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Perspectives on building technology businesses and AcceleratorIndia from Cartezia

Re-inventing Indian Tech Service Companies

Thursday, October 2, 2008

The fortunes of Indian tech services companies are closely linked to the performance of the global economy, particularly US companies.  US markets accounted for 61% of the export revenues of Indian IT and BPO companies last year. The global economic crisis and Wall Street meltdown have highlighted the risks of relying on the Outsourced Service Provision model.

 

The financial meltdown is leading to dramatic reductions in expenditure, with a direct impact on the revenues of Indian BPOs and call centres. Tightening cash flows will put up the cost of capital and investment in existing and new IT projects and development of new products and services, which will hit all the IT outsourcing companies.

At a strategic level, the response of some Indian companies has been to consider expansion into other geographies and industry verticals. Cultural and linguistic differences have, however, previously proved to be a major challenge in expanding into other geographies, notably Japan, which despite being the world’s second largest economy, contributes less than 5 per cent to the industry’s export revenues. Wage inflation and rapid economic growth have increased the cost of doing business in India, eroding the cost advantage enjoyed by Indian tech services companies.

An alternate consensus is now emerging on how Indian tech services companies can survive and emerge stronger from the financial meltdown. This challenge creates an opportunity for Indian companies to re-orient their business strategies, by migrating from a pure-play outsourced IT services model based on cost arbitrage. Instead Indian tech service companies need to focus on innovation in creating new products and services and reaching out to global markets.

With their core expertise in offshore delivery through the perfection of high-quality processes, however, the question remains whether Indian tech services companies can succeed in creating new products and services for global markets. The answer is an emphatic yes!  As a consequence of working closely with international customers, Indian Tech companies have probably built sufficient domain knowledge of their core sectors to create new products and services suitable for international markets.  They can also acquire relevant intellectual property at home and abroad and use their business and process skills to rapidly develop internationally competitive products and services.

The main challenge that Indian tech service companies face in adopting this strategy is the dearth of expertise and experience in developing innovation-led products and services and taking them to market. By partnering and working with organisations with complementary expertise, however, Indian tech services firms can build new businesses from innovations in technology, products, services and business models. Only by doing this can they emerge from the current crisis stronger and better positioned for success in the next growth cycle of the world economy.