Overview of Indian IT Industry

Indian software companies have been in the business of application development and maintenance for global clients for a decade now. This model of doing business has been a high revenue generator so far bringing a high return on investment (ROI). However, in this age of competition, price undercutting and rise in salaries, this model may not yield the desired returns for long.
As per the recent NASSCOM fact sheet, Indian IT Industry performance was marked by sustained double-digit revenue growth, steady expansion into newer service-lines and increased geographic penetration, and an unprecedented rise in investments by Multi-national Corporations (MNCs) – in spite of lingering concerns about gaps in talent and infrastructure impacting India’s cost competitiveness.

From the above table, we see that the Indian IT-ITES sector is expected to grow at nearly 28% for the current fiscal. Indian Service Providers have grown their share of contracts of values in excess of USD 50 million dollars from 1% in 2002 to 7% in 2006.

Need for Paradigm Shift
Over the past decade, Indian software companies have been providing offshore development worldwide. This was a feasible business model given the business environment then. However, business today is more competitive.
1. Software companies are faced with rising costs and huge billing pressures for their traditional businesses. Moving up the value chain is also imperative now as India now faces competition from countries like China, Russia and Poland. India is also losing its cost advantage – its USP for a long time – due to rise in wage rates in the software industry. The recent steep appreciation of the rupee in a short period of time wiped off a few hundred basis points from the software companies bottom-line.
2. Multinational companies are getting down to off-shoring of services. They are copying the business models of the Indian IT firms and it is easy for them as they are moving down the value chain.
3. The clients require more than project or short term agreement specific to technical implementations. With rapid globalization, stream lining of business processes and information processing provide a strategic advantage. Thus IT players in the domain of outsourcing are seen as business partners rather than short term service providers.
4. Firms must move out the over crowded IT service provider domain for a sustained business model. They have to re position themselves as a strategic business provider.

Options for Indian IT Companies
Firstly, the Indian IT firms should identify and venture into emerging verticals. Like e-governance projects from the government, fuelling the growth of the secondary sector and exploring domestic IT market. Indian companies can establish their own offshore sites in other hot spots for software development and engineering services that have lower costs than Bangalore, or explore regional cities in India.

To remain competitive in the future, the Indian software companies can maintain profitability by going up the value chain. There are two broad ways Indian software companies can move up the value chain – consulting and product development. The outsourcing value chain hierarchy is given below:

Product development is a high risk - high gain proposition. On the positive side, if a company is successful in developing a hit product it can experience an exponential growth in revenue and profits. On the flip side, there are chances of the product failing in the market. There is also a chance that the product is marginalized by a superior product of the competitors having same attributes, providing same benefits and similar value proposition. Most Indian software companies stayed away from product development to earn handsome margins on relatively lower investments thereby reducing risks.
Over the years Indian companies have made a foray into software product development but have been able to capture only a meager 0.2 per cent of the $180 billion global market for products. According to a recent study conducted jointly by IIM-Bangalore and Nasscom, revenue potential of India's software products is as high as $7 billion by 2010, a near 10-fold rise from current levels. The table shows the revenue from products of Indian Software firms.

Consulting is an area where Indian software companies can command premium prices. This offers these companies an opportunity to improve revenue productivity. Most of the Indian software firms have laid a strong emphasis on their consulting practices. However, in comparison with the global players, the percentage of consulting revenue as part of the total revenue is very low. The Indian software firms have credibility with the customer in software execution, software development, software maintenance, infrastructure maintenance. Hence, the same customer will evaluate you in the areas of consultancy that he is looking at the Accentures for, provided the Indian software firms build the capability to offer consultancy services.

The major barriers for the Indian IT firms to move up to the top tier are high brand equity and lack of domain knowledge. Even if domain knowledge can be gained through organic or inorganic route, the brand image cannot be built overnight. Hence, the Indian companies will have to change the market perception to succeed in critical consultancy services.

Conclusion
Indian IT industry has shown tremendous growth in a very short period of time. But the rapidity of its growth is more with respect to non-IT industry rather than with the global industry. The intense competition within as well as from outside, the stabilized growth rate, pricing pressure coupled with rupee appreciation and the vast experience accumulated over the years, calls for a shift of gear to move up the value chain. Indian companies are trying to become multinational by expanding operations to emerging countries like China, Russia, etc. however they are slow in turning into multinationals. They can build more of their own products for new generations of computer systems, handheld devices, and wireless content or telecommunications services is one way for India to develop a more balanced software industry that can better control its own fate. The top companies can acquire niche players or build capabilities in them to transform themselves to business value enhancers, bracing the high risk and entry barriers.