Indian It Companies Overview Commerce Essay

Published:

Software and packages or standard software products. Tailored software development involves close interaction involving the development team and the end-user. Usually, software companies that provide customized software focus on domain areas, like retail, banking, and manufacturing or particular vertical market segments. The software developed is specific to the clients related to those particular domains. When developing the software products companies may be targeting to a segment or may cut across segments, but seldom to a specific user. In certain scenarios, business application software products, such as ERP's that coordinate the flow of inputs, work in process and shipments of a company, are very huge and multifaceted. Such kind of applications requires a great deal of customization before they can be put to use by the companies. Often, this customization is done by third party software consulting firms. MIS system of companies has to be integrated to the application systems in an adaptive manner to the companies.

Lady using a tablet
Lady using a tablet

Professional

Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

      Software development consists of many stages from Conceptualization, requirement analysis, high-level design, low-level design, coding to testing and support. However stages roughly correspond to stages described in the waterfall model of software development 8 (Royce 1970). The value addition is typically greater in earlier stages of development - to be precise requirement analysis and high level design. Conventionally firms have developed the software design in-house and outsourced the coding and support. Despite all that, increasingly, consulting firms are undertaking all stages of software development. As projected Indian software firms largely provide services rather than products. Further, Indian software exports consist largely of low-level design, coding, and maintenance services. 

A historical perspective

The Indian software industry consists of a many number of firms which are envisaging good growth:  

Using NASSCOM membership as a measure, the number of Indian software firms has grown from around 430 in 1996-97 to over 620 in 1997-98. Table 2 shows that many of

 

 

8  An alternate model of software development is the Spiral Model (Boehm, 1981).

 

 

These firms entered the industry in to the foray in the era of globalization & Liberalization.. A few big sized companies, with a big periphery of small and medium sized companies dominate the industry. According to the statistics of NASSCOM, the market share of 58.67 software exports revenue in 1997-98 is resulted by the top 25 companies. Almost one fourth of companies evict sales of less than Rs.10 million (about $250,000). 

      The giants in the Indian software firms are, relatively new entrants in to the market. What is more, with a few exceptions cases, outstandingly Infosys, Wipro and Satyam, these firms forayed in to the market with software alone. This is in marked contrast to early entrants into the industry, who had their earlier service links with computer hardware development. Heeks (1996, p. 69) observations that Tata Consultancy Services, (TCS) was the first Indian firm to lay hands on to export software in return for being able to import hardware, in 1974. TCS, currently the largest Indian software firm, employs more than 35000 people.9 In the past decade once software exports took off, many number of firms entered the industry. Entry barriers were low because firms could start small, since initial investments required were fairly small, little more than office space and communication facilities. With the growing need for maintenance services many firms began by providing these services, often by sending software programmers to the client on a temporary basis. 

      The entrants were of two types. The first type were existing firms diversifying into software. These included computer hardware firms, such as HCL and Wipro, as well as firms with large in-house data processing and system integration capabilities such as Larsen & Tubro (LTITL). There were others such as BFL, Sonata, Satyam and Birla Horizons that were, before their metamorphosis as software firms, divisions of large and medium industrial groups.10 The other type of entrants was new start-ups, such as PCS, Datamatics, Infosys and Silver line. Current managers at a large number of software firms worked in these companies earlier in their career. Indeed, one of the best-known software exporters, Infosys was founded by a group of seven PCS managers who broke away from PCS. Infosys's first contract was a support and maintenance contract with a client in the apparel industry for whom PCS had finished a large project. 

Lady using a tablet
Lady using a tablet

Comprehensive

Writing Services

Lady Using Tablet

Plagiarism-free
Always on Time

Marked to Standard

Order Now

      Entry strategies varied and not all firms entered to provide software export services. Some firms entered to develop packaged or shrink wrapped products, as well products for specific industries or products such as enterprise resource planning products, but by the early to mid 1990s, software service exports increased greatly in importance. The result was a great deal of turnover among the leading software firms in India, as shown by the table 3 below. Over the last couple of years, signs of maturity are appearing. Although entry in the industry still appears to be strong, there are suggestions that the market leaders are beginning to identify niches and areas of specialization, in

9 Patni Computer Systems (PCS), a privately held firm, was another early entrant. It started with a data conversion project because India was seen as a cheap supply source at the time. However, steep import duties on computer equipment imports (including keyboards and CRT screens), as well as union regulations, caused much of data conversion work to be shifted to China and Taiwan. PCS also formed an alliance with Data General, a mainframe computer firm, whose equipment PCS marketed and for whom PCS also provided some programming services. This hardware tie-up is apparently typical of other older SW firms (e.g., TCS-Burroughs, TUL-Unisys, Hinditron-DEC, and Datamatics -Wang) 

10 In addition to these firms that focused on software exports, there were others that served domestic users, most notable Computer Maintenance Corporation, or CMC. Responsible for maintaining computer systems after IBM left India, CMC has grown to over 2000 employees and developed the ability to develop and implement large and complex projects, especially for infrastructure systems. CMC has also proved to be a good training ground for managers that would later be employed by other, private sector firms. 

 In terms of technologies or functions, as well as vertical domains (industrial sector). More recently, a couple of Indian firms, BFL and IIS Infotech, have been acquired by a Dutch bank and a British software service company respectively. However, a major consolidation still appears to be some time away, in large measure because demand is still growing rapidly and economies of scale are relatively unimportant, particularly for low level coding and maintenance. 

      Contrary to popular belief, as table 4 shows, the industry is not concentrated in Bangalore, although Bangalore is certainly a very prominent location for firms in the industry. Instead, locations such as Bombay, Pune, Madras and Hyderabad are important as well. However, with the exception of the region around Delhi, there are no noticeable clusters in the northern or the eastern regions of India. The distribution of engineering colleges, concentrated in the western and southern regions, closely mirrors the distribution of the software industry. As table 5 shows, engineering colleges are heavily concentrated in these two regions, which also account for the greater part of employment in the Indian software industry. 

The brief international comparison.

The Indian industry is comparable to that of the Irish and Israeli software industries in terms of revenues and exports. However, the level of earnings per software professional appears to be substantially below that in Israel and Ireland. All three, India, Ireland and Israel, have some common characteristics including an abundant supply of manpower from a highly educated, and relatively inexpensive, English speaking work force. Each country also has some special characteristics that have enabled it to emerge as significant players in the world software markets, albeit in different types of activities and domains. Table 6 shows the growth in exports and total revenues for the Israeli software industry. Israel has emerged as a source of entrepreneurial firms developing software products in areas such as security and anti-virus technology. There are about 300 software houses in Israel, employing nearly 20,000 people, with total revenue of over $1.5 billion. Many of these firms receive venture capital financing from the US and some are listed on the NASDAQ. A large fraction of the firms are engaged in developing software packages, often technically highly sophisticated, for export markets. Many of the world's largest computer companies including Microsoft, IBM, Digital, Hewlett Packard, National Semiconductor, Motorola and others have set up software development centers in Israel. IBM employs 300 scientists and engineers at its design facility in Haifa, while also in Haifa, Microsoft set up its first research and development facilities outside of the U.S. Motorola and National Semiconductor have major design centers in the country, while Intel is currently investing in its largest R&D center worldwide in Israel. 

 

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

11  India has around 40 engineers for every 10,000 people.

 

 

      According to the statistical provide data on the growth in exports, total revenues, firms and employment in the Irish software industry. The Irish industry employs over 18,000 people, with 1997 revenues of over $1.5 billion as well. The software sector comprises more than 600 companies, of which about a fifth are overseas firms. The relatively high degree of foreign ownership, particularly among the larger establishments is consistent with Ireland's emergence as a favored location for multinational firms. Apart from a relatively large, relatively inexpensive, English speaking workforce, the attractions of Ireland include a variety of tax incentives and Ireland's membership in the EU (convenient for exports to other EU countries). As one might expect, nearly 70% of Irish exports are to the EU, of which more than half are directed to the UK. Technology based sectors, notably electronics and software, and chemicals account for 43% and 25% of Irish exports. The Irish software industry develops software products as well as provides a variety of software development and support services. A few Irish software firms are listed on NASDAQ and almost all the ancillary/support companies are accredited to the highest international standards, such as ISO 9000. With some exceptions, however, the Irish software industry does not appear to be as innovative or entrepreneurial as Israel. 

      Note that India has the largest number of people working in the industry as well as apparently the highest rate of growth of revenue, but also the lowest revenues per employee. Whereas the Irish and Israeli firms appear to earn as much as $100,000 per employee or more, firms in the Indian software industry earn only about $15,000. This difference is intriguing, and a matter of some concern for managers and policy makers in India. The difference is particularly intriguing when comparing the Irish and Indian case. The Irish industry also appears to have a significant focus on software services and contract software development, somewhat similar to the Indian industry. Some of the difference may be due to the greater cultural similarity between Ireland and the US and Western Europe and the ability of Irish firms to operate in higher value added stages of the software development cycle. It may also be that the Irish software firms have been able to differentiate their services through domain or technological expertise, as compared to Indian firms, which have, until recently, been unable to distinguish themselves from their competitors. 12 If true, this would imply lower price cost margins, and hence, lower revenues per employee for Indian firms. The low revenue per employee figure for Indian firms suggests that their customers are able to capture a substantial fraction of the value generated from the outsourcing.13

3 Characteristics of the Indian Software Industry

      The Indian software sector displays many unusual features from an Indian perspective. The most obvious one is its export orientation. Given India's size and history of inward development, most industries tend to be driven by the domestic market.

12 A part of the explanation lies in the extremely low rates for domestic software services, of the order of $10,000 per person. By comparison, the rates for domestic work in Ireland are likely to be considerably higher. Tax considerations may also have caused some firms to book revenues in Ireland that were generated elsewhere in Europe. The importance of such accounting practices in accounting for the apparent differences in rates is unclear. 

13 In related study, Arora and Asundi (1999) find that firms' efforts to differentiate themselves through ISO9001 quality certification are rewarded primarily through greater volume of sales rather than through higher price cost margins.

 

However, exports account for 65% of the total software revenue.14 Not only that, software exports have grown somewhat faster than the domestic market, so that the share of exports has actually increased over time. 

      There are important qualitative differences between the export market and the domestic markets. The first relates to different types of software developed. Table 8, gives the composition of the domestic and export software development and services market. The domestic market has a higher proportion of revenues from the sale of software packages and products. Whereas products accounted for nearly 40% of the domestic market, they account for a little under 10% of exports. Over 80% of exports are software services including custom software development, consultancy and professional services. Even though the bulk of the product revenues in the domestic market are probably accounted for by imported software products, Indian firms have produced some moderately successful products, such as accounting packages and word processing packages in Indian languages, for the domestic markets. A number of medium-sized firms make products for the Indian and Middle East markets which are very specific to the business culture etc. In the area of ERP packages, a couple of firms are trying to compete with global giants like SAP, BAAN and PeopleSoft in the domestic market. 

      The second difference between the domestic and export sectors relates to the stages of software development as described earlier. Indian firms usually provide low-level design, coding and some types of testing services for export. For domestic clients the industry provides a wider range of services that usually spans the entire lifecycle of software development. Some of the domestic projects are much larger and more challenging than export projects, with the screen based trading system for the Bombay Stock Exchange and the Reservation System for Railways, both by executed by CMC, an experienced public sector firm, being two recent examples. 

Domestic

In Table 8 we see that most of the firms operating in the domestic sector sell  

software products and packages. A large fraction of the domestic software industry consists of resale of software packages developed by foreign, principally US, firms, thus overstating the extent of software written for the domestic market. On the other hand, there is a great deal of in-house software written by users, especially large Indian firms that is not being captured by these figures. 

      A number of Indian software firms have also developed software packages aimed at the domestic market. However, with very few exceptions, these packages have not been very successful. A number of firms had targeted the domestic market for products and services in the late 1980s. Some produced packaged software products for the domestic market, including a word processing packages for Indian languages, while others focused on developing custom software for domestic clients. For the most part, these efforts were not very remunerative compared to the export market. 15 This points to

14 There are a couple of caveats to this observation. The domestic sector revenues include those from reselling imported software packages and therefore overstate the extent of software development in India for the domestic market. On the other hand, the figures exclude the possibly considerable amount of software developed in-house by users. 

15 There are a few exceptions, possibly the most noteworthy being a subsidiary of Citicorp, which has successfully exported its banking products to a large number of developing countries. Other firms have also targeted other developing countries as outlets for specialized products for the financial, banking and

 

 

the higher profitability of exports of software services compared to other types of software development and even firms that are product focused have added software services and consulting to fund product development (see also Udell 1993). 

      Although it is tempting to point to weak intellectual property rights as a culprit for the failure of Indian firms to develop successful packages, our interviews suggest that at least as important, if not more, has been the lack of experience, especially design and marketing experience, necessary to produce a successful product. In many cases, firms simply overestimated the willingness to pay and underestimated the difficulties of developing and supporting products. The reluctance of Indian users to pay large sums for software products has undoubtedly been very important, as has the slow rate of computerization of the Indian economy. Consequently, most of the established firms have turned to providing services for the export market. 

      Firms that have had domestic experience with consulting do not appear to derive any advantage from it in the export market. Given the simpler and more routine tasks involved in current software exports, the sophisticated capabilities and expertise that firms had developed from serving domestic customers have not been of great value to them in the export market. The CEO of a software subsidiary of a very large Indian engineering firm, explicitly noted that the considerable experience his firm had in executing large in-house software development projects was of limited use in exports. 

"As far as functional skills are concerned, these differ from country to country and client to client and there is a learning curve there. Domestic expertise may be useful in gaining technical expertise such as in coding and project management. However domestic and export projects are two different ball games." 

Exports

As we have seen, Indian software exports consist primarily of software services.  

Further, although some of the leading firms are beginning to differentiate themselves from the rest, Indian software export firms are remarkably similar in terms of their activities. Thus the activities carried out by most firms in India are essentially maintenance tasks for applications on legacy systems such as IBM mainframe computers, development of small applications and enhancements for existing systems, migration to client-server systems, often referred to as porting or re-engineering. The Year 2000 (Y2K) problem has also opened a large market for firms that were traditionally doing mainframe based maintenance projects. Table 9, displaying results from our survey, shows that application solutions are the most common type of export, followed by reengineering (also called porting) and conversion projects, such as Y2K projects. Moreover, although Y2K projects were an important source of revenue, most of the leading Indian software firms have limited their dependence on such projects. 

      Managers at most of the US firms we interviewed agreed that the type of work outsourced was neither technologically very sophisticated nor critical to their business. 16

hospitality industry. Firms like TCS and Infosys have their own banking packages, which they have exported to other "commonwealth" countries with reasonable success. 

16 The managers at a leading electronics and telecom firm said they outsource work related to sophisticated but mature digital signal processing software to their Indian subsidiary. The telecom firms we interviewed outsourced domain related software maintenance or tool development for the maintenance or enhancement of existing applications. The manager at a value added telecom services firm said that they were outsourcing testing of their existing software and to some extent maintenance of their old UNIX based

 

 

Requirement analysis and high-level design is typically done either in-house or by US based consultants. However, smaller firms may rely more heavily upon their Indian suppliers, as was the case of a small firm developing medical software. 

      Not only is the work outsourced technologically undemanding, the projects are typically small. The mean number of man-months involved in the most important export project for firms that participated in our questionnaire survey is 510 man-months, whereas the median is only 150 man-months. Note that since the question related to the most important project, it implies that the typical export project is quite small, even for the large firms. 

      Table 10 shows that the US accounts for over half of all export revenues (58% in 1997-98), compared with 21% for Europe and 4% for Japan. Many of the larger US firms we interviewed are knowledgeable about outsourcing software development and the strengths and weaknesses of Indian software services firms. Some of these firms have also outsourced software development to firms based in other countries like the Ireland, Philippines, Russia and South Africa. 

      The US is not only a major market; competition from US based service providers is a major source of competition. Although competition from other countries such as Philippines and China is typically cited in the press, as tables 11a and 11b show, most software exporters indicate that their main competitors are located either in the US or in India itself. However, with few exceptions, most of the US based competitors are themselves firms that extensively recruit Indian software professionals. Only the largest of Indian firms could hope to compete against established US firms. 

      Many MNCs have set up liaison offices and subsidiaries as well. A number of them sought domestic partners. Initially, the partnerships were to sell the MNC products (both hardware and software packages). Increasingly, however, the objective is to use India as a place for software development as well, rather than merely as a place to sell. Some companies have established, or are in the process of doing so, software development centers in India, and are exporting packages or components of systems to other countries from India. The work being done at these development centers is fairly sophisticated. For instance, the operating system for the "network computer" introduced by Oracle is said to have been designed entirely in India. Similarly, the Texas Instrument R&D center in India is capable of fairly sophisticated work, including analogue chip design. Other prominent MNCs operating in India include Motorola, Siemens, Hughes Network, Computer Associates, Microsoft and Cadence. 

      As well, there are a number of US firms that have established large Indian operations. Firms such as Mastech, Information Management Resources (IMR), Syntel, Cognizant (a subsidiary of Dunn and Bradstreet) and CBSL use their India operations much in the way that Indians software export firms do, to tap a large pool of relatively cheap but skilled workforce for providing software services to US based clients. These firms are similar in many respects to the Indian software firms. Virtually all are headed by entrepreneurs of Indian origin, and started their existence, as did many of the leading Indian firms, by supplying software professionals such as programmers and analysts to

 

 

 

software. However, we did find one exception to the idea that the outsourced projects are not mission-critical: A leading computer manufacturer out sources critical device-driver software that is shipped directly from the Indian vendor for distribution.

 

 

clients in the US. As Indian software exporters establish overseas subsidiaries, the distinction between the two will tend to diminish.

Finance 

      Software services, especially for export, are a very profitable business with good cash flows and limited requirements for up front investment. Therefore, finance is not a major problem for software service firms, unless a firm wishes to expand rapidly or wishes to expand overseas. Obtaining finance is, however, a major concern for firms developing software products. 

      Many of the firms we interviewed appeared to rely on equity financing as the primary source of capital although they had other diversified sources of finance such as loans and lease finance. Others relied upon financing from their parent firm or from business groups with which they were affiliated. 56% of the firms we surveyed indicated that they relied upon personal funds for startup finance. 

      The picture is very different for firms developing software products. In contrast to services, a substantial investment is required to develop the product, and even more to market the product. Firms that are trying to develop software products do face an acute problem of getting finance, in part because the inexperience and conservatism of Indian venture capital funds. A venture capitalist affiliated with a well-known Silicon Valley venture capital firm agreed with the view that venture financing in India for startups focusing on packaged products is limited. He indicated that for a variety of reasons having to do with tax laws, it is more efficient to make equity investments in a U.S firm rather than an Indian firm but to then have a wholly owned Indian subsidiary to make its financial reports in India and get tax exemptions. He also noted that most startups are funded by debt rather than equity. Therefore, having a service component to a product strategy made sense since services provide a relatively easy way of entering the market and gaining experience. Services also provide cash, which startups are unable to get from elsewhere. This venture capital fund has a portfolio of firms developing software products, registered abroad, but which is Indian insofar as their founders are Indian. These firms carry out a significant portion of the development work in India. 

      A manager for a venture fund run by a public sector investment bank noted that although they had invested in as many as 32 firms in the past, only 5 were product focused, the rest being software service firms focusing on exports. However, this venture capital operation no longer invests in startups. Instead, they fund expansion or new product development by existing firms with good track records, or by proven star managers in the industry. Funding investments are in the range of Rs.15 to 20 million ($400,000 to $500,000) but the firm can come back for more as soon as the financing is exhausted. 

      Given the problems in raising money and in tapping public equity markets, some firms have adopted a strategy of using services to finance product development. An interesting example is a firm started by an entrepreneur who had worked for many years in a large US software firm who was financing the venture himself, but was also using supplying software services to his earlier employer to generate revenue. A firm affiliated with a large banking group also used its earnings from its services business to fund product development. 

 

 

      The problem, it appears, is as much on the demand side as on the supply of venture capital. Venture capital funds associated with well-known Silicon Valley venture capitalists, such as Draper International, have only been able to use 60% of the allocated funds.

 

       

venture capitalists are interested primarily in products developed for large markets, and therefore, for products that can succeed in the US. Developing products for the US market from India is widely thought to be very difficult. Table 13 shows that it does not appear that lack of venture capital is the major constraint for developing software products.