Lets Fight It Out on Their Turf
Vice President, Infosys Technologies Ltd.
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.
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.
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).
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.