Indian IT firms must break the old mould
Software firms for all their seriousness of intent are laggards when it comes to investing in disruptive technologies
Blip or trend? That’s the question analysts and journalists are asking themselves about the poor performance of Indian information technology (IT) services companies. For business media (and the interested public), Flipkart is the new Infosys, Amazon India, the new Cognizant, and Snapdeal, the new Wipro. Several articles in recent days have pointed to the decline of Indian IT services companies. One, by Andy Mukherjee of Bloomberg, was titled Death of a Technology
Star. That pretty much says it all. Mint’s team of analysts pointed out around the same time that growth in inflows from IT has stalled.
I’ve never met Vishal Sikka, but people who have, including some on the board of Infosys Ltd, tell me he has tremendous technology vision and is a classic Big Picture guy, perhaps the first Infosys CEO since Nandan Nilekani with these attributes. I’ve met Tata Consultancy Services Ltd (TCS) CEO Natarajan Chandrasekaran a couple of times and been very impressed with his clarity of thought and certitude (both are desirable qualities, not just among CEOs, but also editors). A few years ago, I conducted an informal survey (Whatsapp, SMS) of around 10 CEOs on who they thought the best contemporary Indian CEO was. Most named Chandrasekaran. Infosys and TCS are big companies by any measure. The first had revenue of $9.5 billion and close to 200,000 employees in 2015-16; the second, revenue of $16.5 billion and over 350,000 employees. Clearly, the two are large (also profitable) companies, run by very smart people.
So, what happened to yesterday’s wonder boys?
A little bit of history is in order here. Many of India’s IT services companies began life as body shoppers. They would ship warm bodies to cold climes to serve customers who realised that these companies and coders cost far less than local software companies and engineers. This was in the 1980s (although some of the companies had been founded earlier). Such efforts reached their peak in the 1990s. Private engineering colleges in Tamil Nadu and Karnataka were churning out thousands of engineers, many of whom were happy to work overseas for a dollar stipend, with their regular salaries being credited into their salary accounts in India. The late 1990s were all about the scare around the so-called millennium or Y2K bug – software programmes, and therefore, the businesses and utilities they powered, coming to a halt because no one had anticipated the need for an automatic date shift from 1999 to 2000. Much of this software was in Cobol, and changing the date field everywhere a date was mentioned in lines and lines of code was a lot of fetch-work, but it was also good business.
Somewhere along the way, body shopping was replaced by outsourcing, a more respectable term; customers discovered that the Indians who were managing the Y2K issue so well could also build and run their other software applications; and the Indian companies realised that they could actually do some of the work in India (which meant even more labour arbitrage). Gradually, this grew into the business model Indian IT companies grew fat on – the so-called Global Delivery Model. From their swank and sprawling campuses in India, these companies started serving the needs of overseas customers. Much of the work was done in India or off-site, with only some work being done at the customers’ location or on-site. This was a real innovation, and it disrupted the business – hurting companies such as International Business Machines Corp., Accenture Plc., and Cap Gemini S.A. Many responded by focusing on growing their services business and making India a hub for this.
A decade-and-a-half later, the disruptors have been disrupted. If it was the Global Delivery Model that did this in the 2000s, it is revolutionary new developments in artificial intelligence, cognitive computing, data analytics, the so-called Internet of Things, mobile technologies, and cloudbased computing, all clubbed under that allencompassing term, digital, that are doing so now. Indian software services firms, for all their seriousness of intent when it comes to digital, are still laggards in the business, according to a recent Mint analysis.
The reason for this was beautifully articulated in the 1990s by Clayton Christensen in his book The Innovator’s Dilemma. Large and successful companies are often the first or early experimenters with new and potentially disruptive technologies, but often abandon them because their existing customers see no value in them or the returns are too low (compared to that from their existing technologies). Interestingly, Christensen, a professor at Harvard Business School who also popularised the term disruptive innovation, is a long-serving independent director on the board of TCS.
We see examples of companies that have fallen prey to the innovator’s dilemma – yes, the term has entered popular lexicon – all around us. In car makers late to the electric and autonomous vehicles party. In retailers slow to adopt e-commerce. Even in media companies flogging digital extensions of their own products instead of launching entirely new ones (for entirely new audiences). Many companies in these businesses are, like India’s software services companies, very good at what they do. They run their operations efficiently. They probably have a playbook on how to do things. And all these, critical to the success of their existing businesses, ensure that they ignore, respond poorly, or mismanage disruptive innovations. Can they break out of it? Can Indian IT services companies? The answer is yes and as evidence, I offer Microsoft Corp.
Satya Nadella has made Microsoft cool again – by focusing on the mobile and cloud, developing interesting new products, and spending big money on acquisitions such as LinkedIn Corp., Mojang AB (the maker of Minecraft), and several AI (artificial intelligence) start-ups – and many people thought the day would never come.