Enabling the transition of the Indian software industry from services to products: a study

Abstract

The Indian software industry is a US$ 10 million industry today. Software services and exports account for US$ 7.6 billion of this. With the changing global scenario, India will lose its raw labor cost advantage in the near term, and these advantages are likely to shift to other countries. Despite having capabilities in a wide variety of software applications and their deployment through the exposure in the services industry, firms are no exhibiting a transition to products, and relatively higher value services. Elsewhere in the world, the encouragement to develop products has come in the form of Venture Capital. This study aims first to study the software sector in India, in terms of strategic groups and the strategies they employ. We then try to define more clearly the term “value chain. ” when applied to software services and products and analyze the movement of Indian companies in this value chain. Next, we develop the hypothesis as to why firms are not moving up this chain, or what they need to do to move up the value chain faster. Finally, we validate this hypothesis through a detailed study of the sector. We also look at the Venture capital experience of countries which have been successful in promoting such finding, try to see how such finding helps develop product development, and see if we can see the same trends in India today. In the first phase of research, we defined the value chain more precisely and used publicly available information about a sample of 30 companies. Using this information, and some insights into their Offerings, we divided the companies into the strategic groups. In the second phase of research, we concluded interviews with various senior managers at firms we identified to have product development capabilities to see why they were not making the transition into products. We administrated a detailed questionnaire to the other companies in the set to understand what they saw as their position in the industry in the future, what strategic moves they were making to get there, and what challenges they faced in the process. As a result of this study, we find that there are several factors seen as impediments to moving up the value chain. The most important of these were found to be a lack of proximity to the market, lack of domain expertise, lack of market knowledge, unwillingness to make large investments, inexperience in handling product development risks and carrying a services legacy. While not all of these factors can be controlled by individual firms, they can be controlled by groups of firms working together in some kind of industry association like the NASSCOM, or by the government. WE recognize that the approach that needs to be employed by different firms varies according to their size, market perception, and capabilities. To address this, we make separate recommendations for different types of companies (using the strategic groups we have identified earlier) as to how they can best move up the value chain and continue to be globally competitive in the face of eroding cost advantage and increasing competitive pressure.