Regulatory difficulties and cultural mismatches often limit the attractiveness of outsourcing software development to India, despite cost savings and quality of service. But new initiatives from the Indian government and software vendors look set to take the Indian software export industry to new heights, according to Dewang Mehta, president of NASSCOM, the Indian National Association of Software and Service Companies.
The Indian software industry continues to grow rapidly, reaching total sales of close to Rs100.4bn ($2.7bn) during 1998. This compares with a figure of only Rs500m ($15m) ten years ago. Much of this growth has been realized as a result of the boom in offshore development services. This is growth in Indian software exports has been particularly rapid. Total software exports reached Rs65.3bn ($1.8bn) during 1998 achieving a compound annual growth rate (CAGR) of around 57% over the last five years, ahead of the average for the whole Indian software market of 54%. Mehta expects it to be worth Rs168bn ($4.0bn) by 2000. There are now more than 750 companies in India which are engaged exporting software, says Mehta. Of these, the top twenty five software exporters accounted for almost 59% of the software exports revenues in 1998.
But the Indian software export industry is not just growing, it is also diversifying. Indian software companies have traditionally concentrated on supplying professional services, principally highly technical software development, to the banking, manufacturing and insurance sectors and these still which make up some 48% of export sales. However, project-based services, such as e-commerce, ERP and European monetary union compliancy, are gaining strength and now command around 32% of the export market. In addition, many global and system hardware companies are now sub-contracting software development to Indian companies.
Mehta is also keen to point out that India represents the best value for offshore development, offering a more competitive combination of low cost and high quality than competitors like Mexico and the Philippines (low cost but low quality) or Ireland and Israel (high quality but high cost). The quality of Indian software developers is indicated by the fact that five out nine global recipients of ISO 9000 level 5 certification are Indian.
The competitiveness of Indian software companies in the export market has been helped considerably by a number of factors, says Mehta, especially since May 1998. Perhaps chief among these has been the enforcement of previously disregarded copyright laws, a factor that has seemingly discouraged a large number of potential customers. In India, copyright has tended to mean the right to copy, says Mehta. The Indian government has also increased IT spending providing additional resources for technical manpower development, new marketing channels and improving infrastructure for software development.
These developments are intended to make the prospect of outsourcing software development to India more appealing to overseas customers. However, Mehta believes India’s main advantage over other countries trying to promote software exports is that the country possesses the world’s second largest pool of English-speaking scientific manpower. As of March 1999, the Indian software industry employed more than 250,000 people and continues to be amongst the fastest growing sectors in the Indian economy. Added to this India produces something like 115,000 computing graduates per year, according to Mehta. There is clearly no shortage of available talent.
The English language bias is apparent in the destination of Indian software exports. The USA is India’s largest software export destination, accounting for almost 58% of its total software exports in 1998. Export to Europe was at 21% and more market opportunities in Japan, South Africa, Canada and France were discovered. The six OECD countries (USA, Japan, UK, Germany, France and Italy) together account for almost 75% of India’s total exports to these countries is also almost 75% of its total software exports. In total, 158 of the Fortune 500 companies outsource their total software requirement to India, says Mehta.
A second response to India’s growing software export business has been that more overseas companies are by-passing the outsourcing route for application development and setting up their own operations in the country. These tend to operate either through 100% equity holding, joint ventures with Indian companies or marketing or technical collaborations.
Despite the credentials of Indian software developers, the total market remains, in global terms, small. Much of this arises from the problem Indian companies still face of selling services to a sometimes skeptical global market. Companies have traditionally depended upon direct marketing to end-users, a strategy that has often been less than effective owing to cultural differences in approach. However, many software companies have recently set up their own offices in various countries giving them a more familiar corporate and greater market visibility. Wipro Infotech, Tata Consultancy Services, HCL and Rave Technologies, among others, now have European bases.
Whether this initiative can overcome caution and bring Indian software development into the mainstream of European and US IT services remains to be seen. However, the high quality and relatively low price of Indian software looks set to keep the country at the forefront of offshore software development for the immediate future.
Current exchange rate: $1 = Rs42
