BusinessWeek reader Sudha Kumar says her country's IT sector needs to focus on the customer and assume more risk
The global recession is a wake-up call for the Indian IT industry. The sector had been rocketing along (except for a small dip in the early 2000s), for the past two decades and more, to grow to its current size of $50 billion. As CEO of a Bangalore-based company working in the heart of India's IT corridor, I'm all too aware that in good times you are busy gearing up to service exploding market opportunities. Since this industry was founded on the premise of labor arbitrage, profits were also there to be made.
Today, however, it's more prudent to take stock and create a robust strategy that helps companies not only ride out these difficult times, but also prepare for a future beyond this global recession. This is an ideal time for companies to take a hard look at what they bring to the table. With budgets being scrutinized and buyers being understandably cautious, service providers need to reiterate and reinforce the value of their relationship.
ENGAGE THE CUSTOMER
One way to do this is to create models or methodologies to quantify return on relationship or business value of the IT outsourcing engagements. This would help the sponsor within the buyer organization present a credible business case to her management.
Related to this is the need to obtain a deeper understanding of the customer context and offer solutions that will be of immediate relevance. For example, ideas on leveraging existing IT investments would obviously be appreciated; any solutions that help bring about a measurable reduction in costs or improvement in service time would get a hearing as well.
Many Indian service providers may not have needed to analyze the customer and marketplace at such a level of granularity before. So these steps may not be as easy to execute as they should be, in theory. That said, those that are able to reorient themselves quickly and become truly customer-centric will find more doors opening.
SHARED RISKS AND REWARDS
Another key aspect of customer-centricity is risk sharing. Traditionally, Indian companies have used the Time and Material (T&M) pricing model, where they get paid for the time they spend. This model was fine in the early days, as much of the work done involved maintaining and supporting legacy systems that had little or no documentation, and hence estimating the scope of the maintenance effort upfront was near impossible.
Over the years, India's service providers have garnered a far better understanding of the customer's IT landscape and are now in a position to assume more risk, and hence demonstrate higher commitment to the customer. To offer risk-reward models of engagement, however, service providers need to strengthen and innovate on their delivery capabilities. For instance, they must look at productivity initiatives including reusable frameworks, components, and related factors. They must understand estimation and project management to be able to deliver within the estimated schedule.
In the Business Process Outsourcing area, our companies need to seriously look at technology platform-enabled services, something that many have spoken of, but not made great progress at. This will allow them to absorb variations in the flow of business from the customer (without jeopardizing their own operations) since they have made their dependence on people indirect. It will also help them give customers much needed flexibility and help them ramp up swiftly when the market improves.
EMERGING MARKETS BEGIN AT HOME
The other area to explore is new geographies, starting with our own growing market here in India. The home advantage notwithstanding, companies need to do sufficient homework to understand market characteristics and also estimate the addressable opportunity for their solutions. The India market is still an order of magnitude smaller than the U.S. market; however, it is expected to grow, and even if companies can target some proportion of their revenue from this market, it will help diversify geography risk in the future.
As I commented on the BusinessWeek.com story following India's annual National Association of Software & Services Companies (NASSCOM) conference in February, doing business here is a different cup of tea. It is not just about being less profitable: The engagement model, the skills required are a little different than, for instance, in Silicon Valley. That is not to say there is no potential. But, companies doing business here need to invest and bide their time to reap benefits.
In short, we need to take a hard look at operations and improve efficiencies. India's companies may have taken a lenient view on costs when they were in a high-growth mode. Also, the labor arbitrage gave them a head start and helped them achieve reasonable to good profits with relative ease. With the international business pipeline drying up, one way to shore up performance is to curtail costs, not by cutting down on important areas like training, but by bringing in genuine efficiencies in delivery.
Companies should also look to reduce the linearity in the business model. Owing in part to our availability of inexpensive quality labor (which is, by the way, no longer the case) and the adoption of the T&M pricing model, Indian companies did not worry in the past about a business model that required an addition of people proportionate to increase in revenue.
In fact, statistics presented at this year's NASSCOM event showed that the revenue per person of the Indian IT industry had remained consistent over the past four or five years. Nonlinear business models will help companies be more customer-centric while exhibiting robust performance.
The Indian industry is at an inflection point. Many have scale, many more have proven track records. If they can use tough times to hone their understanding of the customer and streamline operations, they will not only be able to tide over difficult times, but will be poised to take off when the market improves.