Indian Software Product Innovation

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.

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Technorati tags: Indian outsourcing, software products, innovation

The Rising Rupee-Dollar Ratio

I recently received an email article entitled "Stronger Rupee, Stronger India". The essay was about the appreciation of the Indian Rupee against the US Dollar since the beginning of the year. The author's argument was that a stronger rupee was better for India as it would make Indians less dependent on getting low-cost IT service business and force Indians to come up with innovative products.

Although I don't want to operate as an economist without a license :-), I am not sure whether a stronger rupee is good for the country. There is evidence to the contrary with countries such as Japan and South Korea having worse exchange rates. A country like China keeps its currency pegged against the Dollar to avoid losing its cost-advantage.

A stronger rupee necessarily means more imports and less exports - whether that is good for India in the long run is debatable. The IT industry is a very small portion of the economic output in India, i.e., only 1% of the total GDP. And India has a large industrial and agricultural base, which could be affected by the rupee appreciation.

I do know something about the short-term impact on IT outsourcing to India, so let's discuss that. Since the beginning of 2007, the Indian Rupee has gone from Rs. 45 against the dollar down to Rs. 40 (roughly). During the same period, salaries have sky-rocketed in India, while at the same time, there has been increasing competition from East European and other Asian countries.

This situation has led to diminishing profits in the IT outsourcing industry. The outsourced work still exists and continues to grow, but since it is primarily a service industry, the margins are becoming smaller. So while business and revenues are likely to increase, the profits will slowly hit a plateau. Such a situation is normal and expected in any fast growing industry.

The higher margins until recently had allowed vendors to maintain high bench strength and invest heavily in training, processes and infrastructure, among other things. All of these could come under pressure. Smaller vendors, caught between stagnant market rates and rising labor costs, will find it increasingly difficult to manage future growth. This will have negative effects on the Indian IT labor force.

At some point in the near future, rising salaries will hit a ceiling beyond which it is economically unfeasible to conduct outsourcing operations. Remember that outsourcing (or for that matter, any geographically disbursed development) includes several types of overhead costs both for the customer and the vendor. This means that future salary growth will be less spectacular. Highly salaried professionals will be under greater pressure to prove their value and they must, therefore, put greater efforts to maintain their advantage.

Right now, there is a big recruiting rush for software developers. And companies are not really looking carefully at the right mix of resources in terms of different levels of experience and skills. Companies are willing to pay handsomely for any person with a reasonable resume. This is due for a correction.

Companies will have to take stock and put the right mix of experienced and freshmen developers. They will have to spend more to retain such people and train them. This will mean operating lean and paying significantly more attention to resource management and allocation. Overall employment will decrease (or not increase as much) as companies learn to do more with less people.

In recent times, there has been much trickle-down of wealth because of heavy spending by highly paid software professionals - real estate, electronics, automobiles, etc. Some real estate prices have gone up several times. Much of this is speculation because such prices can only be afforded by commercial entities and not by most Indians, who outside IT, still continue to have low salaries.

If the IT industry slows, this could have the effect of slowing down such spending. Some of the corrections in the prices of high-selling goods and services could affect those sectors. In the long run, this could all even out and the economy will be stronger. But in the meantime, a lot of people stand to lose a lot of money.

But what about Indian product innovation? More in my next article...

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Technorati tags: software outsourcing, IT vendors, Indian outsourcing

Flash Forward

There was an incredible story in the news today about a Polish man, Jan Grzebski, who woke up 19 years after having fallen in a coma. He attributed his survival to his caring wife, Gertuda, who stayed by her husband's side and helped prevent any infections by moving his position every hour. It is a remarkable recovery considering that many such patients never wake up from unconsciousness. Sometime back, there was the case of Terry Schiavo, in Florida, who was in a vegetative state for over 15 years until her feeding tube was removed.

In the case of Jan, his recovery is almost like a time travel into the future, except that he has also aged. Everything is totally different. In his words,

When I went into a coma there was only tea and vinegar in the shops, meat was rationed and huge petrol queues were everywhere. Now I see people on the streets with cell phones and there are so many goods in the shops it makes my head spin.

Between his 1988 accident and today, there have been so many amazing changes. The Cold War is over. Communism is dead, except for small pockets here and there. The Internet has fundamentally changed communication and opened opportunities for people across the globe. Hundreds of millions of people have come out of poverty in India and China. Micro-processors increasingly manage every aspect of our daily life, including travel, entertainment, social life, etc.

What would the Communist leaders of the Eastern Bloc have said if they could have taken a trip to the future and seen the world we live in today? I would like to think that they would realize how many more people are realizing their aspirations and dreams than they ever would have under an oppressive socialist regime. At the very least, they would know that communism had failed as an experiment in solving the problems of the market system.

All the technological innovations aside, it is amazing how much we have advanced on the human front. The world we live now is more free and open than it has ever been in all history. There are fewer wars and conflicts, fewer starving people, less illness and death and all the other problems that have plagued humanity. It is very likely that within our lifetime, we will see the end of absolute poverty, disease and war.

And when you consider that, you realize how petty and crazy some of the people in the past were. All the bloodshed and oppression in the past were initiated by people who had no vision of the world that has been made possible today. Think of Europe. 60 years ago, it was the center of the deadliest conflict in all history. Just 20 years ago, it was split between two heavily armed camps ready to destroy the entire world to prove that their way of life was correct. Today, that same Europe has become almost a single entity under the European Union. No more talk of German or French superiority.

Or take a look at other examples from the past and present. The slave traders and slave owners who would not even consider Africans to be human. The cultures that treated women as second-class citizens. In India, "lower-caste" people were treated as "untouchables". Their sight could make other people "impure". Today, a person who even suggests something like that would be thrown out. To provide the name of your caste or family today as a supposed mark of superiority serves only one purpose: To display your only crutch and show that you are clueless, idiotic and inferior in every respect.

So the question is: Which side of history are you on?

Are we holding to thoughts and principles that will become outdated in the new world that is shaping before our eyes? Can we look at what we are doing today and see if it makes any sense in 20 years from now? What about our likings and fears today - will they be around in that time? How open-minded are we? What if we wake up tomorrow and find the world changed, our dreams fulfilled and our dangers destroyed? Are we prepared to take advantage of such a world?

And if we are not able to give the right answers to these questions, it is guaranteed that we will laughed at, mocked and hated by people in the future, just like those Communists, Nazis, slave traders, and feudal lords.

Technorati tags: personal learning, jan grzebski, ideas, principles

Tragic Massacre at Virginia Tech

The killing of more than 30 people at Virginia Tech has shocked the country.

The list of victims has been released. Among the faculty, there is a Holocaust survivor. 4 other teachers and more than 20 students died, including a few foreign students.

We cannot imagine the suffering and pain that the families of the murdered people are going through.

The massacre was senseless - we may never know what thoughts went through the killer's head as he went about his rampage.

There are no answers as to why those innocent people met this fate.

Some of my emotions are the same I felt on 9/11. Why? How could people do such horrible things against others for no fault of theirs?

Unfortunately, the world contains evil, crazy and misguided people. We just cannot understand their motivations or way of thinking. And it is scary to know that there is not a whole lot we can do to stop them.

We can just hope and pray for the future.

Technorati tags: virginia tech

Helping Developing Nations

The developments in many Third World countries over the past few decades show that poor nations cannot go it alone in their development efforts. Richer nations are expected to help them. Many countries need a basic level of growth (at or above 6%) before they can see their poverty decline. These countries do not have the requisite amount of internal capital to achieve such a goal. With the advent of skewed globalization where poorer countries have little bargaining power in terms of lowering tariffs and eliminating trade barriers, they find themselves at the short end of the stick.

The basic problem in the Third World is the level of capital and production needed for sustenance. For example, in the book, "The End Of Poverty", Jeffrey Sachs gives us the example of a family that is making $100 a month using their farm goods - just enough to meet their needs. Then he shows how external conditions can either help them develop (such as better infrastructure to sell their produce or reach new markets) or lead them to penury (lack of rain, family member falling ill).

The Third World countries are in such a situation. Many of them are ravaged by factors such as diseases like AIDS, drought, unfavorable climate, etc. Their corruption and tyrannical governments are partly a result rather than the cause of such problems. To stabilize their economies, large amounts of capital is required - so that disease (fatal or dehabilitating) can be eliminated or reduced and basic infrastructure can be created. The Gates Foundation and other NGOs have recognized this and have made the elimination of killer diseases one of the major priorities. Secondly, these countries don't have the educational strength (and by extension, the legal and political framework) to take advantage of the global economy.

The reason why it is important for richer countries to help the poorer ones is very simple. We share the same planet and the same resources. For example, India and China have large populations because of poverty that results in lack of access to contraception and other medical facilities. Such large populations consume enormous resources including fuel (read "global warming"), water & food, and create massive social and political upheaval.

Poorer countries are also breeding grounds for mercenary interests, including, but not limited to terrorists, drug traders, gun runners, etc. People who make money through such activities have the power to directly or indirectly influence, control and manipulate Western governments. For example, the fact of terrorism in Afghanistan resulted in changing US defense policy and the Iraq war.

Real globalization can help. Right now, many poor countries depending on agricultural exports are thwarted by farm subsidies in Western nations. Outsourcing opponents also fail to understand how much poverty is being reduced by MNC operations in those countries while bring consumers cost benefits.

A final note: Help by richer nations doesn't just mean "money". Throwing a lot of cash at the problem without exploring the political, legal, social and geographical factors that create poverty may only translate into transient results.

Technorati tags: Poverty, Third World, education, AIDS, the end of poverty book, jeffrey sachs

Netflix, Snow, Google and AIDS

I know the title is kind of weird, but it just describes the 4 paragraphs below. Probably more interesting than saying "Updates on past posts". (is "past post" an alliteration?)

In my "Hair Down" post, I talked about Netflix vs Blockbuster where the Total Access program seems to me like a big Netflix killer. It looks like Netflix is doing something about it with its new streaming video service. It is not really appealing since the movies cannot be watched on TV and it is streaming, not downloadable - which means that you have to have a good Internet connection while this is going on. Apparently, it also looks like Netflix is only offering a small portion of their overall movie inventory. On my part, I don't think this is going to work, though I can't blame Netflix for trying.

And in New England, we didn't quite get "snow". It is an ice storm and power is down in many parts in New Hampshire - so far, not in North Londonderry. It is supposed to get really cold here - an unpleasant surprise after the incredibly warm weather we had in December. Roads, pavements and door handles are icy and slippery.

As for my complaint about the lack of an easier interface for some of the advanced features in Google, here is Soople. They have different forms for various types of Google searches. The very fact that this has not been developed by Google is amazing, considering that 20% of everyone's time there is free to spend on pet projects.

Also, here is some more information on the AIDS epidemic in Africa. The biggest challenge of this decade will be to overcome disease and war in Africa. Beside that challenge, all other issues pale in comparison.

Technorati tags: Netflix, streaming video, snow in new england, AIDS, Google Search

AIDS and Corporate Responsibility

Corporate social responsibility dictates that business has an obligation to society beyond what is required by the law and the direct interests of the company. Under that doctrine, one could say that pharmaceutical companies have a responsibility to do something about the global AIDS epidemic. Some strategies are to distribute drugs for free or at low-cost to benefit people in poor countries who cannot afford to buy them.

The primary argument for doing this is there is no market for the companies in these areas. By continuing to ask for the same price, the companies are condemning millions of people to death every single day and at the same time, not selling much. This is a far worse and immediate problem than any of the front page news one sees about terrorism or war in Iraq. The society of multinational corporations (MNCs) is the whole world and all the citizens of the world.

In the long run too, companies stand to benefit. The resources of many African countries are consumed and drained by this fight. They have nothing left to invest in infrastructure, development or growth. If the African people are helped in this process, they can grow and open themselves up for investment and markets, which will benefit those companies.

Practically, there are several hurdles. One very important obstacle (that many people tend to ignore) is the whole problem of the delivery mechanism. In other words, how do you ensure that the drugs actually go to the people who need them at the inexpensive cost or for free? Remember that the drugs by themselves are very costly. Any bandit who gets hold of them can smuggle them back into a richer country and make millions in the gray market. And of course, the poor nation itself may have a black market in such drugs unless supply of the drugs is equal to the demand. (Think of Canada, where the drugs are being sold at a lower cost and people are trying to import them back to the United States.)

The pharmaceutical company needs physical resources to transport the drugs safely to various parts of the poor countries. This needs security and trustable people. It needs infrastructure in terms of clean syringes, cold storage and AIDS tests themselves to ensure that only the right persons are getting the drugs. This is not only costly, but requires a level of support on the ground which is lacking in many countries. In fact, without this, only a miniscule amount of the aid will actually reach the deserving persons.

The other problem is the fact that the pharmaceutical companies are operating in a capitalist society. I don't subscribe to the notion that a company's sole motivation should be profit (a little too laissez faire for my taste). Nevertheless consider what happens when a company's profits are eroded by huge levels of social acts. The company's stock price goes down, investors start fleeing for higher-return companies, employees don't get the pay raise they expect to and also start leaving. Without great employees, R&D suffers and the company goes into a downward spiral.

Instead of placing the responsibility on individual companies, I would advocate that Western and Asian governments place an equal surtax against ALL companies for the purpose of sending aid to Africa or other affected areas. Alternatively, it could also be a percentage of the overall tax revenue (this places the burden on all taxpayers instead of businesses). A coalition of governments pool the money, buy the drugs and establish a secure channel of distribution. Pharmaceutical companies can sell at discounted costs considering the volume of drugs bought.

When governments take over much of the distribution aspects, now pharmaceutical companies can, in addition to the volume sales, can contribute a %age of drugs at reduced or zero cost. This won't solve the entire profit issue, but it will not be as big a hit on the bottom line.

One thing we tend to ignore is that companies today do pay a lot of taxes which are used for all sorts of stuff, including highways, museums, wars, etc. The problem in Africa can be solved to a great extent with a small percentage of that money and with focus and effort by different governments and organizations. It is time to get the priorities straightened out.

Final notes: I had the good fortune of viewing (on TV) a meeting organized by CNN to discuss the AIDS epidemic. Bill Clinton and Hank McKinnell (then-Pfizer CEO) were part of that discussion (http://www.cnn.com/2006/HEALTH/conditions/05/01/access.clinton.aids/index.html). This is one of the biggest crises in the globe today and a lot of MNCs and NGOs are working hard to alleviate the situation.

Links to follow:

http://www.redcampaign.org/
http://www.one.org/

Technorati tags: AIDS, pharmaceutical companies, African countries