strategy is no longer an imperative as it had been once regarded by VCs for their portfolio companies.

So I would suggest our IT service companies should strive to deepen and widen the quality and volume of their service offerings to survive, let alone aspiring to dominate the space.

The choice is theirs. Stand still and go out of business or recognize change and move with it.

Anuradha Says:

April 2nd, 2007 at 7:30 am

Basab, I guess IT/ITeS bashing in the latest fashion, and product vs services is a debate which has remained a debate for years now. The reason is that people who are actually running the services business understand what they are doing and what needs to be done. Product and services are two different businesses, with two different business models, hence to compare them on any of the metrics does not matter. Comparing metrices across businesses is a good academic exercise, I am not sure if this leads to anything else.

Krishna, while I agree that we need to do all that you suggest for the education sector, but where I disagree on where the impact will be. Improving or widening the education net would make more people employable, it does not neccessarily lead to entrepreneurs who can launch breakthrough ideas( including products). Just an interesting data point, on the Fortune (or may be it is Forbes) list I am told that the first MBA CEO appears at no. 22, and the overall percentage of MBAs is very low in the list. This only illustrates that the business success and education may not be as related as they are made out to be. And let us look at what is education contributing to the actual work in IT/ITeS sector. It only acts as a filtering mechanism when you have to pick some people from the large pool available. ITeS sector has been smart enough to not get stuck with any minimum educational requirements.
Another important aspect that I want to highlight when we speak about Indian industry vs MNCs or non-India based global companies is that, Indian industry and Indian work force are two data points. I guess a lot of time the two are confused. When we get a mindshare in the global IT space, it is because of the sum total of Indians employed in the global IT industry. A case in point being Accenture which will very soon have a bigger headcount in India than the rest of the world.

-Anu

Krishna Says:

April 2nd, 2007 at 11:48 am

Anu,

My point was enriching the quality of education available at high end Engineering Colleges would increase availability of employable talent by product businesses. Today high quality talent pool is in severe short supply. This dissuades many a entrepreneur from founding product businesses. In the end, (s)he settles for some high end job or makes do with some low end business that (s)he can, with talent that is available.

Eventually this is why we often get to hear VC rants of the type - “there are so few investible ideas”. They look to fund mostly product businesses only as it will have some residual value by way of IP created. In the case of service business, this is a big hurdle.

I am fully with you on your perception of MBA-CEOs. Most of them suck.

Deepak Vinchhi Says:

April 5th, 2007 at 8:13 pm

Being able to start and build a products business has very little to do with education, technical talent, incubation, etc. - India has plenty of these - but has a lot to do with market understanding, domain knowledge, marketing and sales in the geographies that are targeted.

It is only in recent years that more and more Indians are becoming global citizens, and as a result, feeling comfortable to even conceive global product ideas. This trend will continue and we will likely see some success stories. Still, this is not the only important factor for India; there are many other kinds of businesses that have to thrive in order for India to continue its economic growth momentum.

There is no debate between Services and Products. Both are required, and both have plenty of opportunities for savvy entrepreneurs.

Brijesh Joshi Says:

April 6th, 2007 at 11:32 pm

Total market capitalization of all indian IT companies together is less than Google.This tells the difference between innovation and low cost labour.

Rather than having 1000 companies like infosys,wipro or tcs employing say 5 million software proffesionals by 2020,we need to have atleast 1 google or microsoft or oracle level company by than.

Basab Says:

April 12th, 2007 at 9:19 pm

Brijesh, I feel that I must respond in detail to your comment. Embedded in it are many misconceptions that must not go unanswered.

1. Comparing the total market cap of the Indian IT services industry and Google is meaningless. Google’s market cap (and growth and margins) are high because it is a successful and innovative company. It has nothing to do with a different industry in a different country. Google’s market cap is also greater than the Brazilian mining industry. So what?

2. Some industries are more innovative than others (lets say, measured by a limiting, but objective measure like patents filed). This is true in any economy. Google is more innovative on that count than say Goldman Sachs. So what? They are both ultra successful in their industries. As is Infosys in its industry.

3. What you call low cost labour is more than 10 times the average Indian wage. In my books, more jobs are better than fewer jobs. And higher paying jobs are better than lower paying jobs. A million high paying jobs in the IT Services industry is AWESOME.

At the root of this IT Services bashing is the longing of techies who love technology. An IT Services company does not offer the avenues to grow AND continue to stay close to technology. And they feel frustrated, because they see no option. But there are options. Look around you. The tech industry is awash with venture capital seeking ideas. Go start a product company. Or as I have said before - join one. We are hiring.

http://www.gridstoneresearch.com/careers/index.php

Sujai Says:

April 14th, 2007 at 9:01 am

Hi Basab:
Since you used quotates from my article to make your case, please let me clarify.

You have seen my article as IT bashing. And this is NOT correct. I am not bashing up IT services companies. I am making a case for India to embrace product-making technology companies, without bashing IT services for the contribution that it makes.

I clearly indicated why I would encourage product-making companies in India. It is not to increase average revenue per employee, but to increase the GDP of the nation in a dramatic way. You have conveniently missed out that argument of mine to make your case

How do you propose to make $250 B contribution to Indian GDP by 2010 without having to go the route of technology companies? Can you add $250 B using IT-ITES alone? For that to happen, how many engineers do you need? Those were the questions I was answering.

Basab Says:

April 15th, 2007 at 3:57 am

Sujai, the best way to leave this is to say that we are trying to solve for different objectives. You are trying to solve for the problem - how do we maximize the contribution to GDP from the Tech industry, including products and services companies. Given the crunch on engineers in India (recent FT article) your points are then valid. I on the other hand don’t much care for the contribution of the tech industry. I care about overall GDP growth above all else. A minor secondary objective being the distribution of income. If you solve for these objectives the tech products industry, is like any other industry and frankly one that we have fewer competitive advantages in as a country. Also, the very reason that you like the tech products industry, viz. higher revenue per employee, is going to produce a skewed income distribution which goes against my secondary objective.

brijesh joshi Says:

April 22nd, 2007 at 10:08 am

Hi Basab
This is in response to your comments.What my point was India should rise up the value chain.For a country of India’s size it needs infy,wipro at the same time it needs to develop companies like google and microsoft in future.I dont have exact figures but the total it services offshoring market is worth 150 billion dollars whereas the total IT industry (including products,services,hardware,semicondutors) is worth more than 2 trillion dollars.China’s semicondutor exports were more than 8 times India’s IT exports last year.It is targetting to catchup with India on IT services front,its planning to come out with its own operating system (something on lines of linux),its ultimate aim is move from image of low cost manufacturing to a high end innovator with focus on science and technology.

We have been praising the growth of IT industry since last 10 years but now we should realise that this Industry has reached a stage where it doesnt need all the media attention its getting.Probably indirectly IT is doing disservice to the growth of other industry such as hardware,biotechnology etc.Some kind of visionary thinking and policies should be needed to replicated the sucess of IT industry in other industries.

Vivek Says:

April 24th, 2007 at 1:26 am

Yes we should move up the value chain. But nobody is going to start a product company ‘coz it generates higher GDP or is high value add. Like BaSab says, one has to be passionate enough to start one or join one … and create great products/services that are as indispensable as a Google.

Besides the Global market, the Indian market is prime for Innovation, Product Development too … check out Financial Technologies and their unique Business model (Would have joined them 5 years back ?). Infy, Wipro are helping too (see where BaSab comes from, or who founded Exodus, or MindTree). More than formal education, we need the guts to think BIG, think different, follow our instincts and take chances.

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