Towards sustainable software services

The emergence of software as a significant forex-earner raises several issues including the ability of the industry to further expand its export share as well as widen its product-mix, writes V. S. Sambandan.

WHEN THE Information Technology revolution began, India was caught napping. But now, when the western world sleeps, the Indian software industry is working, churning out software and giving the language its latest cliche ``geography is now history.''

Two out of every five global companies now outsource software services from India. Feeding a part of the developed western economies, led by the new engine of growth - information technology - may thus be an indication of advancement, but the nature and composition of development in the Indian software industry merits close scrutiny.

Increasingly skewed towards the export market, 70 per cent of the revenue generated by Indian software companies in 1999-2000 was from products and services developed for overseas destinations. While exports fetched $4 billion (Rs. 17,150 crores), the domestic contribution to the revenue was $1.7 billion (Rs. 5,700 crores), according to the National Association of Software and Services Companies (NASSCOM). The contribution of the software industry to the country's exports, according to Nasscom, was 10.5 per cent against a paltry 2.5 per cent five years ago. Indications are that annual software exports could be to the tune of $10 billion by the end of the Ninth Plan - in 2002.

However, the emergence of software as a significant forex-earner throws up questions on both the sustainability and the nature of exports. Of particular interest is the ability of the industry to further expand its export share as well as the composition of the exports.

Industry leaders zero in on ``higher profitability'' as the main reason for the export-orientation. "Though there are several indirect benefits operating in the domestic market, pure profitability is what propels software consulting firms to look at overseas markets," says Mr. Lakshmi Narayan, President and COO, Cognizant Technology Systems. Especially in the U.S. and European segments, "there is a high premium for such services because of the shortage of high-end skills locally. It is sheer opportunity cost that makes looking at overseas markets imperative."

Conceding that the foreign exchange revenues are, indeed, most welcome, Dr. M. Anandakrishnan, Vice Chairman, Tamil Nadu Information Technology Task Force, strikes a note of caution and wants the industry to look towards the longer term. The present accent of the domestic software industry ``to re-engineer existing software'' he says, neither augers well for the future nor reflects the real potential of the industry. ``What we are doing is secondary manipulation of the existing software rather than developing original software, which we would have to, in order to sustain the growth levels targeted by the industry," he said, referring to a 1999 study by Nasscom and McKinsey, which placed the total export opportunities at $ 50 billion in 2008, of which IT Services would account for $ 38.5 billion, followed by software products ($ 19.5 billion), IT-enables services ($19 billion) and e-business ($10 billion). ``Now we are taking customised software to serve somebody else's need. There is no Indian branded software which, in the long run, would be the way to sustained earnings."

On the composition of the present exports, he feels that most of the software being developed are ``pedestrian'' in nature and go to meet low-end requirements. Components such as transcriptions, and other short-term data-entry related work, he points out, "would not add up to the numbers we are talking about." A large part of the software developed, he says, is for the management, banking, insurance and hospital segments. "There may be some at the high end of the spectrum, but these are a small part. We have not established ourselves really well."

The software industry, however, thinks otherwise, ``We are catering to every end of the value chain," Mr. Dewang Mehta, President, Nasscom, says, adding, ``We have to do everything." Pointing out that Research and Development spending in the Indian software industry grew from 2.5 per cent of the total turnover in 1997-98 to about 3.4 per cent in 1999-2000, he said, "our aim is to keep on doing value addition."

Simultaneously, he argues, a lot of work is done for e-commerce solutions and e-banking. However, ``we have to go much up the value chain," Mr. Mehta says. On the possibility of reaching the targeted revenue of $ 10 billion from e-business solutions by the year 2008, he is optimistic that "we are on the track."

One significant advantage, that has been the main driving force behind Indian advances in the international software scene is the availability of trained manpower. Qualified and trainable manpower, a fundamental input to the knowledge-based industry, has not been wanting in India. Coupled with this is the cost advantage for western nations to deploy labour overseas. Industry sources say that the costs incurred in an offshore product development (work done out of India for U.S. companies) are in the range of $ 25 to $ 35 per hour. This is in sharp contrast to an on-site development (taking a software programmer from India) which would amount to $ 75 to $ 100 per hour. This cost advantage is also seen as a factor that has enabled Indian companies to reach the position where ``almost two out of every five global giants outsourced their software requirements to India."

While such outsourcing is of considerable advantage in revenue terms, policy makers are apprehensive over the accompanying trend. Of specific concern is the mushrooming of training institutes. ``They are actually coaching classes for specific programmes developed for the export market," Dr. Anandakrishnan, who is also Vice Chairman of the Tamil Nadu State Council for Higher Education, says pointing out that this specificity in the nature of training institutes has resulted in a situation where professionals would have to continually upgrade their knowledge levels to remain in the market.

"We are doing precisely the same" as was happening in the pre- colonial days, he says, referring to the situation where Indian raw materials were exported to the advanced nations. And, "like the pre-colonial days, only the educated gain and the vast majority of 95 per cent of the country do not gain," he points out, cautioning against a looming digital divide.

Mr. Mehta, however, disagrees emphatically. "It is in no way comparable to the manufacturing economy," he says adding that much of the present Indian contribution is by way of intellectual inputs and hence qualifies for Intellectual Property Rights. Moreover, "it is not only the cost, but also the quality" that has resulted in India taking its present position, he said.

Terming illusory the stereotype of a successful Indian software engineer in the U.S. Dr. Anandakrishnan says, "It is true that about five per cent of the Indian IT professionals in the U.S. who have the right technical base and right business profile make it to the top levels. We take them and parade them." Referring to the trend of sending software professionals to the western nations as the advent of ``techno-coolies'', he expresses concern about what is ahead for such personnel if there were to be a shake-up in the industry. "When the U.S. aerospace industry suffered a jolt in the Sixties, those in highly-paid jobs turned taxi-drivers; similarly in the case of the chemical industry in the Seventies, many had to become clerks. For the IT sector, it may not happen immediately but someday, when it happens, it is bound to be alarming," he said.

An urgent requirement which industry and policy-makers agree, is in increasing the value content of exports as well as the catering to domestic needs. "We are still not creating original products, but the proliferation of the Internet, would make it much easier," contends Mr. Mehta. Reasons for the domestic sector not taking off, Mr. Mehta said, include the infrastructure constraints and high costs. However, with government and Small Office Home Office (SOHO) sectors taking off, the future looks promising.

According to the Nasscom survey, though domestic software market was registering a healthy growth rate till a couple of years ago, it could not catch up with the revenues of the software export markets. However, the proliferation of Internet and growth in the SOHO market have resulted in good growth rates in the domestic market.

The domestic software market aggregated revenues of Rs. 7,200 crores in 1999-2000, over its performance of Rs. 4,950 crores in 1998-99". The Nasscom's survey says that despite the sluggish market, the domestic software market's growth of over 45 percent is mainly due to increased government computerisation, Y2K spending, elimination of import duty on software; enforcement of anti piracy laws and maturity in end-user organisations.

An additional cause for cheer, according to the Nasscom, is the fact that 19 of the 26 State governments have already announced their IT policies and many others have formed high-level task forces.

While Y2K software solutions in the domestic market fetched Rs. 680 crores during the year, the ERP segment grew by 23 per cent. At the same time, the CAD/CAM market grew by about 41 per cent. Software for the banking segment recorded a 70 per cent growth over previous year. ``The real growth in the domestic market apart from government spending", Nasscom feels, "could be attributed to emergence of the SOHO market. Software purchases by the SOHO market witnessed a high growth rate of 70 per cent." The turnkey projects segment in the domestic market grew by about 41 per cent and spending for Y2K software solutions reported an all time high growth rate of 140 per cent over the previous year

At another level, the low contribution to the domestic sector is also a reflection of the overall market situation. ``Our export market is substantially larger than the domestic market," says Dr. C. R. Muthukrishnan, Deputy Director, Indian Institute of Technology and President, Computer Society of India (CSI). The overseas market ``is more mature, more competitive," and exhibits ``greater readiness'' for taking to software solutions.

"I don't think the growth of export market is hampering the growth of domestic market," Dr. Muthukrishnan said. Not even the costs, which are anyway "not prohibitive," but overall conditions, including parameters such as the kind of diversification adopted by Indian companies, have resulted in slower deployment of IT.

Indian industries feel that when the market develops, they would have a role to play. ``We feel that when the market really matures for e-transactions, we will have a significant role to play in the e-solutions segment and people would be willing to pay a premium for high-end services, thereby making it profitable", Mr. Lakshmi Narayan of Cognizant says.

Rather than reversing the overall trend of development of software for overseas markets, Dr. Muthukrishnan feels that there is a need to "increase the capacity" on the Indian base. " With human resource emerging as the basic driver there is a need to "increase the number of people in the IT sector." Also disagreeing that Indian exports are more towards the low-end, the contribution of Indian software ``is a spectrum - from customised value added to providing man-power. The range of distribution may not be clear, but increasingly we are becoming more services and software solutions-oriented. We are certainly making progress away from body-shopping, with the growth in offshore software development," he said.

Moreover, Dr. Muthukrishnan says, "We have a presence in IT enabled services as well," which is the major driver of technology, expressing the view that there is no cause for concern over the lop-sided trend of greater exports as compared to domestic contribution.

For instance, during 1999-2000, IT enabled services generated a total revenue of Rs. 2,390 crores for the Indian industry. Of this, almost Rs. 1,690 crores was earned from overseas customers.

With the Indian IT industry's presence in the global markets comfortable for the moment, the obstacles to be overcome require attention at technical and policy levels.

Factors that continue to hinder growth of the industry, according to the survey, are: continuance of physical bonding at STP, EOU and EPZ units, lack of global parity in telecom tariff and inadequate telecom infrastructure.

The Nasscom survey stated that although the government has announced continuation of tax holiday to EOU/EPZ/STP units under Sec. 10A/10B till 2009-10, the substitution of a new section has led to many anomalies that require redress.

At the wider policy level, Dr. Anandakrishnan feels that a comprehensive approach is required to take the advantages offered by IT to all sectors of the economy, thereby reducing the consequences of a debilitating digital divide.

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What they say...

"Though there are several indirect benefits operating in the domestic market, pure profitability is what propels software consulting firmsto look at overseas market."

- Mr. Lakshmi Narayan, President and COO, Cognizant Technology Systems.

``What we are doing is secondary manipulation of the existing software, rather than developing original software, which we would have to, in order to sustain the growth levels targeted by the industry."

- Dr. M. Anandakrishnan, Vice Chairman, Tamil Nadu Information Technology Task Force.

"We are still not creating original products, but the proliferation of the Internet would make it much easier."

- Mr. Dewang Mehta, President, Nasscom.

"We are becoming more services and software solutions-oriented. We are making progress away from body-shopping, with the growth in offshore software development."

- Dr. C.R. Muthukrishnan, President, Computer Society of India.