NASSCOM-McKINSEY STUDY: Strategizing for the Boom

Astudy by NASSCOM and 

McKinsey on Indian IT strategies reveals that India can become a global player in IT and can achieve revenues of $87 billion by 2008–a manifold
increase from $4 billion in 1998. This is achievable if the government provides global telecom infrastructure, unleashes venture creation and incubation
engine, and creates an ideal regulatory environment. 

It is estimated that the domestic market for software and services will be at $18 billion by 2008. Out of this domestic IT services will be $6.5 billion; domestic products $1.9 billion; services to e-businesses $2 billion; and resale of products will be $7.8 billion. 

A lot has to be achieved on the domestic front, as the government is yet to computerize its administration and key departments. In India, IT in the corporate sector is much lower in comparison to other countries. The export market has been more profitable than the domestic market. So Indian companies have focused more on the export market. 

According to McKinsey, India can achieve the $87 billion target if they try to focus on the seven growth enablers which are: supply base of knowledge workers, ideal regulatory environment, anchor MNCs, India Inc. brand, country specific initiatives, communications infrastructure, and venture creation. 

The market is opening up and the various categories to keep a close watch are IT services, software products, IT-enabled services, and e-business. 

IT Services

It is estimated that the market for global IT services will grow to nearly $1 trillion by 2008. Financial services and banking, manufacturing, and retail & distribution will continue to be major users of these services. There will be more demand for Web/package-based services with the growing use of the Internet and Internet-enabled appliances. The increase in IT spending will be due to e-enablement of enterprises; shortage of skilled professionals; continued momentum behind outsourcing to gain flexibility, lower costs, and to gain access to technical skills. Deregulation, globalization, and consolidation will spur rapid IT services growth in industries such as communications, banking, and health-care. Combined with all this will be Y2K and Euro related spending.

In the IT services market, Indian companies can pursue their growth in three areas. First is to leverage on current capabilities and extend into new, rapidly growing service lines such as e-commerce, knowledge management, and convergence applications. Second is to tap new, emerging customer segments such as Application Solution Providers (ASPs) and .com companies under penetrated segments such as healthcare and telecom verticals and non-English speaking countries. Third is to move up the IT services value-chain from piece part maintenance work to full project implementation. A few Indian companies may even build IT consulting practices to
advise companies on IT strategies and architecture issues. Software Products

The market for software products is expected to grow at 188 percent a year. From $134 billion in 1998, it will
increase to $770 billion by 2008 according to McKinsey report. 

When we look at the computing environments where software is deployed, the types of application and requirements for the software are quite distinct. In enterprise computing, there is still a significant demand for e-commerce
applications, ERP type applications and decision support applications that allow corporations to better aggregate, analyze, and use information. This type of software needs to be extremely reliable, scaleable, and allow for high transaction 

oriented performance. 

In consumer computing, the typical applications include
personal productivity tools like word processing, and spreadsheets and a host of client applications that retrieve, manipulate, and store data from large repositories. One has to continuously innovate with ease of use, lower cost, and enhanced
technical support offerings. 

In the emerging category of mobile computing and embedded devices, where a range of devices from cellphone to
Personal Digital Assistants (PDAs) are essentially computers, a variety of general purpose and industry specific applications are emerging. These devices 

frequently require connectivity to central repositories, ease of use, and reliability in a rugged environment. 

IT-Enabled Services 

The global IT-enabled services are likely to grow to $142 billion by 2002. HR-related services, customer interaction services, financial processing, and accounting and data management 

services will account for almost 90 percent of the market. Around 50-90 percent of the processing for most services can be outsourced as it requires simple interfaces, can be standardized, do not require advanced location specific capabilities, and do not require physical presence in home locations. 

Though 70-80 percent of the costs can be reduced primarily because of the wage costs differentials under Indian circumstances, to manage operations in remote locations would be an extremely difficult task. This, together with higher telecom costs, could result in additional costs of 10-20 percent. In spite of that one could incur a net savings of 50-60 percent thereby promoting IT-enabled services in the country. 

India could capture $17 billion of the IT-enabled services’ opportunity, largely in HR services, remote customer interaction services, and data management services. This could in turn create a
million jobs. But before that Indians will need to acquire diverse skills. In addition to the professional skills, training to adapt to global market conditions is also necessary. These are: accent training i.e. learning to understand foreign accents as well as improve diction; gaining an understanding of legal and regulatory issues in customer markets; and developing an understanding of cultural issues in customer market. Depending on India’s relative value proposition, Indian players can choose two strategies. They can either go directly to the end customer, or they can partner with a large remote service player in a hub country to take a backup role. The first strategy will require strong skills in understanding the customer’s business system and good credibility based relationships for any type of involvement. Indian start-ups will, therefore, find it difficult to start alone. 

Getting the first customer will be critical for establishing credibility in the market. Partnering may well be required, at least initially. The second strategy will be no less challenging since the Indian value proposition here will be potentially weaker than in the first strategy. This is because the partner is by definition an experienced player in IT-enabled services and could potentially set up an operation in
India quickly, without an Indian partner. This strategy, therefore, may be most suitable for Indian players running remote operations as backups for overseas partners. 

JVs will give them access to customers and their processes and will
simultaneously allow the customer to remain in control of the more sensitive processes. JVs may also be useful for smaller MNCs to join forces and set up operations in India. Contracting relationships are likely to be an option for providers with existing operations in
processes that are less critical to the 

customer in terms of security and reliability. 

E-business

It is estimated that the global spending on e-commerce is likely to touch
$1 trillion in 2004 and it will impact both developed as well as emerging markets. India has the potential to create e-business worth $1.5 billion by 2004 and around $10 billion by 2008–in both B2B and B2C segments. Increase in Internet usage will create a vast opportunity for e-business as it effectively
lowers costs and helps provide high quality, personalized service. 

Payment systems will be a critical lever for enabling transactions. Connectivity will offer one of the biggest opportunities in the initial phases of B2C
e-commerce growth in India. As more and more consumers get connected, being an access provider has the greatest certainty in terms of revenue generation. The large NRI population will also drive the growth of India centric portals and communities. 

The e-commerce process would be such that it should offer more choices and allow 24-hour purchasing to the clients and providing superior product information, comparative shopping opportunities, product selection support, order tracking, and delivery options. 

How to Achieve? 

India can achieve the above number if it provides the right platform for venture financing of new software start-ups and a good communications infrastructure. Besides, it needs to train its manpower according to the varying needs of the market, and make the necessary changes in laws which have not been revisited with changing times. 

In order to build a robust venture creation process, India has to boost all the stages of the process by rewarding new ideas, supporting and nurturing ventures, and providing flexible and attractive options for realizing shareholder value that will generate the maximum number of start-ups. The venture creation process in India is in rudimentary stage and has been unable to gather steam for reasons like poor infrastructure and complex regulatory procedures that make venture start up difficult. Even the start-ups typically do not attract the right managerial talent to enable rapid growth. In addition, the small domestic market, coupled with limited access to global markets, makes it difficult for even promising start-ups to achieve critical mass. Finally, multiple regulatory constraints make it difficult for entrepreneurs and VC funds to exit and capture value. Access to domestic capital market is constrained by the SEBI’s
requirement of a three-year track record of profits, while RBI guidelines limit the price at which overseas VC funds can disinvest. Recent moves such as SEBI’s plans to allow limited trading in unlisted stocks and to do away with the three-year track record
requirement for start-up IPOs are steps in the right direction. The government has still a lot to do. Companies Act should be amended to permit VC companies to redeem 100 percent of their paid up capital. The related instructions should also be waived. RBI should not regulate the price at which offshore VC funds divest from Indian companies. The lock in period of three years on VC investments in unlisted companies should be done away with. And laws relating to industrial sickness, that make it difficult and time consuming to shut shop and move on, should be simplified. 

A world class telecom infrastructure is a key enabler to growth in IT. India should aspire to achieve global parity in all the three elements of telecom infrastructure–local loops, national backbone, and international gateways. India falls short of current global standards in the quality of its communications infrastructure owing to its poor reliability, bandwidth, costs, and range of services. 

At present reliability is well below global standards on domestic circuits. The downtime varies from 3-15 percent against the global benchmark of less than 0.1 percent. On international circuits, the downtime varies from 0.9-2 percent against the global benchmark of less than 0.3 percent. 

Local loops’ bottlenecks hamper bandwidth availability. The lack of high-speed national data backbone also constrains companies locate their outside the main metros. International gateway capacity too is bottlenecked. The high cost of telecom services and limitations in telecom service acts a major bottleneck for IT-enabled services in the country. 

To achieve this figure of $87 billion, India has to develop over 2.2 million high-quality knowledge workers in software and related areas by 2008. It has to ensure that its workforce has the right mix of technical, business, and functional skills to meet the needs of the individual business segments and customer markets in different markets of the world. Even the regulatory environment has to be tuned so that it allows e-commerce to operate in the country without any hitch and also allows better investment opportunities for venture capitalist who are planning to fund these start-ups in the country. New laws have to be incorporated and amendments are to be made in fields like cyber laws, telecom regulations, investment policies, capital market regulations, procedures, labour laws, and taxation.