The Real Blind Spots of Indian IT Industry
A lot of none too flattering news is floating around the Indian IT industry, encompassing issues around H1-B Visas, purported massive layoffs and dropping share prices. The truth is, as usual, somewhat different and the future is, as usual, somewhat unpredictable.
Before I delve deep into this post, I must highlight my relationship with the Indian IT industry. My first job was in this industry, I learnt my first and correspondingly the most primal lessons in work from it. The firm we co-founded is a software services firm and I earn my daily bread through it. I happen to love technology and hope to continue being associated with it. My career, my future and my life are inextricably linked to the industry.
This is not a rant, a fault-finding exercise or stating the obvious about the Indian IT Industry. The death or downsides of the industry are being predicted since long as doomsday prediction is one of the easiest things to do, someday one is bound to be right. This is a small attempt (“small” being relative in the world of emojis and 140 characters) in exploring how we got here and what it might take to evolve into the next steps.
The Indian IT Industry Today
Without getting too distracted on what the definition of “Indian IT” is , we should first take a look at the magnitude of this industry in India.
Like all trees with deep roots, the Industry is a product of effort spanning multiple decades. The founding fathers of the industry, span across generations, from F.C. Kohli in the 70s, carried forward by forward thinking people of the now big companies in India. Before there were policies beneficial to Indian IT Companies, they had to face the same issues like all other entrepreneurs faced in India — 10 years plus to get telephone connections, issues in importing computers to work on- and some issues unique to the industry i.e. selling services around computers and technology to Indian and International markets.
Success in the industry was not guaranteed- a lot of the big Indian IT companies were 1st generation entrepreneurs who worked differently from the existing conglomerates in India. The path to success was also different- a comparison between Mastek and Infosys- two companies founded at the same time but with different philosophies is an illustration of this.
One of the things the industry should be extremely proud of (but is spoken less of) is carrying forward the legacy of a type of capitalism which was set by models like Jamshedpur . ESOPs when they were unheard of, world-class campuses, excellent training facilities were just some of the practices established internally. The success of the Industry has also led to various social initiatives like setting up of educational institutions, driving the implementation of hugely ambitious schemes like AADHAAR, attempting change from an apolitical as well as political forums , all at scales which are large in ambition and impact.
A look at a few approximate statistics  will help understand the scale of the industry today:
- > $150 Billion in overall revenues in FY 16–17
- Employment to > 3.5 Million people directly
- Somewhere between 6–9% of the country’s GDP
- It can be safely assumed that the direct employment to 3.5 million contributes to the employment. The indirect employment will be a multiple of this number which provides a perspective of the scale of people relying on this industry for their income.
Based on the scale above, even a caterpillar can be as impactful as a fluttering butterfly. So when issues like automation, a temporary President in India’s largest IT market and permanent securities analysts start predicting doomsday, it is important to give a fair hearing to all of them. Let us answer their issues in the following section.
“The Weaknesses of the Indian IT Industry”- by Bain McBoston
So the world’s foremost consultant, Bain McBoston has been pointing out the following flaws in the Indian IT industry for many years :
1. Perform work in only in the low-end of value chain
The Industry needs to move up the value chain has been a common refrain since time immemorial.
Sometime in 2003 when I joined Infosys and was learning ABCs, I remember Infosys Consulting  being launched as a completely separate entity. This was a reflection of the emphasis which the Industry paid to “Consulting” and high-end services even back then.
The truth is the IT Industry knew they had to move up the chain and made several moves in that direction. But the Industry also (correctly) followed the easy dollars at the lower end of value chain where the bulk of business resided as it was transactional work.
2. The only benefit provided is Cost Arbitrage
We treat “Cost Arbitrage” as a dirty word. Till the days come when end consumers start purchasing more expensive items as a regular habit, it can be safely surmised that lowering costs is a very VERY critical part of most businesses. Let us look at some pricing models:
- Lowest Cost: Would an offline retailer (Walmart) reach where it is by offering same prices as the incumbents
- Competitive Cost: Would an online retailer (Amazon) be where it is by offering same or higher prices by highlighting ease & convenience of shopping
- Free: Would Facebook or Google have as many users as they have if they had a small charge associated with it
Even if the argument made is all that the Indian IT companies did was the same thing BUT just at a lower cost, it can be countered with the fact that the Indian IT companies did the same thing AND at a lower cost.
3. High Dependency on North America for Primary Revenues
Most IT firms derive > 50% of their revenues from North America and within that the United States. Within the US, there are few states which would be amongst the world’s largest by GDP if they were countries. That combined with the dynamism of the US business environment, which took the bold decision of outsourcing business as long as it made business sense, is the reason why North America is critical for the IT Industry. But then, North America is also critical for the world economy and most industries around the world.
China as a big market for any non-Chinese company is a huge question mark. The best of firms of the western world, Amazon, Google, Uber, Apple have struggled and any hopes of Indian IT firms to make it big in China will depend on them partnering with some local firm and playing an increasingly diminishing role as the local firms build the processes of Outsourcing.
India’s domestic market was not structured or lucrative enough to build a nascent industry years back. The recent years are changing that and exploiting the local markets will require a different method of working. We will know the winners and losers in the next decade.
North America is important because that is where the market existed even before an IT Industry was created from the business there.
4. No Products and lack of IP
I will refrain from using the few well-known products of the IT industry like FlexCube to counter the lack of IP in the industry. I will even refrain from highlighting spin-offs like OnMobile. Because these examples are indeed far and far between.
What we need to understand is that filing patents does not necessarily lead to benefits in the Services industry. IBM as a company received over 8000 patents in 2016 which is vastly more than even the total patents filed by the top Indian IT companies. Based on these metrics, one should assume that IBM should be thoroughly winning the IT Service engagements but the Services revenues of these companies indicate that this is definitely not the case.
Patents, IP creation and products need to translate into tangible benefits for customers and in a B2B scenario, especially large enterprises, this is a long cycle. It is easier (i.e. safer) for an IT company to pay 10x multiple for acquiring a successful product company than to act in a VC model and fund multiple initiatives to see what sticks. A few of examples to highlight how IP creation can lead to a different path
- I mentioned Mastek above while comparing it with a much larger firm. It took a product & platforms route, avoided the lucrative Y2K services route entirely and now is many times smaller than the top firms in India.
- A relatively more recent example is even more indicative in today’s Mobile-first scenario. MindTree had invested money to build Mobile phones in 2009 which did not carry off. For context, Android was launched in 2007, iPhone in 2009. For additional context, an Indian Mobile Handset manufacturer set shop in 2009, had revenues of around $500 M in 2013 while MindTree had revenues just over $500 M for its entire business in that same period.
The Industry knew and knows the importance of IP, but like all other Industries, the Market and not the Industry decided who the winners and losers were.
So does that mean that there is no truth in the statements above? No, the actual message is that these issues were known and some actions taken.
We could debate the depth of these actions or question their execution like all wise people who benefit from hindsight. But every silver cloud has a dark lining and so does the Indian IT industry. So we can take the above mentioned issues seriously as they seem to be urgent but the question is if these are important.
The huge impact of the industry skirted over the real issues which were getting created due to the very success of the Industry. These are the real blind spots and these are what we will explore next.
I was driving fast, as fast as can be
To the peaks of success, to pluck the fruits from the trees
I did so well, I simply failed to see
The journey was long, there were still small seeds
I was growing fast, as fast as can be
In the valleys of Silicon, minting the Green
I did so well, I simply failed to see
There were plants in my way, not enough trees.
—My song while driving on the roads of the Indian IT Industry
Evolution is a process of change. While it may seem unforgiving for the losers, the pace of evolution actually is accommodating, for the rate of change is often gradual. This pace of change asks questions gently, enabling ecosystems to evolve together with organisms. Individual organisms can be rewarded or punished, but the overall ecosystem is rarely out of equilibrium. Once in a while this ecosystem is thrown off gear, but the cycles of equilibrium are long.
Capitalism is an accelerated form of evolution. It provides all the incentives of survival by weeding out inefficiency and rewarding the survivors well. The rate of change is so fast that there are fewer survivors and here, it is up to these survivors to determine the nature of the ecosystem.The rewards of capitalism combined with the vagaries of Homo Sapiens species implies that the cycles of equilibrium are shorter. This means that there are always a small amount of winners and a large amount of non-winners  in the system. A better way than capitalism has not been explored because a young Homo Sapiens mind can comprehend 140 characters more easily than Tolstoy’s “War and Peace”.
The success of the IT industry was a success of capitalism and the success of an Indian IT industry was a success of capitalism in the Indian society. As the success got magnified, it also brought fore a new equilibrium. But the Indian IT Industry forgot the lessons of cycles which were ingrained in our childhood lessons through stories but not logic.
The blind spots of the Industry was to fail to see the temporal nature of this equilibrium and ignore the 2nd order effects of its success- these second order effects  spanned the people, the process and the product of the IT industry itself.
Before we delve deep into the blind spots around people/process/product, I must emphasize here that not all of these were creations of the IT Industry, some of these just got magnified due to the very success of an Industry. At the same time though, the Industry cannot be excused of ignoring 2nd order effects while fighting for talent, trying to meet the quarterly expectations of an irrational Market and working on transactions to enable 30% margins. Let us explore these now.
1. People & 2nd Order Effects
In a world where companies are valued over a billion Dollars in 6 years, it might be difficult to grasp a concept of long-term plans. In a generation gifted with freedom & a more open economy, it might be difficult to grasp the concept of sacrifice. People like F.C Kohli , Narayana Murthy and many unnamed people could have easily benefited personally by lucrative “Onsite”  positions outside India. But they chose to work on Software without easy access to computers, without telephones and without support of systems around them. My generation (or my first job for that matter) benefited from stories which we are neither aware of nor care to acknowledge.
Loss of this history meant that the Industry forgot the importance of the type of people needed and instead started focusing on people.
This had implications on the way the entire industry extended itself, some of which are listed below
A.) Management as a Promotion not as a Skill: The hierarchy of the Industry is based on engineers at the bottom, with promoted engineers managing a level higher and so on. So if an Engineer did well, he was promoted into the role of a Manager faster implying moving away from the thing that he did well. The career path then was working as an Engineer for few years with an aspiration to become a Manager as early as possible. This meant:
- People who should not or could not manage were promoted to manage people.
- The people being managed were fresh graduates who needed a high level of management but did not necessarily receive it. Fresh graduates paired with fresh managers is where the majority of the company resided and this grew into the Industry we know today.
- Training in Management could not address the real gaps (we will address this later as well) as it was not elevated to the importance it needed.
This chain of incomplete Managers bubbled upward over time which implied that Management capabilities started becoming only transactional in nature instead of being multi-faceted.
Management was treated like a promotion not a skill, Engineering was treated like a lower level task and not as an ability.
This also led to the next issue highlighted below.
B.) Culture of Entitlement: One of the few things I have learnt along the way is that it does not matter how hard you try, you cannot give something if the recipient is not ready to take it. IT firms come with some of the best benefits- gyms with freshly pressed towels, canteen facilities, tooth-paste in dormitories, 5-day week- but I wonder how many of these have helped reduce attrition, or increase employee engagement levels.
- A Metric of Attrition level was created for Management to reduce. It then did not matter if the employee was capable or not, retention became important. Employees were pandered to instead of being managed. Employees who resigned had to be catered to irrespective of their skills, all that mattered was maintaining the head count impacting the customer billing.
- Instead of becoming independent, people started depending on their projects to learn, started depending on the nature of their projects to judge the value of their work (Testing v/s Dev , .NET v/s Java, Maintenance v/s Dev).
- Due to resources like StackOverflow, irrespective of the actual skills, majority employees considered themselves above average because they could get the task done. Concepts like technical debt, design patterns were not considered.
Task completion as a metric became a great equalizer between good engineers and the average ones.
The IT Services Industry in India has a 5 day week, world-class amenities and higher salaries than people in most Industries. But this did not improve output, this increased the level of entitlement felt by people.The expectation was how the company was enabling an individual instead of how an individual was enabling the customer. People who had became inward facing by now started having thoughts of IT service companies not having good work, software product companies being preferable, small companies being better than large companies etc. What was missed in these arguments was that large companies had large needs and large opportunities, they were (and are) like mini-economies waiting for people to exploit them.
But the average IT employee missed opportunities because the average IT Manager missed them because the average IT company missed them because the IT industry missed them.
C.) Narrow Thinking in a Global Environment: Consider the nature of outsourcing on basis of which the IT Industry has been built. A customer decides to get the work done from another entity in another country and the the team executing this project may never be seen by him. The customer also seeks solace in the fact that there is a common denominator of English language which makes communication easier.
This is not just a matter of lowering costs, this is a matter of trust.
Such an environment demands an expansion of thinking, absorbing the scale of global opportunities while leveraging the local lessons we have learned in & from an ancient land. For success, we had to use both a global language of English and the local language of emphasis of knowledge to reach where we are. Both the West & the East were needed, not just the one.
But we failed to realize this and the size of the Indian IT industry meant that it became a microcosm of a urban/ semi-urban India with all its benefits but also all its issues.
People sought affinity in region-based (state-based groups) and they carried this closed groupism even when placed in other countries. Instead of carrying forward the all-embracing nature of an ancient land, we took the parts which were contrary to a global environment, contrary to “Vasudhaiva Kutumbakam”. This was coupled with a small proportion of incompetent Managers enabling a conducive environment for people of their own regions and this simply perpetuated a feeling among inexperienced engineers who saw region-based conspiracies even when none or little of it existed.
Was this an issue only with the IT industry? No. This was and is an issue with the Indian Industry.
Could the Indian IT Industry have done something about it. Yes. There were and are enough highly respected leaders who had the opportunity to create a culture of inclusiveness and embracement.
The issue here was that the Indian IT Industry focused on a culture creation of Western Professionalism when it should also have openly addressed cultural issues of the Indian environment and utilized the cultural strengths of the same Indian environment.
Culture is a soft skill of an organization which determines if and how an organization can survive. Culture is not picking the practices of what have worked before and imposing them in another context (including geography).
We simply missed the “Culture” bus in the Industry inspite of being inherently immersed in it because our models of culture building in an organization were not built on addressing our existing behaviors.
2. Process & 2nd Order Effects
Unlike Manufacturing where similar pieces of the same model need to be created repeatedly with precision, Software that is written is often not the same . In software, there are overlaps, there is sameness, there is similarity and there is the completely new. While this does not preclude the possibility of learning from manufacturing, it also needs a different approach to process for it is with a process that a predictability can be built into the engine of software development.
Process orientation is one of the largest achievements of the Indian IT Industry- recruiting people at scale or high predictability of software delivery in certain use cases being a couple of examples. On the other hand, unlike manufacturing where you can closely predict your output, in software the predictability overall is low and a huge number of software projects do not meet expectations. The prime reasons for this unpredictability is:
- Communication: The actual needs of a customer need to be articulated well by the customer and understood well by the IT company executing the project. The onus of good communication resides with both the customer and the IT company. For the IT company it implies that there is a need to understand the expressed as well as the latent needs of the customer.
- Writing New Software: Within the set of requirements, there is often a need to write a new piece of software or a new piece of software gets written. As this activity is still largely non-automated, the quality of this activity depends on the person writing the software.
By reason, it would follow that the areas where the process is the weakest are the areas where the process would need work on the maximum. All sub-processes should somehow contribute to improving the predictability of output. Let explore some of the major issues with the processes we have:
A.) Flawed approach to the Training Process: If communication & writing new software are key issues, it stands to reason that most training would be built around this. Things should have been easy as the training was being imparted to educated (here implying formal education of 15–16 years) employees but this was not the case as:
- For soft skills, the training mode simply carried the models of existing methods of teaching and hence were simply not effective. Remember that training had to be done on areas which were weak inspite of a formal education. How then could the same methods of delivery suddenly start working. An “Assertiveness Skill” lecture will not suddenly change the behavior of the majority.
- For technical training, we mixed the notion of a new technology (and training in it) with the notion of writing good software and building good practices.
Training should have focused on building habits instead of assumed sudden “enlightenment” at the end of a session or two. Training was treated like a work of a separate department instead of an ongoing exercise.
B.) Flawed Quality Process: The sheer volume of people coding in the IT Services industry is huge. However the amount of new code written (and needed) is surprisingly small. This means that the approach to quality checks for new code was not a huge problem.
We however approached it with a process orientation which was like creating a rocketship for a trip to the local market. Detailed documentation and well-defined processes were created, certifications like CMMI levels touted but focus on the most basic building blocks and their quality was missed:
- We focused on coding standards but not on coding constructs and patterns. We focused on how to write code in new technologies instead of how to write code.
- If a customer did not mandate certain quality standards, then neither did companies promote quality by investing in software quality tools, automation or high quality peer reviews.
- Our processes of a separate QA which is an excellent tool if used judiciously simply encouraged bad development behavior with developers not building quality habits in their work.
Mediocre code wrapped in well-defined process is still mediocre code. Developers bashing out code and developers writing code are two different behaviors.
C.) Flawed HR Processes: This one is an offshoot of the way the Industry is structured and perhaps more of a result than a cause. But the second order effects of HR processes play a huge role in accelerating some of the issues mentioned in the “People” section. A brief look at some of them:
- Increasing Notice period as a way to contain attrition. All this did was give employees more time to interview at more places with an existing job offer in hand (which leads to the next issue)
- Companies were fine with hiring people who had committed themselves to joining at one place by giving double hikes. It came back to bite the companies themselves as their costs increased and they started facing issues where companies were not even sure if a person who had committed to joining would come to work on the day committed.
- Hikes were given on basis of a threatened resignation letter and not on basis of capability. This implied that people who deserved higher pay but did not create a ruckus about it were left out (this species was initially known as engineers before mercenaries took over)
- HR could not come up with any decent practice to evaluate Engineering capability of people using practices which were not relevant. (As a side note, I went around speaking to people in the top IT companies showing a potential tool which would measure Engineering capabilities per person. The companies were too concerned this would expose their engineers).
Flawed HR practices coupled with the “People” issues referred in the section above simply contributed to creating a culture of mercenaries instead of engineering excellence.
There are multiple areas where processes were flawed but I have tried to focus on the ones where the 2nd order effects were huge and shaped the way the Industry functioned.
3. Product & 2nd Order Effects
We finally address the key area of the IT Industry- its core offering, the product which the Industry offered as a culmination of its Services, Processes and the People.
As mentioned earlier in the article, the initial proposition of acquiring business was to perform work at lower costs. This begets the following questions:
- The costs needed to offset the increase in costs of communication required to work in a distributed model
- It was also important to see if the output of the work performed was at par, better or worse than the existing work being performed
For the first point above, the success of the IT Industry underlies the fact that businesses saw value in outsourcing in terms of cost benefits. For the second point, I am assuming that the quality provided must have been atleast at par, if not better in the growing days of the industry. I base this on the following assumptions:
- If quality was not atleast at par, the Industry would have struggled to find its feet in the initial days when benefits of outsourcing in software were not established yet (remember this is IP we are talking of outsourcing).
- The Industry attracted the cream of engineers in its early days when volume of people in the industry was less. The benchmarks of hiring were also pretty stringent .
The initial success of the Industry attracted more business. This was a defining moment where the Industry defined what product it would offer at scale (The initial offering was both lower cost and atleast if not better quality)
With growing scale, the industry chose to define its product as headcount i.e. number of people deployed in a project instead of output of people deployed. With larger volumes, the Industry’s value proposition was “hands replaced by cheaper hands” and not technical prowess replaced by superior technical prowess.
This shaped how the entire Industry chose to grow and structure itself and the second order effects here were always going to be damaging in the long run.
A.) “Price” became the Product, “Pricing” the Organizational structure: The minute the number of people became more important that the type of people, it had implications on pricing which was based on per employee and not on either the output of employee or the output of the project itself.
When pricing is done in a manner bereft of quality, it is always a race to the bottom where competition can undercut each other on price. India is already not considered as cost effective as some other nations. The ability to speak English and a high population of graduates cannot be considered as a permanent competitive advantage.
The issue of pricing led to not just traditional cost-driven competition but a bigger second order effect on people:
- As pricing was per head, differential pricing was done based on the number of years of experience of a person and not the capabilities. This led to a lot of “People” issues we discussed in the 1st part
- The technical prowess or lack of it needed to be compensated by the few highly competent people and well-defined processes. But the salary structures did not disproportionately reward people who contributed exponentially well to the success. The entire systems in the company were setup to create an average instead of elevating the truly good from the rest.
- Years of Experience, not experience became the first factor to drive Headcount-based pricing. Subsequently, experience and not engineering excellence became the next factor.
All this impacted the practices in which a company built itself including its teams & its hierarchies and the larger organizational structure which in turn shaped the structure of how the Industry built itself.
Head-count based Pricing became the core feature of the Product offered
B.) Technical Prowess in a Technology Industry: The most tangible output of any software project is the code written. Writing Code is a cognitive task, the core product of the Industry should have been based around Cognitive capabilities.
- As mentioned earlier, the structure of the Industry was based on headcount. This meant that the core offering of Cognitive output was relegated and technology skills were compromised in the product offering.
- The product should have been Engineering, it became Coding.
There are no stories of Industry’s technology equivalent of an open-sourced Framework like Hadoop, TypeScript etc.
Alternately, if the Indian IT Industry thought its product was its people, then there are no equivalents of a Udacity/ Coursera/ PluralSight etc.
Lack of Cognitive Prowess was hidden under “Processes” which simply hid the weakness of the core product itself.
C.) Focus on Requirements instead of Needs: Because the organizational structure became headcount based, the inherent delivery of the product became cost based and not Outcome-based .
- The second order effect was that focus got diverted from being customer-centric to fulfilling stated customer-requirements.
- The entire culture and resultant processes were around how to execute stated customer requirements better and not how to fulfill customer needs
D.) The Product of the Tier “below”: While the history of the IT industry has its genesis in Engineering services (India’s largest IT firm currently is TCS which was founded in 1968), the IT industry took the shape it is currently in roughly in the 1990s. The initial set of companies have not been simply wildly successful, they have been responsible for setting up the entire Industry.
The benefits have percolated and followers have built on top of the achievements on the larger firms. The unfortunate part though is, most followers followed the same models, same offerings, same organizational structures as the top tier firms with little contribution of their own.
- These companies lack multiple traits of their larger peers — the process orientation, the discipline in execution large deals, Account Management etc.
- So the only offering left of this Tier is “Lower Price”. There are few non-Tier 1 companies which can claim to be truly domain experts in an area where the Tier 1 company is not present.
- The lower Tiers of the Industry are disproportionately dependent on a mix of personal relationship-based clients + lowest possible price instead of company competency-based relationships.
- The ability of these tiers to come up with better and improved models are far and far between. Some examples which come to the top of my mind are Phaneesh Murthy’s aggressive marketing approach towards pricing story, MindTree’s brave attempts at building IP and mobile devices, Mastek’s conscious decision to stay solution focused away from Y2K-based business.
The top Tier companies managed to to do more things correctly than the rest based on which the other companies benefited. The other companies had the option to use a different imaginative approach to compete, the battle would have been long but the resultant companies would also have been more robust to accept change. But that was not to be.
The product of rest of the Industry was to sell the same wine in the same bottle with a lower price attached to it.
The cost arbitrage along with technology competence of an English speaking population was the guiding factor in establishing the Industry. But as we see, the 2nd order effects led to sacrificing the “technology” piece alongwith growth of a generation of poor managers who are disproportionately rewarded. This is the state we are in today.
While concluding the discussion about the blind spots of the Indian IT Industry, it is important to touch on one other aspect. Some readers might be of the view that the Industry did what it had to do to reach here and they were no other alternatives to the story. I can at best only partially agree with this. It might be best to outline my argument by highlighting certain sections from an old interview with the inimitable A.M.Naik, the current Group Chairman of L&T, one of India’s most reputed Conglomerates and involved in primarily in the Engineering & Manufacturing businesses.
- “Manufacturing has to compete with the Chinese; construction has to compete with many large-size companies. If I have to go to the Gulf, I have the whole world to compete with….Remember software companies do not have all these problems, because China is not breathing down their necks. They are deeply engaged in building a powerful China. Don’t think they don’t have IT professionals. They have millions of them but the only problem is that they don’t speak English….Some 30% of IT spend in America is on government automation. How much is it in India? Please tell me how much capacity of the Indian IT industry is being spent to automate India’s medical science, health ministry, hospitals, government, etc….” →
The IT Industry has benefited from an English-speaking audience coupled with a large population where education is emphasized. It also had the advantage of working in a relatively corruption-free environment with minimal archaic rules. Instead of being able to use that strength building strengths domestically, we took short-term steps in the name of globalization which will be counter-productive  in the coming years.
- “…We sell our bodies. Infosys and Wipro do not lose engineers to the Gulf. I lose them to the Gulf; I lose them to IT; I lose them to multinational engineering companies; I lose them to Australia, Canada, New Zealand, FMCG, investment banks… everywhere….Simultaneously, I should fill in the void….” →
While the Industry picked the best talent across all sectors (leaving other sectors bereft of talent in the form of a domestic brain-drain), we still did not do enough to create talent which was possible through other long-term measures. Zoho’s program to educate & hire differently might get them relatively few number of qualified people, but they tried something unique which cannot be said of the IT Industry of India.
- “…..People ask why I don’t pay more, but my margin is 5%. All my competitors around the world pay less than 5% which is the industry margin. Construction business all over the world works on 2%. The IT Industry earns 30% margins……” →
The Industry had 30% margins and it sure has built world-class campuses with great facilities (The first company I worked in kept toothpaste in dorms for people incase they stayed over late. But I wonder how many even noticed it, forget appreciating it). But considering these facilities have not helped address attrition in any meaningful way, the Industry should have used their margins better (my personal view is people do not appreciate the value of things they get for free).
The counter-argument of all this could be that this is being said in hind-sight.
- It is true that very few, if any, could have foreseen the sudden advent of Machine Learning, Cloud-based services or the pervasiveness of Mobile computing devices. But almost all could see the need for greater levels of automation and lacunae of technical skills.
- It could also be argued that the publicly listed companies had a fiduciary duty to grow as fast as possible and long-term measures are not rewarded by the market. While I agree with this, it again raises the point of 2nd order effects and our incomplete ability to retain control in the companies that were founded. Companies like Google bypassed Investment Bankers completely to go public, a Facebook still is driven by its founder because the founder retains control of a specific-type of shares. The point is not whether such Financial structures are easy in India but whether the Indian companies dared to dream beyond existing models from the late 90s and early 2000s when they had an opportunity.
A small story to conclude the Blind Spots discussion: Sometime back, my co-founder and I thought of coming up with a platform where we would measure the capabilities of Software Engineers while they were working in their project environments. This would be a great way to introduce transparency in a system which was people-driven and hence fallible. The performers could be clearly identified and this would help built better teams and better outcomes. We peddled around a bit but found no takers for the platform in the Indian IT firms we spoke with. The refrain was this kind of data would break the backbone of the pricing model in the IT Industry as well as not accepted by software engineers. Surprising?
The Path Ahead
Hacking solutions to create a Product has been a successful approach to solving problems in unstructured environments. The Indian markets, with its under-developed status encouraged such entrepreneurs who could exploit gaps, absence of information and correct contacts in the system to prevail. The export-oriented Technology Industry is more binary in nature and the concept of Jugaad is not a replacement for long-term success in a competitive global market. Hard work alone does not suffice and neither does the act of doing the same thing repeatedly. The Japanese Industry is a great example of achieving the peaks of success in the US before tapering down with increased global competition from Korean and Chinese vendors.
We have the advantage of known precedents of failing Industries, we have the advantage of known precedents of failing companies (could anyone in India 10 years back image a Nokia failing). We retain the advantage of scale and pervasiveness of the IT Industry in Enterprises across the world. With so much information, we now need to know which steps to take to proceed ahead. What follows is an attempt to understand and predict what should and can happen.
A.) What is Already Happening
- Consolidation: It is a known fact that the Industry is tilting towards larger companies as they bring in advantages of scale, processes and domain expertise which is difficult for smaller firms to match. There will be significant churn and M&A in this area and no one will be able to easily escape this process (e.g. companies like Patni and Satyam are no longer around). The process will need to happen faster in Mid-tier companies else they will see themselves in oblivion faster than expected.
- Automation: Practices like Continuous Integration or Automated Testing are already in vogue and will continue to be adopted as they bring a predictability in system behavior.
- Shorter Development Cycles: Again, traditional models of Waterfall or detailed documentation are practices which are being dropped to enable better flexibility in the technology to incorporate business needs.
- Changing Pricing structures: Pricing which was initially structured in different models in large engagements are now percolating to smaller ones as well.
- Indian IT Industry is becoming IT Industry: There are development centers outside India and these will continue to increase over time as India becomes less cost-effective and geopolitical factors take over. Presence in areas like Engineering hubs like East-Europe is going to only increase to service global clients.
- Custom Applications are being replaced by Packages: This is almost like a consolidation of applications in which a backbone of ERP or platforms like Salesforce are being used to create integrated applications. The custom tweaks are at end-points where digitization has not occurred so far.
- Domestic Digitization: The mobile penetration in India has been a major social driver in getting access to communication and then information across India. There are encouraging signs around encouragement of digital transactions, concepts like AADHAAR which should help social inclusiveness . Much like the humongous scale of consumer technology impacted enterprises, this same consumer technology is impacting social change and this will have a major role to play in our country.
B.) What Should Not Happen
- Unionization: There are sporadic reports emerging where attempts are being made to unionize the IT Industry. Any attempts in that direction is going to be hugely detrimental to the Industry. Unions as a concept are at best where exploitation of under-served people is a possibility. And then too, there are significant challenges with the concept. The IT Industry does not comprise of under-paid, exposure-less people. It is a Cognition-based Industry with people sitting in comfortable offices and having access to the world through Internet. Incompetence, or the concept of permanent job security in a competitive global world cannot be tolerated. We do not need the IT campuses of India to become like the textile mills of Mumbai or the IT Industry to become like the struggling Textile Industry in India.
- Robin-Hood Rules: The success of an Industry should be carefully handled by the regulations of the land. Any attempt to try and impose non-market driven forces in the Industry will lead to killing of the Golden Goose that the Industry has been so far.
C.) What Needs to Happen
- Bringing in Leaders for Today: Considering that the structure of the Industry needs to undergo major overhaul, the type of leaders to lead the larger organizations need to change. What succeeded earlier is not what will continue to help succeed today and a different mindset is required. I personally think Infosys got this spot-on by bringing an Enterprise background Product Leader as the head of the organization. The Industry needs to get in people who have had large enterprises and product backgrounds alongwith proven execution skills. As representative examples, Steve Sinofsky & Lars Dalgaard come to mind . There is a very strong reason that the 1st change recommended is a change in leader. Microsoft’s strategies set at the top since the new CEO has taken over have dramatically changed the company from a follower to a leader.
- Agree on the First Principles with New Leaders: It is imperative that when a person is from a different culture, there is agreement between the basic principles of the existing founders and new Management. The areas covered need to include compensation, people management, roadmaps over the short/ medium/ long terms and M&A. If these issues are not thrashed out right at the beginning, then issues are going to creep up later.
- Create new Co-creation Models: IT companies need to specialize further and deeper in certain areas. This probably means that they may have to co-create some offerings with their competitors. This is not very new for the Industry where companies often compete with ERP companies as well as partner with them in similar solution space. IT companies also already take help from ISVs, build on platforms provided by companies like Amazon/ Microsoft/ Google, and still compete in other areas. There are lessons to be learnt from the success of Android. Or understand the way the market is moving when someone decides to create an open-source self-driving car program. There are good business reasons why Product-based companies open-source their frameworks (think React, Hadoop, DART, TypeScript) or when a Microsoft decides to get Visual Studio on OS X. There are multiple ways this can be implemented in the IT Services Industry: A smaller niche IT firm can ride on the wings of a larger firm and both companies can win. Two large companies can get together combing their strengths to enter a domain or an area where both do not have a presence. Entrepreneurial employees can be given a controlled-reign to establish solutions under the aegis of the larger firms (e.g. OnMobile’s genesis under Infosys). IT companies are acting as independent silos and trying to solve too many problems at the same time which is a waste of resources. A simple example: why cannot the large IT companies pool their resources and have common entrance tests for freshers where the hiring criteria is largely similar? Or why can’t they pool resources to tackle the larger problems around Image recognition which are beyond the capabilities of any one company?
- Decide the importance of Financial Markets in Short-term: At some point, publicly listed companies will need to take strong steps agnostic of how the Financial markets reward them. Share buy-back programs which are being planned are a good way of increasing ownership to be able to take bold steps in the market. I wonder if a couple of companies can go a step further and try to take more ownership at the expense of reducing cash and picking debt.
- Bring Technology to the Forefront of Organizational Structures: For too long, technology has been relegated by the metric of headcount. Technology should be prioritized by disproportionately rewarding technical skills. A single good technology person will have an output equivalent to multiple average people alongwith the added advantage of having smaller, nimbler team structures and simpler management. This should become the DNA of the overall Industry.
- Establish correct People processes: People should not be rewarded, skills should. Experience should not be rewarded, ability to do “X” should. Rigidity should not be rewarded, ability to learn & change should. Engineers should engineer. Managers should manage. Engineers who cannot manage should not manage. Managers who cannot engineer should not engineer. Batsmen. Bowlers. Wicketkeeper. And consider yourself lucky to have allrounders.
What Also Should Happen
- NASSCOM playing a more active role: At some point in time, the Industry will have to invest beyond the roles it has traditionally invested in the Domestic market. There is brilliant work being done in areas of Education, NGOs and social upliftment by the IT Industry. But it is time that the IT Industry together invests in technology-driven infrastructure which can help create a more digitized domestic market and in turn drive consumption of technology. Consumption of technology will lead to efficiencies the benefits of which are beyond what I can predict. This will strengthen our economy and our IT Industry beyond the vicissitudes of the global market. This can only be done by companies pooling in resources and working closely with just a couple state governments which are forward looking in nature.
- Government driving Change: The Chinese government has articulated an AI program for the entire nation which is large in ambition. Chinese teams were the leading teams in 2017 in the reputed ImageNet challenge. China has a large domestic market which is being served by cut-throat competition and highly competent technical companies. This example is to show the need of a centrally driven push for technology in areas of education, governance etc. which can then be picked up by the IT Industry. An Infrastructure of a nation today goes beyond roads or transport, it needs a strong technology dimension as well. There have been forays in this area but the velocity and priority need to pick up for this to have any meaningful impact in next 10–15 years.
I spent the 1st half of this article highlighting few of the many achievements of the IT Industry. The 2nd half of the article does not aim to belittle any of these. It is to point out that in the race of expansion, it compromised the initial principles of excellence which would help further strengthen the Industry. The 2nd order effects have deeply percolated in our society beyond the IT Industry and we will end up paying for this in some form.
So will the Industry die? No. But there will be many fatalities.
Will the Industry Survive in its current form? No. In the current form, the Industry will at best wither away to be inconsequential with only a handful of companies existing.
Will the India IT Industry continue its current model? No. In the current model, the Indian IT Industry can at best morph into an IT Industry in other form.
The question is if the Industry can drive the change or atleast be part of it to remain healthy for the next 3 decades.We cannot predict the future but the overall direction is fairly certain:
- From a technology perspective- greater automation, lesser need for custom coding, higher adoption of platforms, greater need for analysis are elements which look obvious.
- From a macro-environment perspective, local incentives by governments will make cost arbitrage less and less relevant.
- Domestic demand will need to be generated to counter the reducing requirement of Enterprise requirements
- Consumer-centric projects might become increasingly important as compared to traditional Enterprise clients. This will lead to repercussions on how societies and governments organize themselves and how nations will work.
Cost-competitiveness in any area is like the flow of water, it will follow the path of least resistance. Industries can be setup on that basis but cannot be expected to use that advantage for too long. Other benefits need to crop in to compensate for the inevitable increase in costs.
The Indian IT Industry has enjoyed a golden run with large margins, minimal government restrictions and headwinds of a large market demand. The next stage will need to be different though. The next set of leaders will have the mind-set of driving revenues of $1 Million with 15 employees, $10 Million with 25 employees, $100 Million with 150 employees….
From an export-oriented perspective, the Industry has at best 4–7 years to restructure itself completely and it can only do it while de-prioritizing public markets.
Or will the Industry wait to test Mark Twain’s prophecies….
Victors are already being decided as I write this.
-  IBM, a US-based company, Cognizant, a US Headquartered company and TCS, an India-based company are all included under the gamut of “Indian IT Industry”
-  Approximate figures as these are roughly extrapolated on basis on published FY 15–16 figures by NASSCOM
-  The article mentions 2004 but I think it was in 2003 when I first heard of it. Another article which speaks about the unit mentions the date as 2003
-  Understanding 2nd Order Effects: Our actions are based on an outcome we hope to achieve. Irrespective of whether we achieve the outcome or not, each action also has effects beyond the intended outcome. These are 2nd order effects and we will highlight these effects in some of the most critical areas of the Industry.
-  Non-winners comprise of losers but also those who did not lose but did not win.
-  “Onsite” refers to positions at Client’s location in IT parlance. Those outside India get to earn in multiples over what they could earn in India
-  Software issues across Enterprises is largely similar. Software Functionality across Enterprises within the same domain are largely similar. Software Needs with functions are often similar as well. This is why ERPs have large adoptions in Enterprises.
-  In the first company where I worked, we were assigned employee ID numbers in the sequence in which we joined the company. So the early employees had smaller employee numbers. There was a saying that you could predict the capabilities of a person in the company just by looking at the employee number!
-  Outcome-driven pricing or Fixed-price models are increasing in adoption in this decade but these are still primarily played out in large Enterprise deals and not inherent in the Product of the Industry.
-  Microsoft was forced to share its source code with the Chinese Government to ensure government procurement. Similarly Cisco had to share its designs of routers being made in their manufacturing plants. This knowledge has been in turn used to hack through networks by state sponsors.
-  Initiatives like AADHAAR have areas and loopholes which need to be plugged. The issue again may not be in the concept but in its implementation.
-  These are representative names of the type of skills needed to win in the market. Am not suggesting that these two gentlemen should actually be approached….on second thoughts, why not!?