Monday, December 30, 2013

End of Indian IT Industry?

Vivek Wadhwa is pessimistic about the future of Indian IT because of its inability to change (See here). He makes the point that the CEOs see that the ground realities are changing but are unwilling to do anything about it, with the daily imperative of closing Outsourcing orders dominating their agenda. In short, the sector has become a prisoner of its own success and there is a lack of strategic thinking.

While I share Professor Wadhwa's sense of foreboding (that Indian IT industry isn't changing with time) and his prognosis (the lack of strategic culture), I would think that it is more of a case of an industry that can't change itself rather than industry leaders not wanting to change. Indeed, this makes things worse: Global IT services is an extremely competitive industry, and one thing that works for Indian companies here is the ability to scale, to line up thousands of workers which companies from other competitive countries can't easily do (with the exception of China, where language becomes a barrier). However, with the changes in technology usage and consumption, scale may become less important than innovation and design abilities (particularly in the context of new opportunities) and with Internet of things, language a lesser barrier. The business model of Indian IT industry may indeed wither, if these things come to pass.

Apart from being a prisoner of its own success, I see four interrelated factors hindering Indian IT industry's ability to change. These are the nature of capital, the process-driven industrial culture of the workplace, the lack of start-up ecosystem and the wider education system that supplies the workforce. It is worth understanding each one of these factors in turn to see what is making Indian IT compete with its hands tied behind.

First, most Indian IT companies, those which are able to scale, are publicly listed, and therefore CEOs are under pressure to deliver quarterly earnings growth in the face of declining margins and stagnating demand. Therefore, their attention on chasing the next outsourcing order is understandable. And, because of the other factors present (the ones mentioned above), aligning with the changes in the IT industry is not about mere strategic re-alignment inside, but a more fundamental shift of the business model itself. Stock markets are usually bad at allowing changes in the business model, and the CEOs' priorities merely reflect that of their investors.

Second, because of the Indian IT industry's business model, that of creating huge pools of qualified programmers and other IT workers at a low cost, the company cultures are modelled around process-driven industrial culture. At its best, it is more Microsoft than Google; At its worst, it may resemble Ford Motor Company a hundred years ago. This makes Indian IT good at doing many of the twentieth century IT tasks, but inadequate for many emerging opportunities. And, change here is almost impossible (even the famed experiments at HCL Technologies, so celebrated by Gary Hamel, seemed to be fizzling out) because the internal company ecosystems have spawned a wider system of education to produce more and more of industrial-era workers. 

Third, if there is little hope of change from inside, one way the companies tend to adapt to rapidly changing industries is by tapping into start-up ecosystem outside. However, the start-up ecosystem in India still remains weak, primarily because of the tycoon culture of the Indian economy, as well as the lack of qualified workers, rising overheads and difficult legislation. The Indian government has indeed paid lip service to entrepreneurship development, but the focus of all such initiatives, presumably in the quest of prime time TV, was to endow more land, resources and facilities to large IT service companies, propping up the same endangered business model with some life support. 

Fourth, the Indian education system has failed to up its game. So, not only skilled graduate pool has become inadequate for the current scale of Indian IT industry, resulting in higher wages (undermining the business model) and high turnover, the nature of skills have become out of sync with the changing needs of the industry. The Indian education system reflects closely the hierarchical, process driven culture of the IT companies, and the elaborate tests and ranking systems reward those who can play the system rather than stand outside and innovate. And, again, innovation in Indian education system has been extremely rare and usually marginalised, because of the lack of incentives from the employers and lack of any alternative, like a start-up ecosystem. The regulators have made it worse, superimposing an input-defined system of quality assurance and restricting the entrepreneurial activities in training and skills development sector by repeated and misdirected government interventions.

I am conscious that this view is unerringly bleak, ruling out any possibilities of change, and the reality must not turn out to be that way. However, I fear that we are still looking for wrong formula to make amends and bring about the change. The Indian companies have so far responded to this challenge through acquisition and offshoring using their huge cash reserves, acquiring skills and abilities abroad as well as venturing out to Ireland, Poland and Philippines to set up shop to tap into local skills base. However, these efforts were so far directed to supplement their existing business models, and given their deep dependence on Indian manpower, it is unlikely that these overseas facilities or acquisitions can effectively help transform the way these companies do business.

The other usual retort to this bleak view will be that Indians are extremely innovative, making do with little and pulling off impossible feats in the face of scarcity, the paradigm of Jugaad innovation now popularised in the West. But this presents a fatalistic view - that somehow everything will be alright for such a successful industry - which is very Indian, but has been proven to be incorrect. And, indeed, in my view, there is a limit to Jugaad, and it may actually be counterproductive for India in the changing industry context (see here).

The only way to get out of this and transform the industry may lie in some joined-up policy thinking and cooperation between businesses, educational establishments and government. This should be easy in theory, but extremely hard in practice in India, where the political culture is dominated by the big and the mighty, the business has a blinkered view to work only on its immediate benefit and the education sector is left to drift along in search of a meaning. To be an optimist, therefore, may be about believing in the possibility of change, and there is some evidence of change at the State level in India, with new governments trying to break the mould. Whether these efforts will bring long term benefits is yet to be seen: In the mean time, the only option will be to remain fatalistic and wait for the knights in the shining armour to save the distraught IT maiden. 

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