Lets Fight It Out on Their Turf

Pankaj Jalote

Vice President, Infosys Technologies Ltd.

Electronics City

Bangalore - 561 229

The time has come for Indian software companies to become multinationals and start companies in the West.  Indeed, it may be one of the most desirable ways of increasing revenues and bottom-lines and might even be necessary to effectively fight  the current inflow of multinationals to India.

Economic Rationale

As more multinationals open development centers in India, it will become harder for the Indian companies to retain people.  Multinationals can always afford to pay better, not because of their financial muscle, but because of the nature of the relationship between the parent company and its center here.  For illustration purposes, let us consider a company in USA which does software development for itself.  Say, it costs the company $7000/- per person month in USA.  If it opens a development center in India, and spends $4000 per person month, it still saves $3000 per person month.  On the other hand, an Indian software company developing software for clients, even if it charges $4000/- per person month, it cannot spend the entire amount as it must also make a profit in this $4000 rate.  That is, given a rate in India, the multinational makes a profit even if it spends the entire rate amount on the Indian center.  On the other hand, the Indian company can spend only about 60-70% of this on the center (assuming a profit margin of 30-40%).  Clearly, if salary wars really start, Indian companies will find it hard to win against multinationals.

However, this economic logic can be inverted and used by Indian companies to increase their profitability and strength by going multinational.  The idea is as follows. An Indian company starts a full fledged software development center in the USA, manned by people from USA (and India).  As a US company, this company charges US rates.  However, it “sub-contracts” parts of its work to its parent company in India, making double profits on these parts (the US company makes a profit as well as the Indian company makes a profit).

Note that the relationship between the Indian company & its subsidiary is just reverse of  the relationship a typical multinational has with its subsidiary in India.  With multinationals, they provide work to their center, while in the case of Indian companies, it is their overseas center that will provide work to them.  Note also this concept is different from setting up centers in other Asean countries to meet the manpower needs.  The driving force here is not shortage of manpower, but the desire for higher rates and profits.

There is another economic reason to support such a move. Currently, Indian companies charge between $15 to $25 per person-hour of effort from their overseas clients. The rates for comparable expertise in the US are around $50 to $70; the rates in other developed or semi-developed countries might be lower. This means, that Indian software companies are already operating at around one third to half the hourly cost in the west. As most Indian software companies deploy lesser tools, and the level of technical education of many software professionals is not always very high, the chances are that the productivity and quality of Indian software may not be as high as in the West. All this means that it is unlikely that the rates that Indian companies can charge will increase as much in future as they have in the past---after all if the rate is close to the rate of an US or an European company, why would a US or European customer come all the way to India to get its software developed, given the perceived risks and psycological barriers that exist? On the other hand, the salaries are likely to continue rising. This will create pressure on the profit margins, and alternative means will have to be devised to increase profit margins. Going multinational might be just the right alternative for this.

Focusing Further

Even if an Indian company wants to starts a company in USA, how should it face the competition there and create a market for itself?  Unless there is a reasonable chance of succeeding, no company will make this move as investments are likely to be high.  An average SW professional in USA costs about $80,000.  Hence, the cost of running a 50 person company in US is about $400,000 per year.   In addition, there is also the cost of setting up the company.

First prerequisite for this model to succeed is that the subsidary should have a strong US or European face. In other words, it should be a bona-fide local company, with local people, and, perhaps even local share holders. It should not be percieved as a marketing or work sourcing arm of an Indian company---in this situation, it is unlikely that any client will pay the prevaling local rates.

In addition, it will be most useful if the Indian connection of this US company can be exploited to create a niche in the US software services market.  One possibility is to exploit the time zone difference and the internet  and  multimedia technology to offer Rapid Application Development (RAD) services in well defined business areas.  In the current times, there are many business sectors, in which time to market is one of the most important parameters.  For these business segments, a rapid development service offering for their support software can  create a niche for itself.  An example of this is financial services where frequently the window of opportunity is small and so the software to support the services for this window has to be developed rapidly.

However, just having development teams in two time zones is not going to be sufficient to provide a true RAD.  Suitable development process models will have to be developed, and technology will have to be fully exploited for this.  For example, incremental development models, or the evolutionary object-oriented models might have to be used to reduce dependencies between work elements, libraries of reusable components for the market segment will have to be built before hand to reduce the cycle time, proper distributed work-flow management tools will have to  be built on the internet, and multimedia workstations might have to be  used to pass work products and instructions from one developer to another.  In other words, a lot of work will have to be done to precisely define and make possible the service offering.  However, it is technically feasible (which was not the case a few years ago). 

Year 2000 is another such service where a niche can be created. There are various estimates of the total volume of business that will come due to the year 2000 problem varying from $50 billion to over $200 billion. One thing is clear that the year 2000 problem offers an enormous business opportunity, which companies world over are trying to encash. A company in the west that just offers a solution to the year 2000 problem might be able to create the niche needed to focus and succeed in the market.

Risks

Most of the risks in this strategy revolve around opening a center in the West, where costs are very high, and market fiercely competetive. One risk is whether there is a demand for the proposed service.  A market survey can be used to get actual estimates of the market size and estimate the value of the proposed service.  Another risk will be in marketing this service and showing that it is different and more effective than those offered by the competitors in the west. This is where the companies will have to apply their business and marketing expertise to make such a venture successful.

NOTE: The opinions mentioned in this article are that of the author and do not reflect the policies or thoughts of Infosys, or any other organization.