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The changing structure of the IT market

Ashok V Desai

What is remarkable about the Indian software industry is the vast number of firms in it. Nasscom has 800-odd members, IT directories list thousands, and there are many more unlisted anywhere.

This market structure harks back to the days before 1990. At that time the industry was tiny - it employed fewer than 30,000 people - but they were employed by or organised in many small firms.

There were no satellite communications, no Internet, and the only way of exporting software was export of coders. Personal computers were only ten years old; there were hundreds of programmers who had written BASIC, COBOL and Fortran programmes for IBM mainframes.

India lagged behind the world which was converting to PCs and packaged programmes. So when someone in America wanted their mainframes configured or new programmes to be written for them, they could find such outdated but valuable skills in India.

The programmers were clustered around the handful of government laboratories and big businesses. They began to form small outfits and export people - what came to be known as body-shopping.

The business was similar to the recruitment agents for the Middle East which had sprung up all over India - but particularly in Kerala and Rajasthan - in the 1970s when as the oil boom caused a severe labour shortage in Iraq, Kuwait, United Arab Emirates and Saudi Arabia.

This business began to change after N Vittal set up Software Technology Parks in 1990. They were industrial estates; the only difference was that each had a VSAT link which firms located in STPs could use to transmit programmes and data.

That by itself did not lead to bigger firms; the early STPs deliberately kept firms small by giving them only 500 square feet of space.

But such firms could mediate between domestic software producers and foreign buyers; they could get work done outside the STP and use their link to export it. Thus firms no longer needed to be small.

On the contrary, large firms came to have an advantage. When programmers were being body-shopped, their foreign lessor could put them to any use. But once work came to be done offshore, it had to be in large, self-contained packets. As confidence in Indian firms grew, the packets grew larger.

The clients were always in a hurry; it was advantageous to get a job done quickly by putting a large team on it. The constraint on size imposed by the government on firms in STP disappeared once firms were allowed to set up their own VSAT links.

This is how big firms acquired an edge after 1993 - an edge that is reflected in today's TCS, Infosys, Wipro and Satyam.

Small firms did not disappear. In Bangalore and Chennai, a practice of outsourcing work grew up; it allowed firms to take on big jobs without taking more people on their payroll.

They could also use cheaper programmers who did not have engineering degrees without employing them directly or revealing to their foreign clients that they used them.

The labour shortage also brought forth many training firms; besides NIIT and Aptech which grew big, there were many smaller training firms all over India.

And once Internet became popular in the latter half of 1990s, a great many small firms came up that developed and maintained web sites for clients. Thus, while the coming of VSAT favoured big firms, it did not handicap small firms.

Then came the meltdown of the IT boom in the US in spring 2000; that transformed the landscape in India. Export orders fell; as demand fell, the big Indian firms stopped outsourcing, and small jobbing firms began to close down.

As the market for software cooled, the demand for new programmers fell, and with it, the training firms underwent a slump. And customers soon discovered that Web sites added little to the bottom line; so Web designing business also fell off. Thus, all three mainstays of small firms turned down, and many of them closed shop.

This is what a Nasscom survey showed. There were four groups of firms with substantial exports: big firms with sales over Rs 10 billion commanded roughly a third of the exports, medium firms with sales of Rs 1-10 billion had another third, and branches of foreign firms as well as small Indian firms had each roughly a seventh of the market.

Of these, medium and small Indian firms have lost out to the biggest Indian and foreign firms; the market has favoured size.

There were also niche service suppliers and firms concentrating on products, with small market shares of 3-4 per cent; of the two, product firms have done badly.

Then there are firms specialising in IT-enabled services - which has done best of all, better even than the biggest firms. These firms are small; but there is no advantage in smallness here. If this business takes off, there will soon be huge firms employing thousands, as GE is already doing.

Thus, the size structure and specialisations of Indian firms have changed unrecognisably and irrevocably in the past two years. The age of the small, unspecialised, undifferentiated, labour-intensive firm is over.

Many think that the business they did will go to China and the Philippines. It will not; it has ceased to exist. To grow, Indian firms will have to find something else.

What will it be? The IT-enabled services market is huge, and India has a clear advantage in its cheap labour.

However, this is precisely the part of industry that is most affected by India's political unreliability. Wars, riots, political extremism - these are just the kind of bad news that can prevent the growth of IT-enabled services. And our politicians will ensure that such bad news will not go away.

That is why the industry needs business that is more stable and less sensitive to bad news. The big firms will try to climb up the value chain - go into business process outsourcing, system integration, and embedded software. They do not need advice; they are scanning the market and will take informed decisions.

But if they are to continue their stellar growth of the past, they will have to find new niches. If they do not, they will die - but more likely, they will leave India and become American firms.

That is what I would worry about if I were in the government. The largest Indian firms are already international. They are quoted in stock exchanges abroad, they have large offices abroad, and they have acquired firms abroad.

For them to scale down facilities in India and go away would be easy; and the loss would be entirely India's. If this is to be prevented, we need better economic management at home.

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