At the age of 31 in 1991, Pankaj Ghemawat became the youngest full professor in the history of Harvard Business School. He had joined the faculty in 1983. A professor of global strategy at the IESE Business School, University of Navarra, in Spain since 2006, Ghemawat is famous for challenging The New York Times columnist Thomas Friedman’s theory that the world is flat in his eponymous book.
Tech solutions: Ghemawat says it’s time for Indian IT firms to move from a cost-based pricing model to a value-based pricing one. Bharath Sai / Mint
Author of Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter, Ghemawat is certain that protectionist walls will go up in developed economies affected by the global downturn and warns Indian information technology (IT) firms against taking false comfort in arguments that they would reap a demographic dividend or adopting a “we have seen crises before” attitude. Indian IT firms will have to move beyond the low-cost value proposition and move up the value chain to be able to survive and thrive, says Ghemawat, who spoke with Mint on the sidelines of the National Association of Software and Service Companies’ India Leadership Forum 2009 held last week in Mumbai. Edited excerpts:
Given that business volumes may decrease in the near to medium term, how should Indian IT companies address the current economic slowdown?
While revenue inflows can be influenced only to a certain extent in the current market scene, Indian IT companies should address the issue of bringing down operational costs and improve efficiency. However, one thing companies should avoid doing is reducing headcount without a specific purpose. It needs be done selectively, and in alignment with broader business objectives, keeping in view things like focus verticals and future business prospects. Companies should also effectively use training and development activities to improve employee efficiency.
Another thing that Indian IT companies should do, and do immediately, is working on increasing the revenue per employee. Compared to their global competitors, the revenue per head is significantly low for Indian IT companies. This is also a reflection of the business model that they have followed for a long time, and that model of growing through scaling up will need to change, if they have to deal with the current crisis.
One much-heard response to the current crisis is a ‘paradigm shift’ in the business model. How would you describe such a new model?
So far, Indian companies had a fairly simple model, which is the value proposition they offer through resource augmentation. However, that growth, as we have seen, has flattened out and companies will need to move up the value chain and can do more value-added services for the customer. They have to move away from a cost-based pricing to a value-based pricing model. Customers in crisis-hit economies are looking at outsourcing more complex processes to achieve much-needed savings. But to serve such clients, Indian IT companies will need different competencies.
Indian companies are also making a false analogy to the 2001 crisis and tech bubble burst and have assumed a ‘we have seen it before’ attitude. I think this crisis is different, and ‘mother of all crisis’ is not even beginning to describe it. I’ve seen nothing like this before and there is still a lot of uncertainty about when things will begin to get better.
Will the current crisis lead to greater outsourcing?
In the medium and long run, undoubtedly the dynamics and economics of the outsourcing model are compelling. But in the current environment, this argument may not hold true. IT investment is nearly half of all capital investment for some and pressure (from governments) might be greater.
With increasing unemployment and matching political rhetoric in markets such as the US, do you think protectionism may add to the problems faced by Indian IT companies?
Yes. And in a very big way. Indian companies have been taking false comfort by citing demographics and the business reality of getting things done at a lower cost. This time around, things are very different, and if in the previous instances Indian companies had the support of the corporate world in developed countries, it is increasingly not there anymore.
A recent big survey in the US shows that college-educated and graduate Americans are increasingly taking a stand that globalization (of which offshoring is a part) may not be the best idea after all. Further, given the extent of public money being spent as part of stimulus packages, there will be a lot of political pressure to do the ‘right thing’.
Recently, the Indian trade minister advised IT companies to look at the domestic market for business and growth. Do you think that will help companies maintain growth?
There is definitely business to be done in the Indian domestic market. However, it is also different from the outsourced work and it gives much lower margins than what Indian companies are used to. It also requires a different kind of model to be successful, and the question is, can Indian companies balance the two models without losing focus?
Do you think that the prevailing valuations will spur vendor consolidation among the tier-II and tier-III categories?
If you look at the numbers, not many of the players in that bracket have impressive margins. So, once business volumes get worse, it will be a question of survival for such companies and could lead to some degree of consolidation in that space. However, the question of buyout is different as cash could be a big constraint.