This is a follow-up from my previous article, The Rising Rupee-Dollar Ratio“. Whenever there is talk about the growth of the Indian IT industry, there is much lamenting of the fact that almost all the revenues come from outsourced services such as programming and testing instead of from software products. People say and rightly so, why after several years of software development experience, Indians do not have their Microsoft or Oracle or Google?
It is a mistake to say that there are no software products made in India. For instance, take a look at this listing. It is estimated that India’s product revenue potential is as high as $7 billion by 2010. Still, that is a fraction of the potential revenue from outsourcing, expected to be $60 billion by 2010.
One reason for the outcry is the fear that outsourcing revenue has less long-term potential than product development. Many people believe that with the rise of other outsourcing destinations and higher costs in India, the country will become less attractive for outsourcing. Hence, companies must invest in software products and focus less on outsourcing.
In my opinion, outsourcing in itself is not going to disappear. Outsourcing can really be termed as imports of services. Like imports of goods, outsourcing will survive as long as there is a cost advantage. Developed countries will continue to outsource as long as they can get a better deal for the same services.
Although Indian outsourcing firms will face increasing labor costs, this will level off at some point through internal company restructuring, greater automation, more people entering the IT labor market and so on. While other countries may offer more attractive costs, India continues to hold an advantage in terms of experience and infrastructure buildup over several years.
Russia and the East European countries are an interesting example here. There is a high level of superlative talent in those nations because of their high-class universities and prior (Communist-era) investment in science and technology. However, they have not yet developed the processes to effectively compete with Indian companies who had spent tons of money in software methodologies like CMM (Capability Maturity Model) and other business and management processes.
Also, India continues to boast millions of English-speaking, college-educated graduates. Particularly in South India, there are hundreds of colleges and universities crunching out computer students, not to mention thousands of smaller educational institutions teaching specialized computing languages or skills. On top of all this, there is an Indian Diaspora in various Western countries, particularly the United States, United Kingdom and Australia, not coincidentally all English-speaking countries. Outsourcing to India is not going away that soon.
But the question still remains: Why doesn’t India have big brand names for software products coming out? Leaving aside the fact that there are many other highly developed countries in the same situation, why isn’t there even a single strong Indian company in the software product marketplace despite a decade of software development?
There are many contributing factors for this state of affairs. One of the foremost problems is software piracy, leading to virtually no domestic consumer market for software products. With all due respect, I am yet to meet any Indian (in India or the United States) who is ready for pay for any software product if he or she can install it for free. This includes operating systems, databases, anti-virus products, utilities, etc. – you name it. And Indians are, without exception, the fastest adopters of any free or open-source products or services.
Ignoring the ethical implications, this has served as a huge barrier for any budding software entrepreneur in India. They cannot make any B2C products or services because there is nobody to buy them. And this situation is not a function of money. Even people who can afford to buy the software will not do it because piracy has become a socially acceptable norm. With web-based services, there is limited scope for subscription-based applications and hence there is a greater reliance on advertisements. That is probably the reason behind the sorry state of look of the Rediff portal.
This creates a bias towards creating B2B products, which seems to be the current state of affairs in the Indian software product business. The problem is that these applications are really difficult to build because the specific domain knowledge requires a lot of time and money to acquire. It is also heavily localized towards the national or regional laws and regulations. Thus it is difficult to obtain an international audience for such products.
The high and ever-increasing salaries for software professionals in India have created a significant opportunity cost for any fresh-out-of-college graduates going into software entrepreneurship instead of a high-paying job. There is also heavy social and culture pressure on young software developers to gain employment at a prestigious software company, preferably a multi-national firm. And India does not have a Bill Gates or a Steve Jobs to show as an example to prove anything different.
A problem with outsourcing companies is that, from a managerial perspective, it is not easy to manage and market services and products simultaneously. Services are low-margin, but require less sales effort once you are established. If a customer has a pain in terms of resource or cost crunch, they will outsource. Marketing products is more complex, because buying a product involves many other criteria. Think of renting vs. buying a home.
So what is the future? I would say that there is still hope. You have got to remember that unlike Western countries, most educated Indians have grown up with no knowledge of computers until they first studied them in engineering courses. Also, until recently, India was burdened by bureaucratic regulations and widespread corruption (which still exists) that restricted entrepreneurship, commerce and finance.
With increasing globalization, India will have to conform more to global standards of intellectual property. Corruption and bureaucracy are likely to decrease. The newer generation is increasingly more computer-literate and likely to contribute more in software innovation, especially with the advent of the Web as the primary development platform. Hopefully, we will see more from India in the coming years.