Almost every Indian publication is writing about the woes of India’s software industry. “The Software Party is Over”, “End of Part 1” are some of the headlines. This follows the results recently by companies like Infosys and Wipro which signalled increasing price competition, lower margins, and hence, lower growth rates. The reality sunk in: the era of 30-50% growth rates for software services companies was over. It was now just another industry with growth in the 10-15% range.
So, what can Indian’s software services companies do to re-ignite growth? I think the answer lies in creating products and focusing on emerging markets. Both require a change of mindset – so far, the focus has been on services and the developed markets. Will they do it? I don’t think so. The reaction is likely to be an increased focus on services of all sorts (business process outsourcing and the ilk) with an emphasis on “volumes”. The Walmart model applied to services. Of course, the problem is that none of the big Indian companies has the scale – their key resource (people) are available aplenty across all the leading companies. The ones who have succeeded have managed their people and customers better than the others.
The present situation should have been anticipated. With the astounding level of details these companies give about their billing rates and margins, it would have been naive not to expect their customers to negotiate on the amount of profit they can make! When GE sells an engine, it is hard to get an idea of the profit margin. By contrast, when Indian software companies are selling their services, everyone knows their costs and margins!
The irony is that India’s software companies have all got plenty of cash. The top few, thanks to their Nasdaq IPOs and cash-generating businesses, probably have a few hundred million dollars in the bank apiece. The only use of the money I see is in building up bigger and bigger campuses, since few of the companies (except Wipro) have shown a penchance for acquisitions.
The services strategy needs a complement. The companies need to take some risk to create products. The world is ripe with opportunity. This is a great time for new ideas. The decision-makers at these companies should start reading people like Kevin Werbach and Tim O’Reilly, and look at “alpha geeks“. Spend time in the world of bloggers to get a sense of the future. There are plenty of new things happening which will make a big impact in the years to come. What is needed is a mix of ideas and imagination. Will India’s software services firms take up the challenge? How much ever I’d like them to, I feel they will not.