Tuesday, April 03, 2007

Barcamp Bangalore 3: My observations

I was at Barcamp Bangalore 3 held at IIM-B during March 31st and April 1st (2007). One can clearly see the interest growing from the first event then to the second and now to the third. The turnout has been doubling every event and on Saturday there were 320 participants.

There was an interesting topic later in the evening on Saturday, delivered by Savita Kini. She asked ‘Are we ready to move from IT services to product making companies?’ And of course, this is a topic of my interest. Soon, it turned into a small debate with different kinds of views being aired.

I want to talk about some of my observations from this debate. First, I want to compliment Thomas Friedman, Nandan Nilekani, and all those analysts, writers and industry experts who have created a good myth surrounding our IT industry. They have done an excellent job. Because, there were some quite experienced industry folks in that debate who vouched that when work is outsourced to Indian IT companies or when MNCs set up offshore units in India, the wealth created by those units actually stays in India.

I want to dispel this myth here.

How do offshore MNCs and IT services companies create wealth?

When a IT services company such as TCS gets a job from company ABC, it pulls up N number of engineers, and what TCS gets in revenues is N times a certain fixed amount per year. Therefore calculating the revenues of any IT industry thus becomes very easy. The average $ per person is usually known – and it hovers between $30,000 and $40,000 (for top IT services companies). So, if Infosys has 60,000 employees, then its revenues should be $1.8 to $2.4 Billion. The same rule applies to almost every company. A good services company with 3000 people would be making approximately $90 Million. No additional revenues come from the actual sale of the product. Say, the product is sold 10 times or a 100,000 times, the TCS would still only get its revenues from the number of employees it contributes to servicing that product. None of the profits from actual sale of the products ever reach the Indian shores. The revenues (and the profits) from the sale of actual products go those countries where these companies are housed. (To US in case of Intel and Microsoft, or Finland in case of Nokia).

When a typical MNC puts its offshore unit here in India, the only motive is to cut down the costs. While going for offshoring, they decide on the non-critical work and send it to its offshore unit in India. If an engineer in US costs $120,000 to the company, his typical cost is less than $40,000 in India. Hence the cost advantage! However, no revenue that comes out of the products developed or services rendered by these offshore units actually come back to India. If ever they do, they only come back in increasing the headcount of its offshore units. When Nokia sets up a unit in India, the Indian unit will not generate revenues because of the units sold, but only because of the money pumped in to staff the engineers.

To think or believe that we are creating the wealth the same way those product making companies are creating is a myth that needs to be shattered.

In the colonial times, Indian babus were used by British to act as middle managers to the British bosses. The British, by paying a good salary to Indian babus, above that of the slaves or the natives, were able to keep these Indian babus happy, while they continued to reap the benefits of the toil of the workers. That’s why Indians were taken to West Indies, East Indies, Africa, Fiji, etc. The Indian elite babus who quickly learned English, Mathematics and other desired skills became extremely good middlemen (managers) who served British to help them continue their dominance over other populations.

Second, a lady asked if NOW is the right time to start product-making companies, especially since Savita listed so many challenges on her discussion board.

Shouldn’t we wait for the opportune time before we start product-making companies in India?

Frankly, I believe that any kind of analysis should be left to consultants, advisors, bankers and VCs. Entrepreneurs should just stick to DOING it. There’s no opportune time for doing anything, not even for war. By the time we in India actually solve all the challenges that Savita listed (which included like Education, Discipline, Mindset, etc), it will take an eternity. We don’t sit down solving the barriers and then go about doing it. We just do it and in the process hope the barriers go down. We are already late according to me (and Savita and few others). While Indians celebrate the fact that we are going to be the services hub the way China is now the manufacturing, thereby implicitly shrugging off the responsibility to foster other industries, China is already transforming itself into a global product making player. Haier, Lenovo, ZTE, Huawei, etc, have already arrived and many more are in the making.

According to one observer there is no market for products in India. Some of us had to cite some examples to wake him up to reality. That India adds 5 million subscribers in India per month. We need to look at some more examples. That India is adding thousands of cars per month. That India consumes food, clothes, electronics, etc, with great appetite. Isn’t it surprising to assume we do not have the necessary market when ever top brand of the world is making inroads into India to sell Indians goods and products?

According to some people participating in the debate, India does not have brands like Nokia and Microsoft, and hence cannot enter the global arena. The question is do we really need brands to enter the products-market? Does the brand come first and then the product or the product first and then the brand? While we Indians keep debating if there is a market or not, ZTE (China) is entering India with its own low-cost mobile handset and making inroads into India.

Third, when I said that one of the Indians attitudes is not going all the way, which I call last-meter problem, someone suggested it was the same with Microsoft.

What is the last-meter problem of India?

Look at an Indian road, the last-meter is usually left unpaved, and this seems to cause lot of damage to the road. That last meter produces all the dust, and is also the culprit during the rainy season. The erosion will eat into the paved road itself and very soon we need repairs. This seems to be the perpetual state of affairs in India- start- incomplete- repair. Not finishing up the job to its absolute completion is something like a disease that is all pervading. Half done, incomplete and shoddy jobs are seen everywhere. I call this the last-meter problem. We don’t go all the way; we seem to run out of gas during that last meter.

However, to say that this is the same with Microsoft is far-fetched. Agreed, most engineers seem to detest Microsoft for their monopoly. But, we have to admit that their products are definitely superior (to a layman user) in comparison to anything out there in the market. While an engineer may marvel at the open source and other competing products, Microsoft, by pursuing the common layman as its user has made excellent contribution to penetration of PC and hence Internet, and hence to dissemination of knowledge to every corner of the planet. For an idealist or an expert engineer, Microsoft may seem to be flawed or not perfect, but to an ordinary user its closest to getting the simplest software to deal with an otherwise complicated PC. The last-meter problem of India is not analogous to imperfect Microsoft products.

Overall, this barcamp was great. I got to meet some interesting people and its always fun talking about some of the topics that interest us the most.


Raja said...

This generation will see the struggle in terms of establishing product companies out of India - When they will have finished, they will have set the grounds for our next generation to launch into product companies with far greater ease.

Krish said...

Good rant. Your reference to Infosys / TCS reminds me of Cricket cannibalizing other sports in India.

Fueling the growth of product companies call for a good deal of nerve and gumption. We should be willing to place intelligent bets, and give up the smoothness of predictability for the non-linear upsides of intelligent risk taking. Not all bets will lead to success but there’s hardly any safety in passivity either. We need to have the self confidence to set a direction but not the arrogance to fight the need to change if market conditions so require.

The rapid growth of the Indian IT service firms masks the fact that they are doing more of something they have done for a while, but are challenged to optimize given the low quality talent base. And when it comes to newer markets, the assumption that the success in Application Maintenance will automatically give them success in other markets - Systems Integration and Infrastructure Services or BPO - is flawed.

Every few years or so Indian firms face a challenge - in the past it was what will we do after Y2k, then it was how do we survive security and visa issues after 9/11. The Indian cat has not used up its nine lives - but it is going to take a new set of discipline, investments and innovations from them to overcome the next set of challenges. One of them could be systematic transition to product innovations.

But a good first step would be to get over our "illusion of control" over the IT services market.

Ashish said...

Infact, I wrote something similar..and honestly, Indians techies are into software not by choice, but because it pays well.
And to build a product culture, you need peopel who are passionate about technology [and not just worried about CTC!]