The Indian IT industry’s future potential
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News about the coming death of India’s information technology (IT) services industry started to trickle in about five years ago. KPMG broke the news of “the death of outsourcing” in a white paper in July 2012. In January 2013, The Economist reported that India was no longer the automatic choice for IT services and back-office work and cited a report by the consulting firm Hackett that the migration of service jobs to India (and other offshore locations) would stop entirely by 2022.
Despite such prognostications, there is also optimism about the prospects of India’s IT services industry for the coming decade. First, the industry has gone through, and survived, trying times before, such as the dot-com crash of the early 2000s and the 2008 financial crisis. Second, the major IT services firms devote significant resources to employee training and development, offering world-class facilities and educational programmes for new and existing employees. Third, some of them are also beginning to adopt new business models and develop new products and platforms to wean themselves off low value-added services and time-and-materials and fixed-price pricing models.
Finally, the $1.2 trillion global IT industry, growing at a rate of 4% a year, will continue to offer opportunities for IT services firms operating at all stages of the IT global value chain. CIOs (chief information officers), the primary customers for IT services, tend to be risk-averse and like to do business with firms with which they have had good prior experiences. All of these factors should continue to offer opportunities for India’s IT services firms for the foreseeable future.
However, not all firms will do well, or even survive, in the new, hyper-competitive global business environment. Only firms that continually upgrade their capabilities and offerings in line with emerging technologies and market imperatives can hope to survive and even prosper in this environment. There are five priorities for firms to pursue now to carve out a fair share of the IT services global pie for themselves in the future.
Build and upgrade capabilities continually
Capability building and continual upgrading are essential for organizational survival and growth. Gone are the days when one could rest on one’s laurels. Joseph Schumpeter’s 1934 seminal insight about “creative destruction” is truer today than in his time. Industries contain the seeds of their own destruction through incursions by new firms using innovations to destroy the incumbents’ advantage. Established firms can counter the forces of creative destruction through capability building and innovation. Capability building requires both internal and, especially, external sources of knowledge and capabilities, e.g., mergers and acquisitions, licensing, joint ventures and strategic alliances.
Explore, not just exploit
Scholars have argued that firms should pursue strategies to balance exploitation of existing resources and markets with exploration of new resources and new markets. Exploitation is “the use and development of things already known”, whose returns are often predictable and achievable in the short term. Exploration, on the other hand, is “the pursuit of knowledge of things that might come to be known” and whose returns are uncertain and potentially in a distant future. Too many firms do not devote enough, if any, attention and resources to exploring new opportunities and thus fall short on innovation, which comes from exploration of the unknown. Successful firms achieve innovation through both internal and external sources and, increasingly, through external sources of innovation, such as open innovation.
Offer ‘responsibility arbitrage’ as a new value proposition
Foreign multinationals come to India to leverage Indian firms’ low-cost structure, talent, scale, technology expertise and flexibility. Now, with growing competition for IT services business from other geographies, Indian firms must offer something significantly more valuable to their clients to differentiate themselves from the competition. This includes consistency of service and guaranteed results or the opportunity for them to benefit from “responsibility arbitrage”. For instance, in 2006, Tata Consultancy Services adopted the tag line “experience certainty” to communicate dependability for results to its clients. To offer a guarantee of service, firms will need to be highly selective in terms of the technology domains, industry verticals and the clients they serve. No firm can be everything to everyone.
Adopt non-linear business models
IT services firms in India often bill their foreign clients on a time-and-materials basis. Much of the risk in such assignments rests with the client. Consistent with the third priority noted above, more and more service providers should begin moving towards non-linear, outcome-based business models where pricing is based on results achieved, and with the provider also having some skin in the game.
Move up the relationship value chain
Traditional sources of competitive advantage for India’s IT services firms, namely low cost, talent, scale, technology expertise and flexibility, are increasingly passé. Wharton’s Kartik Hosanagar recommends that Indian firms must become partners with their clients, and get involved in conversations about “what to do” and “why do it”, not just “how to do it”. Conversations involving the latest technology and business trends increasingly involve people at the C-suite level. While successful IT services firms developed sticky relationships with their CIO clients in the past, they must now begin to move up the relationship value chain at client firms by also building deep relationships within the C-suite. The benefits that service providers offer their clients (and themselves) increase substantially as they move up the relationship value chain and from the back office to the front office.
Vinod K. Jain is visiting associate professor at the Rutgers Business School, Newark and New Brunswick.