Indian IT 3.0: The world is your oyster12 min read . Updated: 09 Dec 2016, 08:29 AM IST
Unleashing Indian IT 3.0 can pivot India to innovation leadership, giving the country a more central role in shaping the industries of the future
Unleashing Indian IT 3.0 can pivot India to innovation leadership, giving the country a more central role in shaping the industries of the future
Most people don’t realize this, but India’s tryst with information technology (IT) started more than three millennia ago. Aryabhata laid the basic foundation of IT and digitization with the invention of zero.
Fast forward to the 20th century, and Indian IT industry veterans have even more fascinating stories to tell. In the 1970s and ’80s, code was physically shipped to clients. Every programming change warranted another shipment, something very hard to believe for most people today. Authorities were unsure of how to treat software codes. Were they goods or services? What tax regulations would apply? Amid this confusion, the IT industry slowly took shape in the 1980s, taking advantage of the huge opportunity presented by computerization.
The industry remained small until 1990, gained some momentum in the post-liberalization age, and Y2K was the game-changer for the sector. Faced with the massive IT implications of a changing millennium in the late 1990s, the western world found itself unprepared, coming up short both on capability and capacity to deliver the requisite transformations. Indian IT companies stepped up to the challenge. History is witness to the seamless transition that enterprises made to 1 January 2000—no major incident of computing malfunction reported. The world acknowledged the contribution made by Indian IT in making this happen, catalysing a decade of hyper growth for the sector in the country.
The statistics since 2000 speak for themselves. At the time of liberalization, in 1991, this was a $150 million industry. By the turn of the millennium, the sector had grown by more than 30 times to around $5 billion and has since ballooned to $150 billion, having expanded another 30 times. India accounts for nearly 55% of the “offshore" of this services market comprising IT, engineering and business process management. India leads by a margin, displacing erstwhile incumbents like Canada and Ireland. India’s five largest IT companies today count themselves among the top 20 firms in the industry globally, with the quintet also appearing among the largest 10 IT enterprises in terms of market capitalization.
The industry has been a major contributor to the Indian economy. Directly or indirectly, the sector contributes around 10% to the gross domestic product, nearly 25% to exports, and employs over 13 million people. Smaller IT firms account for about 60% of this contribution, while women make up around 35% of the industry’s workforce, making it one of the most diversity-friendly sectors in India.
The industry has changed Brand India forever. The land of snake charmers and elephants is now the land of technology and home to a vibrant IT industry that is transforming enterprises across the globe. Any discussion on IT in global forums is incomplete without a reference to India’s prowess in the sector.
Opportunity to capitalize on this tremendous head start
Indian IT has the opportunity to play a pre-eminent role in shaping the future of the entire industry.
Innovation partner for global enterprise: After pioneering the global delivery model, the Indian IT industry has been steadily moving up the value curve. Starting off as a provider of talent, Indian IT enterprises today are increasingly partnering with enterprises in their transformation journeys. We estimate that around 15-20% of IT projects today involve delivering business impact (Level 4) or enabling innovation (Level 5) for their customers (see exhibit 1). Having said that, there is tremendous scope to increase the proportion of these high-end services further, as companies the world over look for robust solutions to address disruptions around them. A recent survey by BCG of global IT clients found that over 90% of the respondents wanted Indian IT firms to do more in terms of partnering with customers on their innovation and transformation agenda.
Transformation engine for India: Looking within India, the role played by the IT industry beyond the economic impact is quite substantive. There are many examples of large-scale transformations that have taken place over the past decade in India. Today, over 65% railway tickets are booked online, passports are issued within a week and nearly 23 million Indians filed their taxes online in 2016. The landmark GST (goods and services tax) reform will be implemented on a platform built by the Indian IT industry. Similarly, core banking solutions from IT companies transformed banking forever. Aadhaar, with over one billion Indians registered, is the largest biometric database in the world. However, there are a lot of areas that still need an IT revolution. India continues to face the challenges of capital scarcity, a highly dispersed population and low levels of literacy. Technology will serve as a critical enabler in bridging these gaps. IT can be the force multiplier for India, bringing in transparency, efficiency and access to address issues of governance, health, education, sanitation, infrastructure and many more.
The progress achieved by the IT industry over recent decades has resulted in a trained talent pool of two-three million Indian engineers. More importantly, the country today has a large pool of talented architects and experts with 10-20 years of IT experience, including rich client interactions and expertise in cutting-edge technologies. These individuals can help shape Indian IT’s future, and some of them are already spawning start-ups to this effect. India was home to over 4,000 start-ups as of 2015, around 40% higher than the previous year. Today, it is the third-largest base of start-ups, of which nearly 50% are in the technology sector, and several having been founded by Indian IT executives. Clearly, the innovation engine is humming.
Mega shifts poised to create massive disruptions
Ubiquitous connectivity, explosion of data driven by an extensive proliferation of connected devices, and an exponential increase in computing power, are together driving fundamental disruptions for industries, consumers, employers and the broader society. This will have a fundamental impact on the IT industry, challenging existing paradigms and creating a plethora of new opportunities.
Everything is software: How much of a car is made up of software? Today, mechanics run diagnostic programmes before looking under the hood, even in the case of a traditional ICE (internal combustion engine) vehicle. There are 30 computer processors in a basic car, and up to 80 in high-end vehicles already. Tesla’s Model S has only 18 moving parts compared to more than 2,000 in a traditional car—the rest is made up of software and batteries. Jeff Immelt, chairman of General Electric and Co. (GE), recently said, “Industrial companies will become software companies". Today, he sees the jet engine as 37 sensors generating one terrabyte of data during every flight, and is betting the house with GE Digital. Technology and software is blurring industry boundaries and the competitive landscape. Amazon, a retailer, is now the biggest public cloud provider. Detroit, facing huge existential threats, is actively investing in Silicon Valley-based technology companies that are disrupting transportation. With software becoming so critical to value creation and competitive advantage, the opportunity facing Indian IT companies is immense. It is possible to imagine that a car in the future would have 50% of its technology and software coming from an IT major? Now, that would be a huge, and largely new market!
Carbon to silicon shift: The L-K substitution curve in economics (labour-capital trade-off) is playing out in the IT industry as well. In the industrial era, machines used steam and then electricity to replace labour. In IT, human labour (carbon) is increasingly being replaced by computing (silicon). As computers are increasingly able to mimic human capability and actions, this will accelerate. These technologies will disrupt the traditional service delivery model. In low-end business process outsourcing, up to 75% of the current human effort can be eliminated with cognitive and robotic technologies. Human effort will predominantly be required only in services higher up the value chain. Dealing with business models that are not based on labour as well as a pyramid where talent is largely high-end are pretty much opposite to the current business model of the industry that is based on large-scale and relatively low-end talent factories. The need for upfront investment in intellectual property (IP) and assets will be another new shift driving an overhaul in the current propositions and the business model.
Changing buying paradigms: With software becoming core to the enterprise, IT spending itself is decentralizing. The business buyer, or the “C-not-IO" (other than CIO), is becoming important. Recent estimates suggest that already, over a third of IT spending, on an average, is being influenced by the business, and not the chief information officer or CIO. This means significant changes in terms of front-end engagement and proposition. In addition, the consumerization of IT, changing employee behaviour and dynamic customer requirements in a hyperconnected world are also disrupting traditional ways of IT delivery. The traditional approach of “design-build-test-deploy" will only create dinosaurs—irrelevant at “go live". The need of the hour is for an iterative and agile approach, leveraging the best-in-class solution components from a partner ecosystem, allowing rapid stitching together of end-to-end solution. Overall, the traditional model of building internal capabilities (do-it-yourself), focusing on the CIO, and using offshore leverage and pyramid structures to drive competitiveness will change as the world changes how it buys and consumes services.
These disruptions and shifts will challenge existing business models, while also creating significant new opportunities. This will provide the opportunity to develop Indian IT 3.0, where the industry can play a pivotal role in a world that is being continuously impacted by forces of technology.
Indian IT 3.0: The journey from Good to Great!
We think the evolution of the Indian IT industry over the past two-three decades can be described in two majors waves, and believe the third one is ready to take off (see exhibit 2).
Indian IT 1.0 was aimed at making the CIO a more effective business partner—responsive, efficient and effective. Quality and cost-effective talent and globalized operations were the foundational elements of this proposition.
Indian IT 2.0 saw a more active engagement on business issues with the CIO (and CXOs). From cost-effective talent, the proposition evolved to include domain expertise, as well as some IP frameworks and operational best practices. Cost savings were complemented with process re-engineering and the associated impact on business metrics. This $1 trillion market, growing in steady single digits, has been the playground of the industry so far.
The future, however, will see a far richer set of avenues as technology and software pervade the businesses further. With an increasing role in the enterprise agenda and value creation, many disruptive opportunities will emerge for Indian IT organizations:
End-to-end play: This is the “deepen the core" extension of the current proposition. As companies grapple with changing technology landscapes, rapidly changing needs and costs pressures, companies will be willing to hand over the business process to technology stack to make it future-ready and scalable. They would likely entail the relevant mix of scale and innovation at each layer. For example, highly automatable operations could potentially leverage robotic factories at the top of the stack (the business process layer). Custom solutions could be built using a modular architecture with a partner ecosystem, with infrastructure layers being provisioned by public cloud providers (think Google, AWS or Azure of today). This provides scalability, attractive economics and flexibility for the enterprise, and opens up pathways for large-scale partnership. This will also create opportunities to create new industry platforms and utilities, like Amadeus for travel.
Disruptive non-traditional plays: Can we imagine software from India riding over the commodity hardware of the next-generation autonomous car (remember the electric vehicle has only 18 moving parts)? IT companies are already playing an increasingly bigger role in media. Accenture and Sapient have combined their strong digital capabilities with acquired creative talent to become leading media agencies, actively competing with traditional players. In the financial sector, some companies are trying to become payments banks—competing with traditional players as well as fintech start-ups. Could the next digital bank be created by an Indian IT firm? Manufacturing 4.0 is set to have multiple technology drivers, including autonomous robotics, analytics, industrial Internet, augmented reality and 3D printing. Can Indian IT position for 3D manufacturing and extend given it is more about technology? Many non-traditional plays emerge given the strengths of the Indian IT in technology.
New roles and services: A recent BCG study for an Asian government indicated that 75% of the existing jobs in that economy would be impacted by cognitive technologies and robotics, and that almost a third of them will get eliminated before 2035. Some other analysts have more aggressive predictions for traditional jobs indicating significant disruptions by 2025 itself. At the same time, this disruption will create several new roles—think drone traffic coordinators, robot compliance managers, or 3D printing specialists. Can Indian IT serve as a manufacturing operator for companies, using 3D printing remotely, just like how applications and infrastructure are managed off-site? As more such roles emerge, India’s talent advantage will once again come into play. Can Indian IT firms create large pools of such new skill sets to serve the emerging needs of their clients in the future?
These opportunities represent a multi-trillion dollar market that is likely to grow at a very fast rate. Instead of mere share shifts, IT firms will have the chance to pursue new markets with disruptive propositions and new business models. Unleashing Indian IT 3.0 can pivot India to innovation leadership, giving it a more central role in shaping the industries of the future.
Time to change the engine while still flying
The success of Indian IT continues to drive high expectations, not giving it any breathing space to step back and reflect. The future is filled with new and exciting opportunities, but they pose some fundamental questions for Indian IT and all the stakeholders that must be rapidly addressed.
• Today, Indian IT is the incumbent and innovation is being driven by nimble and new-age competitors. What should Indian IT do to avoid being disrupted and to take advantage of the opportunities being presented?
• What policy changes and infrastructure enablers would the government need to think about to encourage the sector?
• The future will require a very different, and more heterogeneous, talent pool. How can the IT industry, the government and academia together collaborate on ways to develop the requisite skill sets for tomorrow?
Indian IT is in pole position to build on its strong legacy and capitalize on the disruptions under way. The world is Indian IT’s oyster, but the sector will require a major metamorphosis. As Indian IT 3.0 evolves, it will not measure its success by the number of people employed or revenue generated, it will measure its success by the impact it delivers in transforming lives, enterprises, industries and societies. This will indeed be the journey from “good to great" for the sector.
Neeraj Aggarwal is managing director at the Boston Consulting Group, India. Vikash Jain is partner and director at the Boston Consulting Group.