Despite its initial success, there are concerns among India’s software and services companies about whether the country can maintain its dominant outsourcing position. Ed Thomas reports.
To most outside observers, the Indian IT industry is in rude health. Recent figures from India’s National Association of Software and Services Companies (Nasscom) suggest the sector is growing at close to 30% per year, driven by software and services exports that are expected to have topped $31bn in the 12 months to the end of March 2007.
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Yet at the annual conference held by Nasscom in Mumbai, the atmosphere was far from self-congratulatory. Rather, many of the keynote speakers went out of their way to warn the audience of the dangers of complacency.
This theme was summarised by the forum’s final speaker Lakshmi Narayanan, vice-chairman of Nasscom and CEO and president of Cognizant Technology Solutions: “The Indian IT industry’s position is by no means dominant globally. Not everything is hunky-dory. The underlying health of the industry is not so good.”
Narayanan’s comments served as a reminder that India’s rapid growth is built on an infrastructure that often struggles to cope with the demands of high-tech industry. He also alluded to widespread fears that the country’s education system may not be able to keep up with rising demand for highly-qualified employees.
This eagerness to dampen any sense of smugness among local industry leaders was summed up by a panel discussion entitled ‘Is India Declaring Victory Too Soon?’ Here, senior figures from India’s IT sector, including Azim Premji, chairman of Wipro Technologies, Nasscom president Kiran Karnik and Tata Consultancy Services’ CEO and MD Subramaniam Ramadorai, analysed the weaknesses still apparent in the market and counselled against getting too carried away by the outward signs of vitality in the sector.
For the majority of speakers, the biggest problem facing Indian IT at the moment is the lack of qualified workers. “The availability pool is not a strain, but the suitability pool is definitely a strain on many companies,” says Ramadorai. “When you are recruiting 30,000 people a year, the problem [of a lack of suitable employees] becomes acute.”
Premji concurs with this analysis, but points out that India is not the only country facing this predicament. “There is a scarcity of high-quality software professionals everywhere in the world,” he says. “There is a general absence of people wanting to take technical careers.”
Yet India is unique among its competitors as it currently has a surplus of people available for work. “We’re not concerned about demographics,” says Neeraj Gupta, executive VP at second-tier Indian vendor Patni Computer Systems, “but we are concerned about the quality of personnel, the level of investment in training and the ability to move staff up the training ladder.”
India’s Prime Minister, Dr Manmohan Singh, also identified human resources development as the “biggest challenge” facing India during his address to the conference. “The demand of the IT industry is increasing and becoming more discerning. We have a quantity problem as well as a quality problem,” he said.
All of the speakers who touched upon this issue agreed that the best way to solve this problem was through what Karnik called “basic, drastic education reform”. Singh raised hopes that such action would be taken, saying that he supported the setting-up of so-called ‘finishing schools’ for IT professionals, which aim to ensure workers have the full set of skills required by the industry (more than a dozen such centres are currently at the pilot stage).
Singh said that, in the long term, he wanted to expand programs of this kind across India’s education system, alongside a rapid ramp-up of secondary and collegiate education, a “huge expansion” in Masters and Doctoral programs and a drive to attract more people into teaching.
This demand for government intervention to improve education standards illustrates a significant change in the IT industry’s general attitude to state involvement. Both Nasscom and the Singh administration agree that, in the past, a hands-off approach by the government had allowed the IT sector to flourish.
However, Karnik is now calling on India’s leaders to become more involved. “There is a need for an active role for government in this country,” he insists. “What we have a lack of is not too much government, but too little governance.”
For his part, Singh appears ready to take a more prominent role: “We will do all we can in the government to promote the industry’s continued growth and success. I believe that the government does have a facilitative role to play in building on and maintaining India’s competitive advantage… Our policy framework will continue to be supportive, rather than acting as a barrier to progress.”
Where Nasscom and the government disagree is on the issue of taxation, in particular the Software Technology Parks of India (STPI) scheme. This gives tax breaks to companies setting up in designated areas and is due to be phased out in 2009.
Karnik makes the association’s position on the matter abundantly clear: “There are simple figures I can show you that demonstrate how government will lose out if they don’t extend STPI. From the point of view of dispersal, decentralisation, competition from abroad, growth of small companies, we will take a hit.”
This message was supported by B. Ramalinga Raju, chairman of both Nasscom and Satyam Computer Services. Introducing the Prime Minister on the event’s final day, Raju said: “The 10A and 10B tax credits [which give companies in STPs exemption from income tax for a block of five years in the first eight years of their operation] need to be extended. If they’re not, this would be a great setback. If we are to fully reap the benefits of the opportunity we have, then we need to extend those schemes that have produced so much benefit in the past.”
While Singh made no specific mention of the STPI project in his speech, he supported Nasscom’s goal of extending the influence of the IT industry beyond tier-one locations such as Bangalore, Chennai and Mumbai and into cities such as Pune, Chandigarh and Kolkata.
“While the IT story is a remarkable story, millions of people’s lives are still untouched by it,” he said. “This is a failure, but it is also a great opportunity. We need to ensure that the rural population gets the benefit of the IT explosion. The IT industry must aim to reach out to the hinterland, to tier-two and tier-three cities and even to the villages.”
Many of the leading names in the Indian IT sector are already doing just that, embracing the concept of corporate social responsibility (CSR). At its most simple level, this requires commercial organisations to make decisions based not only on financial factors such as profit and return on investment, but also to consider the social and environmental repercussions of their actions.
According to Nasscom’s estimates, between 50 and 100 of its members currently have a CSR program, and it is forecast that, by 2010, IT companies will have had a positive impact on the lives of as many as 200 million Indian citizens.
Satyam, the fourth largest IT services vendor in India, is one company that has made high-profile investments in CSR projects. Any tour of the company’s operations in Hyderabad will take in the Byrraju Foundation, set up in memory of company chairman Ramalinga Raju’s father, the founder of the Satyam group of companies. The foundation is funded by both Raju and a group of trustees and run on a not-for-profit basis, with Satyam itself assisting with the incubation of projects.
The foundation focuses its work on the rural areas of Andhra Pradesh, the state in Southern India of which Hyderabad is the capital. It ‘adopts’ villages, with the aim of developing their healthcare, education and infrastructure to the point where they can become self-reliant. To date, the foundation has adopted 158 villages, covering a total population of close to one million people, and about 25 have so far come close to completing the required transformation.
Specific aspects of the project include improving adult literacy rates through targeted literacy centres, extending access to clean drinking water, setting up local health centres staffed by trained professionals and upgrading the facilities of rural schools, including a move towards computer-aided learning.
The Byrraju Foundation’s work is most closely associated with Satyam’s own operations through its Gram IT (’Gram’ means ‘village’ in Hindi) project, a rural business process outsourcing scheme that provides employment for the educated village population in centres that supply transaction and voice processing services to Satyam’s India-based customers. The facilities tend to have about 50 seats and claim to be able to train staff to provide high-value services in a relatively short space of time, generally between three and six months.
The management at the Byrraju Foundation is adamant that major corporations like Satyam cannot sit around and wait for the Indian government to do something about the problems currently crippling rural areas. For their part, government agencies eager to avoid being seen dragging their heels on developing India’s infrastructure are increasingly entering into public-private partnerships to carry out specific projects.
In Andhra Pradesh, for example, the state’s IT and communications department has established a partnership to install a broadband network across the entire region. The total cost of the project, which is designed to give Hyderabad the best connectivity in India, is estimated to be about $100m.
According to the department’s special secretary to the government, M. Gopi Krishna, the state authorities are also taking great care to ensure that revenue from IT goes to where it is needed, with a particular focus on rural areas.
Local governments are prepared to go out of their way to accommodate the needs of the IT industry, as the benefits it brings with it are just too great to pass up. In Andhra Pradesh, it is estimated that IT has created 165,000 jobs in the last five years. The rapidly growing needs of the market also mean that investment, while initially concentrated in so-called tier-one cities, will gradually flow into tier-two and tier-three cities, leading to greater levels of development in these locations. Already, the government of Andhra Pradesh is touting Vishakhapatnam, Vijayawada, Tirupati, Kakinada and Warangal as up-and-coming offshore sourcing locations.
Nasscom is also looking to do its bit to ensure that the IT industry does not stagnate. Karnik says that Nasscom is planning to establish a fund of INR 1bn ($23m) “to create the right ecosystem for a growing industry, one that allows incubation and innovation in products”.
More concrete plans will be unveiled in the coming months, says Karnik, but the ultimate goal is to encourage people with fresh perspectives to get involved in the IT sector. “If there’s a person with a bright idea, then what can we do to help take it forward?” asks Karnik. “We want to help people understand marketing and finances, and allow them to patent their intellectual property.”
Karnik is adamant that Indian companies must look to move into new product and service areas in order to maintain the country’s unique position in the global IT market. “The job of a leader is to stay ahead of the pack,” he adds. “We would like India to be a leader in thought leadership, across the whole industry.”
Singh also demanded that the industry’s leaders keep looking forward, rather than being satisfied with past success. “My advice to you is: Do not rest on your laurels.” Singh surprised many in the audience by demanding even faster growth from the IT sector. Nasscom’s target of $60bn in software and services exports by 2010 should be met by 2008, he said, and by 2010 the industry should be looking at exports of $80bn. “Business cannot be ‘as usual’ for all times to come,” he warned. “Doing things differently is the way of the future.”
Premji believes that, by looking to expand into new areas, India can change the way it is perceived by outside observers. “India has always been painted as a nation of followers,” he says. “We are not a nation of followers. Over the next few years, you are going to see a lot of innovation coming from India.”
The chairman of Nasscom’s innovation forum, Ganesh Natarajan, goes further, arguing that more is at stake than simply improving India’s image; that innovation is a necessity for the sector’s survival. “Somewhere down the line there’s a wall waiting to hit us,” he says, “therefore we need to do something differently in order to continue being successful.”
CBR opinion
Far from being an opportunity for back-slapping and self-congratulation, this year’s Nasscom conference revealed some of the IT sector’s fears for its future. These are focused on the ability of India’s infrastructure, from transport to communications to education, to cope with the demands of supporting such a rapidly expanding industry. While these concerns are well-founded, the fact remains that India’s IT industry is growing by almost 30% a year, impressive by any standard, and some commentators have forecast that this performance will continue well into the next decade.