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Labour, Location and Firm Strategy in Software Services – Dynamics of Value and Volume Capture

Sandip SarkarInstitute for Human Development, New Delhi

New Spatialities and Labour Workshop6th-8th July, 2012IGIDR, Mumbai

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Sections

• Introduction

• Global IT Companies

• Global IT Market for Indian Software Industries

• Changing Strategy of Indian IT Software Players

• Can Indian Firms Break into Product Market

• Compensation to Workers and Working Conditions

• Indian Software Industry in GVC/GPN Framework

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Introduction

Value Chain in Software Industry is different from that of manufacturing products like garments, automobile and mobile handset.

Mostly service user firms (that includes software producing firms) give contracts directly to firms and not many layers of firms work in single chain.

GVC stages of firms can be identified by specific tasks they undertake and firms over time and over different network system can move from low-value activities to relatively high-value activities in GPN.

Revenue sharing model between different layers of firms in the chain is difficult to find.

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Global IT Companies

A. Top Companies in Software segmentThe Top 100 software companies in the world had total revenues of $221 billion in 2010.

Microsoft accounted for 22.2% of software revenues of top 100 companies and its revenue was more than combined revenue of 2nd (IBM) and 3rd (Oracle) largest software companies.

The structure of revenue of top 100 companies is highly skewed.The number of successful new software companies are decreasing and the acquisitions are leading to further consolidation at the top.

Entering in this segment and to become successful is becoming quite difficult. China has 2 and Brazil has 1 company in top 100 companies by sale revenue (www.softwaretop100.org).

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Global IT Companies….

B. Top Companies in IT Service segmentTop 100 IT service industries include a broad array of activities. Large number of software top 100 companies also belongs to IT services top 100. Most notable is IBM which is number 1 in IT services and number 2 in software in revenue.

The revenues of top 100 software service companies totalled $451 billion in 2010 and revenues of IT service segment are going up much faster than that of software segment. The market share of top 10 companies is 40.8% reflecting much less skewed structure than the software companies.

Barrier to entry in this segment is comparatively less and it allowed 4 Indian companies to get into top 650 companies by size of revenues (www.servicestop100.org).

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Global IT Companies….

C. Top Companies in Hardware SegmentThe total revenue of top 100 hardware companies totalled as 1,066 billion dollar in 2010. The market structure is diversified as in the case of software service segment.

Half of the top 100 companies in the hardware list also produce software, and two-thirds of the companies also offer IT services although each has its specialisation. Margins are very thin in the hardware industry and competition is intense. Brand recognition has become important factor to get higher margin. Apple grew fastest in 2010 through strong sales of iPOD to jump 10 ranks to become 9th largest.

Low labour cost base and excellence in manufacturing has been advantage to East Asian companies. Underdeveloped manufacturing base in electronics has not allowed Indian IT companies to enter this large, competitive and dynamic segment (www.hardwaretop100.org).

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Global IT and Telecom Market for Indian Software Companies

In the year 2001-2, more than three-forth of export revenues of Indian IT-ITeS industry came from IT services.

Over the years other two segments ITeS-BPO and software products & engineering services grew at a faster rate than IT services. Still in 2008-9, IT services constituted 59 per cent of export revenue of IT-ITeS industry.

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Indian Domestic IT Software Market

The domination of IT services in domestic market is even greater.

Telecommunication is the largest segment of this IT service market largely because of rock-bottom cost model followed by the Indian wireless Telcos. They share infrastructure and outsource most of the activities and concentrate on marketing and strategy.

IBM by dominating domestic telecom outsourcing contracts earns > $ 2 billion annually with Wipro being nearest competitor. The combination of technology, services, hardware, software and research that IBM brings is difficult to match by Indian IT service companies like Wipro.

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Growth of Software Industry in India

Three Is (India, Israel and Ireland) experienced high growth in in the last two decades and much of the software growth in these countries is accounted for by exports. They have greatly benefited from global MNCs.

Two Hypotheses: 1. Distributed model of industry growth, where industrial clusters organize around a region along with their professional and technical networks.2. Development centre around the role of large organization.

India did not neatly fall in any of these two models. Geographical concentration of domestic and MNC software firms in Bangalore reflect the distributive model. Simultaneously some early entrant MNCs (Texas Instruments) also generated substantial demonstrative effect.

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Indian Software Industry in GPN/GVC Framework

Entry in GPN/GVC: On Shore Model of 1980s:

• Large demand of customized software required for shift from mainframe to network PCs.

• Installation and maintenance of Enterprise Remote System (ERS).

Offshore Model of 1990s

• Large depreciation of Indian rupee in 1991 kept wage rate low in India.

• Lower telecommunication cost allowed Indian companies to provide offshore development centres (ODCs) ot MNCs.

• Large Indian software companies provided ODCs to

several MNCs simultaneously for economies of scope and generate project management skills largely valued on time material cost model.

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Indian Software Industry in GPN/GVC Framework…

a. Process Upgrading after mid 1990s• Increased competition led larger Indian firms to go for quality

certifications and acquire domain expertise by concentrating on specific industry lines.

• Larger firms started moving up from time material cost model to fixed price contract model to improve their margin at greater risk.

b. Product/Service Upgrading from 2000• Acceleration of earlier process of fixed nature of contract and large size.•It moved to large-scale outsourcing model that requires ability to scale up quickly, better human resource management, increasing ability to manage global operations.•It led to increase in labour productivity by use of more efficient practices and use of less qualified workers in less demanding work through division of work. Larger firms started value addition by integrating software services and front end services .•Through these processes pioneering Indian firms learnt to transform programming skills of labour force into firm-specific capabilities.

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Indian Software Industry in GPN/GVC Framework…

c. Functional Upgrading• In the last few years, major Indian IT companies are emphasising on

increasing revenue productivity by undertaking more share of higher value added services

• For complete business process deals they are hiring entire team of consulting persons onsite (foreign countries) .The other operations like enterprise solution and application management, programme management etc. are handled offshore (domestic country).

• Larger firms are reorganising in different verticals (industries) to enable them to offer clients total service capability, visibility and develop deeper domain knowledge.

Consequences• Narrowing the difference of business model of Indian IT service

providers and MNC service providers as MNCs have accelerated hiring in low cost centres like India.

• For complete business process deals Indian companies have started hiring entire team of consultants offshore (foreign countries).

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Indian Software Industry in GPN/GVC Framework…

Gap between Lead Firms and Large Indian Software Firms

• Indian firms emphasised on gross margins and neglected building brands.

• Indian firms work largely on 4 verticals (industry line) compared to global majors who work in 10 verticals with much larger client base and can spread their risks thinly.

• Indian firms do not actively pursue inorganic growth of firms and are less integrated in their offerings.

• Unlike global majors Indian firms have not developed system of subcontracting out of work and undertake entire work process in-house.

• More than half of revenue of global IT major come from high-billed services like consulting and package implementation whereas Indian companies make less than one-fourth of their revenue from high-billed services.

• Most importantly, the combination of technology, services, software and research that global major possess is difficult to be matched by major Indian IT companies who generate substantial chunk of revenue only from software service activity.

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Indian Software Industry in GPN/GVC Framework…

Social Upgrading

• IT software sector largely provides well-paid jobs compared to other jobs available in India. This sector being knowledge intensive, the average starting annual salary of software professionals was around US $ 7,000 in 2009. In last one decade nominal salaries mostly experienced double digit annual growth.

• However, in 2009 this sector faced extensive job cuts and virtual freeze in nominal salary.

• In other parameters like job security, working with constant deadlines, annual leave with pay, freedom of associations etc. it fares badly with comparable jobs in other sectors.

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Thank You