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BW Businessworld

Time Of Coding Projects Over For IT

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These are times of fear and excitement for India's software industry. Margins of the marquee IT firms are falling guidance for the near future is guarded.

The fear derives from the industry facing revolutionary transformation. The business model which made Indian software firms into a $108 billion export business is undergoing rapid change. The mainstay of the industry is cost arbitrage and the vast Indian army of coders who do low-end work either off shore or at client sites in cities like Bangalore and Noida. While the arbitrage cost leverage remains, margins are shrinking rapidly.

There is excitement too for the IT industry. It comes from new markets and from opportunities in cloud computing to delivering complex processes in engineering software to analytics. Indian firms are moving albeit with caution in new areas.

One reason is saturation in the traditional business model that worked so well for three decades. Analysts believe that 80 per cent of jobs that could come offshore have already come to India. Secondly countries like Philippines are fast catching up in the BPO space.

Says Industry Veteran and Fellow, Arthur & Toni Rembe Rock Center for Corporate Governance, at Stanford University, Vivek Wadhwa "The problem is that the market is stagnant for Indian information technology firms. They must take advantage of the new opportunities to survive and thrive. Technology is advancing rapidly and making obsolete the systems that IT firms are building and maintaining. The bigger opportunities are in using exponential technologies to solve big problems. Advances in Artificial Intelligence, robotics, medicine, 3D printing enables this. Indian IT could, for example, be helping American industry rebuild its manufacturing sector with robotics. It could be developing big data solutions to healthcare or new medical devices."
 
For survival Indian firms have only one option - to go up the software industry value chain. This comes with its own set of challenges.

The first is to convince the client that the concerned company can deliver on greater, more complicated tasks. The second is to ensure that the talent is available in India that can translate large processes of the client without mistakes on time and lastly there is the challenge of spending more on branding to enter the elite league of companies that provide consultancy for entire operations or own proprietary software.

Benoy CS, Director, ICT Practice, Frost & Sullivan explains, "The Indian software advantage in cost arbitrage is ending. The industry is undergoing stark and drastic change. This change is driven partly by new disruptive technologies and partly by change in customer requirements."

For Indian IT firms the time for coding projects is over. However in sectors such as cloud computing, analytics and management of entire processes there are new opportunities.

Akhilesh Tuteja, Partner and Head of IT Advisory Services, KPMG comments, "These are exciting as well as trying times for the Indian IT-BPO industry. In the first three decades of its evolution, the Indian IT-BPO industry embraced the outsourcing wave in the US and Europe to emerge as a technology enabler for clients and in the process became a $100 billion behemoth. Now the industry needs to reinvent itself and move from being a technology enabler to a business enabler.
 
Beyond Coding
Some Indian firms have already started adapting to the changed IT climate. Infosys signaled this when it selected Vishal Sikka to lead the company with his famous Rs. 5 crore salary. Sikka is known as Mr Innovation in the industry. His background is radically different from the kind of work that bring majority of revenues for Infosys. At his previous job at the German technology major SAP he was leading the team that developed High-performance Analytic Appliance - SAP's  money minting proprietary tool that uses memory linked software for database management. Introducing him to lead Infosys is a clear signal that the firm intends to change course. It will innovate and get out of its comfort zone. Given Sikka's understanding of the big data domain in particular, it is likely that Infosys may roll out products in that space this year. Already it has developed a 'Cloud Ecosystem Hub' a solution that helps enterprises to build and manage a unified hybrid cloud environment in a market that is dominated by global players like Amazon and VMware.

U B Pravin Rao, Chief Operating Officer, Infosys says," Our primary focus is on bridging the gap between business and IT and to help clients realize measurable business value. For instance, Infosys migrated Ricoh's European data centre estate to the cloud model, with an aim to reduce carbon emissions by over 80 per cent by 2050. A private cloud model was deployed across 35 locations within Ricoh's European operations. Ricoh is now able to reduce its infrastructure costs by up to 30 per cent through the removal of 1,000 servers across the region. This has also resulted in an annual reduction of 16.8k tonnes of CO2 - the equivalent of emissions from 3350 cars."

"Similarly P&G has a strategy of realizing their next billion dollars from business in emerging markets. To help them move closer to this goal, P&G and Infosys co-created a cloud based platform that connected P&G with its distributors and facilitated easy exchange of information in emerging markets characterized by issues of connectivity, literacy, language etc. The solution developed for P&G has now been industrialized as a cloud-based service and forms the basis of the Infosys TradeEdge platform, " he added.
 
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New Domain Expertise At HCL

HCL has taken the route of developing domain expertise. In aero space, for example, HCL has partnered with Boeing to put in place systems that validate, through software modelling, Boeing's aerospace software requirement for the 787. It is estimated that up to 900 HCL engineers worked with Boeing on this validation project. However building domain expertise does not come cheap, nor is it easy.

HCL saw the opportunity coming early and first started working for Boeing vendors such as Rockwell and GE aviation. They worked on over 700 projects of varying complexity over the years before it's Boeing break through.

HCL is also focusing on the internet of things. According to Frost's Benoy "The internet of things offers a lucrative but complicated upstream opportunity. HCL has developed a smart metering solution - mCEM which allows utility customers to take control of their energy consumption through the Smart Grid and Smart Meter network. This enables customers to reduce their energy usage and have much greater visibility of their consumption. This has found new clients and that is the way Indian firms need to take the innovation route."

HCL's is focusing on a value added play by anticipating trends and providing technology for them. Ajit Kumar of HCL Technologies Ltd, says, "The needs of the clients are changing. Our feedback indicated that the client wanted advances in application support and maintenance. We at HCL launched two new propositions built on principles of non-linearity. These higher value offerings have found customer interest, as they offer exponential benefit by aligning IT to business impact."

Going Up The Value Chain TCS Way

At Tata Consultancy Services too there is an appreciation of the changing winds of business. TCS has over the last few years signed a marquee of foreign car makers for high end computer modeling work that call for rigorous motor car testing. The assignments include taking over a complete set of requirements for computer validation for clients and is a break from the traditional ways of doing IT business in India.

Taken together the big firms are showing a flexibility that will help the Indian software industry add new business in a changed environment. The investments required and skill sets needed for moving to products consultancy and intellectual property platforms are large. However in time the returns to the top line are likely to be larger.

Rudra Bose, consulting associate at NASSCOM, comments, "To create a strong consultancy services domain, the sector is already heavily investing in domain expertise and innovation skills development in an attempt to shift towards IP-owned and soft skills which will help the IT industry in servicing their clients better. But, to fully exploit the scope of the domain, the IT industry needs to bank upon its large human resource and focus on greater efficiencies through skill development."
Nimble firms VC money new hubs and new markets
 
At A Glance

Indian software firm's margins in its core business of coding are expected to fall from an average of 25 per cent to about 11 to 12 per cent over the next five years. Firms are shifting to newer opportunities in cloud computing segment and analytics. Companies like HCL are into complex modelling for Boeing. While TCS is doing car testing modelling for big Detroit firms, Infosys is helping firms like P&G manage their entire processes

The story of the transforming landscape of Indian information technology industry from coding to value added services products and consultancy is not limited to the giants of the trade. Smaller firms are nimble more adapt. Some are jettisoning IT services model all together.

One such firm is Sapient based out of Pune a town that is a busy hive of new kind of its firms that are product and consultancy oriented. Speaking of the business model Hemant Joshi, Co-Founder, Sapience Analytics Private Limited says, "In a product oriented business you go to the client and explain what your product can do to their business. In the traditional model you offer a price at which you can carry out their routine process. We have developed a productivity tool that enables firms to increase worker productivity. There is traction now for Indian firms that innovate in the product space. We are now opening a US office later this year as the market has shown interest in our products."

Sapient is not alone. Firms such as Mcarbon provide a mobile technology based product which allows telecom firms to increase their productivity. The new ecosystem for product and service firms is enabled by the relatively easy access to venture capital.

Alok Mittal MD, Canaan, says, "There are a lot of new firms that are totally bypassing the old services model and are straight away developing products. There is VC funding available at much higher level then before in India for new ideas in cloud computing analytics and other developing fields. We have recently funded a firm run by Ashok Soota called Happiest Minds. This company is an example of how Indian firms are going to more specialized high end platforms. IP and domain expertise across a set of focusaed areas is the strength, which include application services, software product engineering, infrastructure management, security, testing and consulting services.
 
The new ways of doing business is also focussed at new markets. In a significant recent development, TCS signed a deal where it will have a majority ownership with Japan's Mitsubishi Corp to create a firm that will focus on the world's second largest software market valued at $100 billion. This is the biggest step in recent years by an Indian software firm to focus on the Japanese market as well as exclusively develop the consultancy business in within the software domain.

The transformation, underway in the software industry, is likely to change the way Indian industry is perceived. With greater attention to new areas like cloud and analytics, with a broader skill set and more emphasis on value added survives Indian firms both big and small are leveraging new strength. As Alok of Canaan partner says, "The new players in the ecosystem who are willing to innovate are likely to find venture capitalist that are willing to fund as well as stay patient for returns."