Normalizing the IT Ecosystem
[A shortened version of this article was published in the Indian Express on the 3rd Mar, 2005. Unfortunately it isn't available online: See the Express Careers section in the paper edition. This is a good article to forward to new readers of the blog, who want to know what it's all about.]
One of the biggest stories in India in recent days has been the development of the IT Industry, powered by BPO (Business Process Outsourcing). The Indian IT Industry is now considered the outsourcing king of the world. This industry has raised India's self-esteem, brought in billions of dollars, and provided employment for lakhs of engineers.
It would be interesting to see the Indian IT Industry as an ecosystem. As in a biological ecosystem, the various components of the industry - Education, Research, Services, Products, Support - are all dependent on each other for survival. The size and strength of each component is determined by the others. An ideal IT ecosystem would find space and opportunity for people of all types of interests - whether developing products, doing research work, managing development teams, supporting existing products, or just coding 9 to 5. The American IT Industry comes very close to this ideal, except for the recent distortions due to outsourcing.
The catalyst for the growth of the IT industry in India, as is well known, was the cost factor: we were able to provide trained engineers to work on IT related tasks at 1/4th or 1/5th the billing rates of engineers from the US or Europe. Besides this our engineers spoke English well. This created a huge market for our services companies. Due to this overriding focus on BPO, the IT industry in India has not grown in a balanced manner. Almost all of the heavyweight companies are Services companies, and the major portion of their work comes from the outsourcing of work by First-world companies, mostly American. We can call them 'Outsourcee' companies. These companies occupy an unnaturally large proportion of space in our IT ecosystem.
No such opportunity was available initially for Indian products companies, so that segment did not take off. It takes up a less-than-normal position in the ecosystem.
This dominance of services-related work has led to the creation of a huge pool of talented software engineers attuned to working in such conditions. These engineers have a fairly safe career - they are insulated from the success or failure of their current projects, because there are always more clients waiting. However, working in an outsourcee company creates a few problems for the engineers:
- The work that is outsourced is usually not core or cutting edge work, so they do not work on the newest technologies. Many projects are entirely about maintenance of legacy systems, for example.
- Because these engineers move from project to project every couple of years, they do not acquire any domain expertise in the area of the project. Thus they remain skilled only in particular coding languages but never in the domain-related concepts.
- Because designing or architect-level work rarely comes to the outsourcee companies, the only career growth path for the engineers is towards technical management - i.e. to become team leads, project managers, and so on. Such posts tend to take the engineer away from his technical work.
Companies need to keep a pool of trained, ready engineers in reserve for sudden expansions of projects. This means that between projects, engineers often find themselves on the bench - often for months at a time.
The outsourcee companies, themselves, also suffer from a few problems:
- Because the billing rates for each engineer are fixed, and clients often negotiate these to rock bottom rates, the only way to improve the company's revenue is to recruit more engineers and get them billed. This makes the overall management more and more difficult with time. This is in sharp contrast to the best product companies, where a small team of dedicated engineers can create wealth of millions of dollars.
- The company's work has very limited momentum. Engineers produce no IP (Intellectual Property) for the company itself, because the products produced are owned by the client. Month after month, the revenue comes only from billing. This means that even if the company has done cutting edge work once, it doesn't help later - the billing must continue somehow.
Most of the above are known problems. However, Outsourcee companies willingly endure them, because the Services business is the least risky among the various types of IT companies in India. So, services companies continue to grow day by day.
All these factors put pressure on the hardcore techies. These are the engineers who view computers and related technology as a passion rather than as a profession. They are the people who do not want to move into management, but want to go ever deeper into the technical aspects, work on the latest technologies, and participate in the creation of new standards. In a balanced IT ecosystem, these people would have left the softer, safer services jobs and moved to cutting edge technology projects in product companies. However, as mentioned earlier, the IT companies in India are largely services-oriented - there are very few products companies here. So there is no ready alternative for them.
Why is that the case? Why have so few products companies come up in India so far? The answer lies in the following reasons:
- Small Indian market. The number of computers per thousand in India is still very low. Products developed exclusively for the Indian market tend to have very low sales. This means that products developed in India for Indians have to be very specialized and pricey. Consider the various banking software applications developed by companies like Infosys and Wipro. These products were possible because the banking sector was amenable to computerization, and a clientele of 5 or 10 large banks, with maintenance contracts, was enough to turn a profit. A smaller company cannot hope to come up with such a product. It depends on large volume sales.
- Exposure to the international market was very low. Since the Indian market is small, products need to be developed for the international market. However, it was difficult for entrepreneurs here to gauge the current trends and keep up with the newest technologies. For a product to be successful, it must fulfill an emerging need. For example, could it have been possible for India to produce a software package for burning CDs? No, because CD writing drives in India became popular many years after they spread in the US and Europe. By then the standards and the market was well established, and several software packages to fill the niche had already been written. Contrast this with ICQ, the Instant Messaging software that came out of Israel in the early 90s, before any other IM was popular. It created a niche which Yahoo Messenger and MSN Messenger later took over.
- No safety net. In places like the US, salary levels are high enough, so saving is easier. Once sufficient savings are in place, it is a low risk to start up a company in ones garage, persuade a few friends to join as partners, and try developing and selling a product for a couple of years. This can go on as long as you have your savings to live on. Besides this the size of the IT industry is much bigger. If your idea doesn't work out, there are scores of companies waiting to recruit you. This was impossible in India, where your average Indian salary didn't permit you the bandwidth to live on your savings for extended periods. Also, India had a much smaller number of companies recruiting.
The tide, however, seems to be turning now. The success stories making the news today are not only the large services companies, but smaller companies developing products and technologies at the cutting edge. These companies are usually run by techies who worked at services companies for a while, then saw a niche they could fill. They are fighting and winning their battles in the international market, giving competition to established American and European companies. So far, the scope of these products and technologies has been small and focused on solving specific problems. But these are the forerunners of larger, mass-market products.
Ironically, it is the growth of outsourcing that has solved most of these problems:
- The size of the Indian market is growing. The number of computer-literate people has grown up sharply, partly because of the good growth of industry and partly because computers are seen as lifestyle products as well.
- Software engineers in the IT industry work on products and services for the international market. They are affected by the newest trends and technologies. This gives them a good idea of the emerging markets. They also have experience of working in large projects, so they are aware of the management and technical issues faced.
- The salaries in the IT industry are fairly high by Indian standards. Today, an engineer, with a few years of work, can very easily save up enough money to run for a few months on his own steam. There are many cases in the newspapers about companies started up in just this way. There are dozens more product ideas that didn't work. The entrepreneurs who tried the experiment generally go back and join some services company - they were never in danger of unemployment.
- The resources required to start an IT company are very low. This was well demonstrated by the rise of IT in India. It just takes a few computers in a spare room and an Internet connection. The revenue earned by a product company is also not proportional to the number of employees - meaning that you do not need to keep recruiting in order to grow.
Because of the above point, a successful product company can afford to pay its employees much higher salaries - a further incentive for people to join up.
A second wave of dissatisfied engineers is also following these entrepreneurs - people who do not want to start up product companies on their own, but want to work in one. Thus the product companies have a steady stream of applicants wanting to join them. Witness the thousands of applications received by the Bangalore centre of Google. These companies do not need to recruit continuously in order to grow, so the supply of engineers is more than the demand. Hence the companies can pick and choose the best engineers - which makes them desirable places to work in for techies.
On the other hand, the services companies, in order to grow, need to recruit at terrific speeds. They are casting their nets ever wider, poaching from each other, creating training programs for people from other disciplines. In their case, the supply of engineers is not enough to meet their demand. Hence as these companies grow, they cannot maintain the technical standard of the employees. This will further push the hardcore techies towards the product companies.
The smarter services companies are taking advantage of their in-house techies to start up product divisions. Again, this is a positive trend, because they can take advantage of the synergy between the products and services divisions to benefit both.
All of these factors lead towards the growth of the products segment of the IT ecosystem. The rise of such companies can be considered as a maturing of the IT industry in India. The ultimate test of the industry would be, when a fresh graduate joins the industry, he should be eventually able to find a job in exactly the kind of work he likes doing.
One of the biggest stories in India in recent days has been the development of the IT Industry, powered by BPO (Business Process Outsourcing). The Indian IT Industry is now considered the outsourcing king of the world. This industry has raised India's self-esteem, brought in billions of dollars, and provided employment for lakhs of engineers.
It would be interesting to see the Indian IT Industry as an ecosystem. As in a biological ecosystem, the various components of the industry - Education, Research, Services, Products, Support - are all dependent on each other for survival. The size and strength of each component is determined by the others. An ideal IT ecosystem would find space and opportunity for people of all types of interests - whether developing products, doing research work, managing development teams, supporting existing products, or just coding 9 to 5. The American IT Industry comes very close to this ideal, except for the recent distortions due to outsourcing.
The catalyst for the growth of the IT industry in India, as is well known, was the cost factor: we were able to provide trained engineers to work on IT related tasks at 1/4th or 1/5th the billing rates of engineers from the US or Europe. Besides this our engineers spoke English well. This created a huge market for our services companies. Due to this overriding focus on BPO, the IT industry in India has not grown in a balanced manner. Almost all of the heavyweight companies are Services companies, and the major portion of their work comes from the outsourcing of work by First-world companies, mostly American. We can call them 'Outsourcee' companies. These companies occupy an unnaturally large proportion of space in our IT ecosystem.
No such opportunity was available initially for Indian products companies, so that segment did not take off. It takes up a less-than-normal position in the ecosystem.
This dominance of services-related work has led to the creation of a huge pool of talented software engineers attuned to working in such conditions. These engineers have a fairly safe career - they are insulated from the success or failure of their current projects, because there are always more clients waiting. However, working in an outsourcee company creates a few problems for the engineers:
- The work that is outsourced is usually not core or cutting edge work, so they do not work on the newest technologies. Many projects are entirely about maintenance of legacy systems, for example.
- Because these engineers move from project to project every couple of years, they do not acquire any domain expertise in the area of the project. Thus they remain skilled only in particular coding languages but never in the domain-related concepts.
- Because designing or architect-level work rarely comes to the outsourcee companies, the only career growth path for the engineers is towards technical management - i.e. to become team leads, project managers, and so on. Such posts tend to take the engineer away from his technical work.
Companies need to keep a pool of trained, ready engineers in reserve for sudden expansions of projects. This means that between projects, engineers often find themselves on the bench - often for months at a time.
The outsourcee companies, themselves, also suffer from a few problems:
- Because the billing rates for each engineer are fixed, and clients often negotiate these to rock bottom rates, the only way to improve the company's revenue is to recruit more engineers and get them billed. This makes the overall management more and more difficult with time. This is in sharp contrast to the best product companies, where a small team of dedicated engineers can create wealth of millions of dollars.
- The company's work has very limited momentum. Engineers produce no IP (Intellectual Property) for the company itself, because the products produced are owned by the client. Month after month, the revenue comes only from billing. This means that even if the company has done cutting edge work once, it doesn't help later - the billing must continue somehow.
Most of the above are known problems. However, Outsourcee companies willingly endure them, because the Services business is the least risky among the various types of IT companies in India. So, services companies continue to grow day by day.
All these factors put pressure on the hardcore techies. These are the engineers who view computers and related technology as a passion rather than as a profession. They are the people who do not want to move into management, but want to go ever deeper into the technical aspects, work on the latest technologies, and participate in the creation of new standards. In a balanced IT ecosystem, these people would have left the softer, safer services jobs and moved to cutting edge technology projects in product companies. However, as mentioned earlier, the IT companies in India are largely services-oriented - there are very few products companies here. So there is no ready alternative for them.
Why is that the case? Why have so few products companies come up in India so far? The answer lies in the following reasons:
- Small Indian market. The number of computers per thousand in India is still very low. Products developed exclusively for the Indian market tend to have very low sales. This means that products developed in India for Indians have to be very specialized and pricey. Consider the various banking software applications developed by companies like Infosys and Wipro. These products were possible because the banking sector was amenable to computerization, and a clientele of 5 or 10 large banks, with maintenance contracts, was enough to turn a profit. A smaller company cannot hope to come up with such a product. It depends on large volume sales.
- Exposure to the international market was very low. Since the Indian market is small, products need to be developed for the international market. However, it was difficult for entrepreneurs here to gauge the current trends and keep up with the newest technologies. For a product to be successful, it must fulfill an emerging need. For example, could it have been possible for India to produce a software package for burning CDs? No, because CD writing drives in India became popular many years after they spread in the US and Europe. By then the standards and the market was well established, and several software packages to fill the niche had already been written. Contrast this with ICQ, the Instant Messaging software that came out of Israel in the early 90s, before any other IM was popular. It created a niche which Yahoo Messenger and MSN Messenger later took over.
- No safety net. In places like the US, salary levels are high enough, so saving is easier. Once sufficient savings are in place, it is a low risk to start up a company in ones garage, persuade a few friends to join as partners, and try developing and selling a product for a couple of years. This can go on as long as you have your savings to live on. Besides this the size of the IT industry is much bigger. If your idea doesn't work out, there are scores of companies waiting to recruit you. This was impossible in India, where your average Indian salary didn't permit you the bandwidth to live on your savings for extended periods. Also, India had a much smaller number of companies recruiting.
The tide, however, seems to be turning now. The success stories making the news today are not only the large services companies, but smaller companies developing products and technologies at the cutting edge. These companies are usually run by techies who worked at services companies for a while, then saw a niche they could fill. They are fighting and winning their battles in the international market, giving competition to established American and European companies. So far, the scope of these products and technologies has been small and focused on solving specific problems. But these are the forerunners of larger, mass-market products.
Ironically, it is the growth of outsourcing that has solved most of these problems:
- The size of the Indian market is growing. The number of computer-literate people has grown up sharply, partly because of the good growth of industry and partly because computers are seen as lifestyle products as well.
- Software engineers in the IT industry work on products and services for the international market. They are affected by the newest trends and technologies. This gives them a good idea of the emerging markets. They also have experience of working in large projects, so they are aware of the management and technical issues faced.
- The salaries in the IT industry are fairly high by Indian standards. Today, an engineer, with a few years of work, can very easily save up enough money to run for a few months on his own steam. There are many cases in the newspapers about companies started up in just this way. There are dozens more product ideas that didn't work. The entrepreneurs who tried the experiment generally go back and join some services company - they were never in danger of unemployment.
- The resources required to start an IT company are very low. This was well demonstrated by the rise of IT in India. It just takes a few computers in a spare room and an Internet connection. The revenue earned by a product company is also not proportional to the number of employees - meaning that you do not need to keep recruiting in order to grow.
Because of the above point, a successful product company can afford to pay its employees much higher salaries - a further incentive for people to join up.
A second wave of dissatisfied engineers is also following these entrepreneurs - people who do not want to start up product companies on their own, but want to work in one. Thus the product companies have a steady stream of applicants wanting to join them. Witness the thousands of applications received by the Bangalore centre of Google. These companies do not need to recruit continuously in order to grow, so the supply of engineers is more than the demand. Hence the companies can pick and choose the best engineers - which makes them desirable places to work in for techies.
On the other hand, the services companies, in order to grow, need to recruit at terrific speeds. They are casting their nets ever wider, poaching from each other, creating training programs for people from other disciplines. In their case, the supply of engineers is not enough to meet their demand. Hence as these companies grow, they cannot maintain the technical standard of the employees. This will further push the hardcore techies towards the product companies.
The smarter services companies are taking advantage of their in-house techies to start up product divisions. Again, this is a positive trend, because they can take advantage of the synergy between the products and services divisions to benefit both.
All of these factors lead towards the growth of the products segment of the IT ecosystem. The rise of such companies can be considered as a maturing of the IT industry in India. The ultimate test of the industry would be, when a fresh graduate joins the industry, he should be eventually able to find a job in exactly the kind of work he likes doing.
posted by Sudarshan | 4:31 AM
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