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Strategic Trends in the Indian IT Industry

with Eben Moglen, Professor, Columbia University and Rahul De, Professor, IIM Bangalore

Growth Strategies for Indian IT Industry

EM: Indian service giants find themselves moving towards preferential services, a world in which there is less money extracted from software and more money available for solutions pioneered by service companies becoming solutions companies. Software costs go away. What is more, I think the progression is clearly natural. You move from servicing proprietary software to servicing free software. Then you begin customizing free software to provide solutions to customers who otherwise would have been compelled to buy proprietary applications.

RD: Companies like Infosys and TCS are primarily in the services sector, which is where they generate their revenues. Then you have firms like Microsoft and Oracle whose revenues are from software, mostly proprietary software. Microsoft has also dabbled in hardware. Oracle goes and buys Sun Microsystems and tries to change the game, become a big hardware player. And they want to combine and become a big powerhouse like IBM. It used to be the case that hardware was dominant and software was small. In the 90’s this changed and software business became dominant. Now a big chunk of what could be called software has started going to the services business. In the future it is likely that services will grow rapidly and software business will decline dramatically. We now see the Cloud emerging. Firms want to move from capex (capital expenditure) to opex (operational expenses) models. They don’t want to invest in capital intensive equipment or incur upfront costs. They just want variable costs. Is that a good thing? Well, then they don’t have issues like depreciation.

The shared view is that the proprietary software business is going to decline and services business will become dominant.

EM: Everyone knows where the market for improved IT services exists. These are sectors like retail, shipping, finance and others.

Developing countries like India like to operate in a controlled financial environment. They derive advantage from not being fully connected with the global financial system. They still have to remove certain frictions from their systems while maintaining the ability to have national governance. That is a tremendous IT opportunity. Moreover, there is UID which is going to open a whole new set of platforms for things happening in India.

RD: If I may divide services into two, there are application-oriented and those that support embedded software. Embedded is growing at a rapid rate because chips are getting introduced into everything, even bicycles, clothes. In India we hardly make hardware; we don’t have fabs. But we churn out a lot of the design of the circuitry and software on top of that. And this is a big growth area.

In terms of sectors, finance has been one of the most IT intensive sectors, for applications, and the IT industry is already serving them. Government services are an attractive sector in the sense that government is a very complicated thing and has huge requirements. There is a lot of money flowing in and out. You have to automate services for large segments of the population with ability to target at the individual level. So there Indian companies stand to gain a lot. In organized retail, the level of IT structure that Tesco and Walmart have is not yet present in India. It is definitely a growth area in India. And add to that, there is e-commerce which represents a huge growth area not just in India, but around the world. Many of the emerging e-commerce businesses are riding on the smartphone wave, hence there is a good opportunity in application software.

There are other areas like healthcare, infrastructure (whether road services, railways, city infrastructure), intelligent buildings, energy-efficient computing, automotive software which take a mix of both embedded and application software and are also good opportunities.

Finance, government and retail remain lucrative sectors for IT but other sectors are also turning into significant opportunities.

Sustainability of Some Emerging Business Models

EM: It is important to achieve non-linearity if you can’t achieve some other major form of cost reduction. It may be that it is fine to have 160,000 employees and to move that to 260,000. The question is can you improve the revenue per employee in some important way. So the first thing I might want to do is to challenge the premise of the question which is that their success requires them to escape their model in the near term or the medium term.

The second thing I would say, is that their current model puts them as large organizations running large operations. Given that, they should be in the solutions business, not in the hardware business and not in the service business. That means their primary competitors are those that provide solutions, neither time nor materials, but knowledge about more productive ways to employ resources. And in this, non-linearity is achievable, because economies of scale exist when there are materials that don’t cost anything. Free software works very well in this world. It allows you to make major modifications, producing major increases in value from minimal investments.

So the question really presented is how do you convert services businesses into solutions businesses. The movement from service to solutions is the movement from understanding the customer’s IT to understanding the customer’s business.

RD: There is much scope for non-linear models. Value added services are being provided through the consulting mode. Some may be trying to make software products, but it doesn’t make much sense unless tied to a service package. Open source makes a big difference here because you can build massive capabilities around free software. Strategically there may be no barriers to entry to this approach, after all anyone can pick up a free software application and become an expert around it. However, when you go deep into the application domain or when you require an entire suite of solutions (end-to-end), there is little documentation and the only way to learn is to try things out. So building around open source is a very valuable strategy.

Non-linearity may be desirable but is not the only way to think about the problem. More pertinent is to understand the customer's business and to leverage free software as much as possible. Non-linearity may simply come about as a result of them.

EM: Not very, because it is easier for developers to write stuff and simply give it away. The real point here is that developers have been living off the proprietary software industry and now there are new parties trying to say that we can save your role as proprietary developers by making you producers for an appstore. I think this is a transitional form. The end form is that I make solutions and sell them to people I know are glad to have them, basing those solutions on free raw materials. And I let those solutions be shared because whoever has shared those solutions will come to me for having used them.

RD: The apps model works more in the consumer space. It is not applicable or directly translated to the enterprise or corporate space. One can do apps, but finally an enterprise doesn't just require some apps, they require the IT partner to be there and to be helping them out.

Selling apps is not very different from selling PC applications and can't remain a viable strategy for long. Moreover the apps model may not be easily applicable to enterprises who value services and support much more.

Influence of free software

EM: They don’t have to compete with free, or with software selling for price zero. They compete by providing intelligence enabled by such software. Software is not the product but that which enables you to create solutions that you sell. All that happens when open source software is available is that the cost of your IT raw materials is zero, that’s all. Nobody who gets into the business of selling raw materials could get into the business of selling thinking.

RD: They should create a separate line of business for open source. It’s very clear that if you have a lot of business coming from servicing proprietary products, it’s a big cash cow and you can't just give that up. But you can let the two co-exist and support firms on both. Revenues are coming from both, but open-source based business is increasing at a faster pace. Some of the proprietary applications will tank, though they may not disappear. Many of the previously proprietary applications have opened up due to this pressure.

The consensus is that IT firms should embrace free software instead of competing against it. Open-source and proprietary software will co-exist but with a continuously declining share for the latter.

EM: Only some parties in the IT industry are focused only on creating IP. Most parties are straddling half and half. They patent what they can and they build upon what is available for free. They depend more and more on the free raw materials but they also try and make expensive raw materials and sell them to others. They are doing as any business does, exploring as many ways as they can towards making profit.

I think, in the long run, the part of their business based on free raw materials will turn out to be more and more economically significant and the part based on selling proprietary raw materials will be less and less so.

RD: Well, open source is not lacking in IP. You can create a software, open-source it and give it away, but there is still your copyright on it. There are no patent rights. Software cannot be patented in India per se. If it is wrapped up in embedded hardware, it can be patented, but it is very tricky. Patents exist outside India but are challenged left and right. So I think the patent model is not a good way to go, though the copyright model works. And even if you give away software, you have the most skills related to it. After all, who knows MySQL better than the developers themselves. If a firm is critically dependent on MySQL and wants to improve it, it will want to hire them.

There are other strategies like having a community and a premium version. If you take the community version, you just pay for the services, while if you take the premium version, you also get a lot of fancy features.

Most IT firms are already realising the limitations of patents and are simply extracting value from them as long as they can. The copyright model works much better. Increasingly, developers get business for their expertise and not for the product itself.

Environmental Risks and Data Security Issues

EM: There are political appeals but not actual technological solutions. Moreover, free trade is not a disposable product for the US in the 21st century. Nor is the internet. The American economy depends upon them the same way that the British Empire depended on free trade. It is not feasible to let go of them. There may be politics around these issues, but one cannot make actual macroeconomic policies based on closing the American border to movement of work over the internet.

RD: Where else are you going to find thousands of engineers to cater and support you on all your development needs? So far India is the biggest player. The numbers in Philippines and other countries are still tiny to what we are churning out. And the lock-in is not really in hardware or software, but in services and the soft skills.

Both are of the opinion that the obstacles being created against outsourcing to Indian IT firms are hardly going to work. Outsourcing makes sense from both economic and operational perspectives.

RD: It is a management problem. The security environment in most firms has to be further strengthened. It is not just Indian companies which face security issues; there is, for instance, substantial number of leaks in Europe too. It is in the interest of most companies to not reveal or report them, after all the last thing companies want to do is to tell their customers that their data has been breached. Estimates are that only 7% of the cases get reported. People have been working on technologies like encryption to solve these problems, but it is really a management issue; the policies are not in place.

Monitoring comes later and may not even be necessary. Just informing employees what the security issues are and how to prevent them can be a big help. For example, creating awareness about the importance of keeping passwords confidential and not sharing them with others. People understand technology, but they have to be made aware of security as a concept.

Policies, awareness of security principles and good management can be effective in tackling data security issues. Employees have to regard data security as an integral part of their jobs.

Conclusion

Selling software and hardware products is not going to remain an attractive proposition for long, since businesses are increasingly moving to opex models like using the Cloud, free software is often good enough, and because businesses derive their real benefits from services, or how intelligently the software and hardware is being used in their business context. IT firms looking for sustained growth and non-linearity should keep trying to understand their customers’ businesses and build solutions around free software as much as possible. Giving a product away and letting customers come to you for your expertise is a much better strategy than patenting and selling proprietary products. Also, given the above, the appstore model will likely turn out to be a transition phase. Risks like outsourcing bans are not very credible since there are few alternatives available to customers, and also because economies today cannot shut out the external world without hurting themselves. Data security issues are a problem but one that can be tackled substantially by relatively simple measures like spreading awareness among employees and putting proper policies in place.

Quotes

"Firms want to move from capex (capital expenditure) to opex (operational expenses) models. They don’t want to invest in capital intensive equipment or incur upfront costs."
(Rahul De: On the changing nature of IT operations in firms)

"There is UID which is going to open a whole new set of platforms for things happening in India."
(Eben Moglen: On the exciting opportunity available to IT firms to provide governance solutions in India)

"Embedded is growing at a rapid rate because chips are getting introduced into everything, even bicycles, clothes. In India we hardly make hardware; we don’t have fabs. But we churn out a lot of the design of the circuitry and software on top of that."
(Rahul De: On the opportunities for Indian IT in embedded devices)

"The real point here is that developers have been living off the proprietary software industry and now there are new parties trying to say that we can save your role as proprietary developers by making you producers for an appstore. I think this is a transitional form."
(Eben Moglen: On the transitional nature of the appstore business model)

"And even if you give away software, you have the most skills related to it. After all, who knows MySQL better than the developers themselves. If a firm is critically dependent on MySQL and wants to improve it, it will want to hire them."
(Rahul De: On the business of giving away software for free)

"Only some parties in the IT industry are focused only on creating IP. Most parties are straddling half and half. They patent what they can and they build upon what is available for free. They depend more and more on the free raw materials.."
(Eben Moglen: On the increasing relevance of free software in the IT business)

"Free trade is not a disposable product for the US in the 21st century. Nor is the internet. The American economy depends upon them the same way that the British Empire depended on free trade."
(Eben Moglen: On the lack of credibility of outsourcing bans in the US)

"People understand technology, but they have to be made aware of security as a concept."
(Rahul De: On how to tackle privacy and data security issues in IT)

Profile

Eben Moglen is a Professor of Law and Legal History at Columbia University, and Chairman of the Software Freedom Law Centre which counsels, among others, the Free Software Foundation. He is one of the key figures in the free software movement.
He has a J.D. and a PhD in History from Yale University, and has served as Law Clerk to Justice Thurgood Marshall in the US Supreme Court. He spends his time trying to improve the patent and copyright systems, and advocating the use of open-source software in various panels and forums.

Rahul De is a Professor in the area of Quantitative Methods & Information Systems at IIM Bangalore. His areas of interest are Economic Impact of OS Software, Models of Technology Diffusion and Development of E-Governance systems.
He has a PhD from the University of Pittsburg and an MBA from Faculty of Management Studies, Delhi. Prior to that, he completed his B.Tech from IIT Delhi. He has consulted on ICT and open source software and has published several research articles on E-Governance.