Making the right bets

Making the right bets

A friend who works in the manufacturing sector recently asked me, “What is so great about the Indian IT story in services? It’s all about doing low-end coding work for American companies, after all. Why have we not created a global product like MS-Windows or SAP-R3?" A very common question that’s posed more as a derisive comment than a sincere one.

The software services business is very different compared with the software products business. Deriding Indian IT’s achievements in services because it hasn’t succeeded in products is like discounting Ekta Kapoor’s success in TV serials because she does not produce successful films like a Subhash Ghai.

The fundamental expectation of a global product from Indian IT is surprising, considering that no Indian firm from any industry has been able to create a successful global product so far and some industries have been around for a hundred years.

Creating global products requires deep investments in research and development, marketing, brand building and sales, and an unconditional faith in the superiority of your product. It is a different ballgame, and it is going to be a while before we get there, as an economy and as a nation.

Software products is a $300 billion business globally and is a high-margin business. It is a glamorous and high-growth business but also one that has high risks and, so, a high mortality rate.

For every Microsoft and Oracle that has succeeded, more than a hundred thousand companies have sunk with or without a trace.

When you are growing and you are young, like the Indian IT was in the 1980s and 1990s, you need to focus and you need to take bets. Indian IT could have bet on products or on services, not on both.

IT services is a $600 billion business globally today. Indian IT has delivered both high margins and high growth rates without having to bear the risks of the product business by betting on IT services. It is today a $40 billion industry employing 1.7 million people.

The global delivery model pioneered by Indian IT is a unique value proposition. It delivered immense value to enterprises by reducing costs, just as a unique product such as SAP-R3 helped integrate operations across the enterprise.

In the end it is all about about delivering value.

The net margins of the leading software services companies in India are comparable with the net margins of companies such as SAP and Adobe and are significantly higher than margins of other successful product companies such as Intuit, Symantec, BMC and CA.

The global top 10 IT services companies (by market capitalization) include three Indian firms today.

It is argued that the high growth in services based on currency arbitrage and exemptions may not last.

That is perfectly possible and probably inevitable. However, high margins and high growth in software products will not last forever either.

Usage-based SaaS (software as a service) models and open source-based software have altered the software landscape.

All licence-based product companies today have already adopted or are on the verge of adopting SaaS model (where margins are lesser).

The product companies, too, now pay much more attention to the services revenues from their products, which earlier were left entirely to partners and system integrators.

Product companies are increasingly positioning themselves as end-to-end solution providers rather than be perceived as pushing products.

IBM was the first to make the transition in the late 1980s and the intensity has only increased in the last few years. Interestingly, Ford—a hardcore automobile products company—has declared that it wants to be perceived as a transportation solutions company and not as a company which makes cars!

So, 10 years down the line, product-only firms will be asked: Why are you not in the services business?

Anirudh Joshi works for Wipro Ltd. He is based in Bangalore. Comment at