When Strong partnership became hindrance to growth: An example from
Indian Software Industry, 1990-2004
Rakesh/Mishra
Abstract
This paper investigates the impact of changes in technology on the joint venture firms
in Indian Information technology (IT) Industry. It has compared the performance of
two groups of firms. One group has Joint Venture (JV) firms between Indian business
house and foreign technology leader and other has 100% owned Indian firms. The
technology change under study is increase in microprocessor power. The study
outlines the changes in the microprocessor power and its impact on the strategic
environment of the Indian IT Industry. It has looked at the strategic changes that JV
firms undertook to negotiate this technology change and its impact on revenue growth
and profitability (PAT) of the firms.
In the face of fast technology changes Joint venture firms did not grow as well as
independent firms. These joint venture companies had realized the attractiveness of
software service sector quite early but could not changeover their business focus fast
from hardware to software. From the perspective of Indian partners of JVs the study
illustrates that strong partnership will become hindrance to growth in case of fast
technological changes which throws new opportunities that cannot be pursued within
the objectives of partnership.
Introduction to Indian Information Technology Industry
Information technology (IT) industry in India is comparatively a new industry. From the data
in CMIE database we see 7 companies in the area of Information Technology existing in
1990. Some of these were Joint ventures. Joint ventures in Information technology industry
were diversification efforts of established business houses of India e.g. Tatas, Birlas and
Goenkas. After 1990 a number of new software companies were incorporated every year
(table 2). The birth rate of companies picked up pace after 1994 and between 1994 and 1999,
123 new companies were incorporated. Indian software export grew from Rs. 0.3 billion in
1990 to 475 billion in 2002-03 (Nasscom, 2004).
Indian software industry is much smaller compared to the global software industry. According
to NASSCOM forecasts, the global IT services market is likely to grow from 394.8 billion in
2000 to US$ 700.4 billion by 2005. Total software export from India is three (3) percent of the
global software export, which is miniscule.
But what has attracted world’s attention is the rate of growth of the industry. Average annual
growth rate of exports for ten years from 1991/92 to 2001/02 is 43%. In terms of Indian rupee
the export for last five years grew at CAGR (compounded annual growth rate) of 62.3
percent. Domestic software growth rate is 46.8 percent. Also this industry has been export
oriented and has grown without much support of domestic software industry, which is unique.
It has generated huge employment opportunities for educated youths of India. Software
industry has impacted the Indian industry in a deeper way by giving some new and innovative
business philosophy like stock options for employee. It has produced an example for
other industries that are desperately looking for ways to thrive in globalizing,
liberalizing Indian economy.
In its report ILO (1997) lauded the emergence of the Indian software industry as a
shining example of how third world countries can take advantage of the liberalization of
trade practices among nations and emerge as world leaders in some industries using their
strength.
Evolution of Indian software industry is interesting. In a short history it has shown the clear
picture of organizational selection.
Nature of product/Service
Indian IT Industry developed to meet the domestic IT needs of the country but more
importantly software development capability of Indian technical manpower allowed it to
supplement the Information technology Industry in US. Initially firms came to meet hardware
demand like Tata Unisys, Digital, ICIM Fujitsu etc. But hardware demand started getting met
largely by imports after 1996, due to the reduced import duty. There were firms which were
fulfilling the software demand in India and overseas. Firms producing software packages in
India is negligible. What most of the firms focused on was export of software development
services. Due to the country advantage this business became so profitable that most of the
firms became primarily focused on providing software services to US and other overseas
market. Today is a predominantly service industry providing software development services.
It is also trying to provide other service like Business process outsourcing etc to its clients.
Hardware products manufacturing is limited to low-tech Personal computer and Printers and
met to a large extent by grey market players.
2
Growth of processing power of microprocessor
In 1964 computers heralded into a new era. This became possible due to the Integrated
circuits technology which used semiconductors to miniaturize transistors. Now thousands of
tiny transistors could be put on small silicon chips. Miniaturization not only made the
components take less space, but it also made it faster and economical as far as energy
consumption was concerned.
These third generation computers saw an increase in the memory up to 2 megabytes (MB) and
processing speed of up to 5 MIPS. This increase in processing power made it possible for
computers to use operating system to coordinate the working of its various components, CPU
printers and other devices. Human operators were no longer needed. Monitors and keyboards
were introduced to replace punch cards. These computers were designed as upgradeable.
Third generation computers were accompanied by the software that people could use without
extensive training. Programming languages like RPG and Pascal were developed to help
programming. Computers became cheap and easy to use. These computers found a large role
in businesses.
Fourth generation of computers started in 1980 and is continuing since then. These
computers use very large scale integrated (VLSI) technology and has 200,000 to over 3
million circuits per chip. Since 1980 microprocessors speed has increased from 5 MHz to over
200 MHz and memory capacity has increased from 2MB to 4GB. Cost of processing has been
continuously falling for all types of computers Mainframe, Mini and Micro. Cost of
performing 100,000 calculations have plunged from several dollars in the 1950s to less than
$0.00004 in 1995 and still going down further. Today computers have become household
goods. The power of computers that took one large room is now available in a small desktop.
These computers have found widespread use in businesses, governments and households.
Fourth generation computers lifted the limitation of processing power and storing capacity.
This gave a fillip to software demand. Now people could develop software to meet their need
without bothering about the processing power of the computers. This fuelled innovation in the
software and created a huge demand for services for developing and maintaining the software.
Impact of the technology change
Till 1969 software used to come bundled with the hardware but in late 1960s IBM had
realized the huge potential of software and beginning 1st January 1970 IBM started charging
for software separately. This invited many software players who could develop software
economically for the hardware supplied by the manufacturers. As a result total software
industry revenue grew from US$2.5 Bn in 1979 to US$25 Bn in 1985 and continued growing
astronomically.
Now it was the software that was limiting the use of hardware. Software development was
time consuming and labor intensive. The need for programmers who will develop and
maintain the information system was increasing rapidly for US government projects and US
industry. Information system was becoming a crucial input for the efficiency and effectiveness
of firms. The need for programmers outstripped the supply very soon and projects started
experiencing delays due to unavailability of programming professionals. With the
standardization of job activities, programming languages and hardware environment the
technology and skills within the software development became standardized. This made it
easy for projects to source people from outside even from other countries (Greenbaum 1976,
Kraft 1979). TCS tried to exploit this opportunity by starting its software export in 1974. It
3
also helped TCS meet its export obligations to import hardware. This opportunity of providing
onsite programming services grew as high quality human resource became available for
programming job. 1980s saw a large number of computer hardware finding its way in India
and this increased the availability of trained software programmers.
Firms pursuing IT opportunities with hardware vendor partnership
As early as 1960 India was identified as a manufacturing base for mainframe computers by
IBM and ICL a British mainframe manufacturer. IBM wanted to develop India as a
manufacturing location for its businesses in Eastern hemisphere but due to government’s
policy of self-reliance, it did not happen. India lost a big opportunity to East Asian countries
like Taiwan, South Korea and Singapore. And it could not develop itself as a hardware
manufacturing location ever after. 1980 saw several joint ventures between Indian companies
and hardware multinationals. From the data taken from CMIE database we get following
companies existing in 1989 in software industry: CMC Ltd., Digital globalsoft Ltd., P S I
Data systems Ltd., Tata Infotech Ltd., Tata Sons Ltd. (Tata Consultancy Services), Zensar
technologies Ltd, Wipro, International data management Ltd. and Abacus Computers Ltd.
Most of these companies were diversification attempts of big established business houses into
growing hardware Industry.
- Tata Burroughs was established in 1977 which became Tata Unisys Ltd in 1987. 100%
export oriented computer peripheral manufacturer. Unisys being a partner and major
customer. Unisys 40%, Tata 40%
- Digital Equipment Corporation (India) Ltd. Incorporated in 1988. Focused on hardware
business DEC (US) 40% Hinditron 35%.
- ICIM Fujitsu Ltd. started in 1983 as a JV between International computers (UK), Fujitsu
(Japan), and RPG group. Fujitsu ICL was having 40% and RPG group had 40% stake.
Focused on producing line printers and mini/micro computers
- PSI Data systems started as an Aditya Birla group company in 1973 to manufacture
products for telecom and IT sector. In 1988 group Bull a French hardware company took
26% ownership in equity that increased to 50.35% in 1998. Group bull designs and develops
servers and software. Bull was a major investor, Customer and partner. More than half of
the business used to come from Bull Corporation.
Firms pursuing IT opportunity Independently
- CMC Ltd. came to maintain the IBM computer installation in 1975 under deptt. Of
electronics. Before its divestment in 2001 to Tata Sons Ltd. government of India was
majority stakeholder in the company up to 77%. After divestment it is a subsidiary of TCS
ltd. and Tata sons holds 51% of its equity.
- Tata Sons Ltd. (Tata Consultancy Services) was pursuing software opportunities. TCS
started its software service export in 1974. It was a 100% owned subsidiary of Tata Sons
Ltd till 2004. It is the largest software company in India and largest service exporter.
- WIPRO Ltd. Western India vegetable products limited was renamed Wipro ltd. in 1984.
Slowly Wipro shifted its focus from other businesses to providing Information technology
services globally. Actually the diversification took place in 1980. Initially it was also in
manufacturing of hardware for Information technology Industry. But due to market pressure
it changed its focus to software services and in 1992 it went global with its global IT
services division.
4
Period of confusion and Experimentation in business focus (1990-91)
No new companies joined the Industry in 1990. Among the new firms starting in 1991 most
of them were focused on hardware business but were niche players. They were collaborating
with niche hardware players and do software business related to the hardware partner.
Mahindra British telecom and Tata Elxi were Joint Ventures.
Figure 1: New Entrants in 1991 and their business focus
Global Tele Ltd
I C D S Ltd.
Mahindra British
Telecom Ltd.
Tata Elxi Ltd.
Network Engineering and IT Services
NBFC also in Hotel Business, diversification in Software
Telecom Software and Services
Hardware manufacturer and System Integrator for SGI
hardware
Lan Eseda Inds. Ltd. Software
Rolta India Ltd.
Manufactures work servers/ hardware and software.
Computer graphics, mapping and engineering software
In 1991 Information technology Industry in India IT industry in India was populated with
firms having various focuses. Some firms had their origin in hardware business that they
had started with collaboration of foreign hardware manufacturers. Though they had changed
their focus to exploit the new software opportunity but to a large extent previous business
focus was still there. Some of the firms had their origin in the domestic market as
management consultants, large company data processing centers, ex-staff of local IT
Company. These IT companies were focused on domestic software market. And, there were
firms focused on software exports.
Till 1990-91 this confusion remained and experimentation with business focus continued.
Looking at the performance of these two clusters in 1990 we see that –
Figure 2: Performance of firms in 1990
Companies
Revenue
%PAT
Business Focus
Tata Unisys
391.2
(80,310)
131.4
Hardware
supplier)
Digital India
416
-3.89
Hardware
ICIM Fujitsu
619.1
1.95
Hardware
Companies
Revenue
%PAT
& software
(captive
Business Focus
TCS
882.1
10.12 Software domestic & Export
Infosys
Not Avlbl
Software Export
Mastek
Not Avlbl
Software domestic
5
Figure 3: Performance of firms in 1991
Companies Revenue
Tata Unisys
527.1
(170,350)
% Rev Growth %PAT
25.78
12.79
Business Focus
Hardware
&
software
(captive supplier)
Digital India
631.4
34.11
3.79
Hardware
ICIM Fujitsu
792.5
28.00
3.62
Hardware
Companies
Revenue
% Rev Growth %PAT
TCS
1.2904Bn 46.29
13.48
Infosys
50
Not Avlbl Software Export
Mastek
Not Avlbl
Not Avlbl Software domestic
-
-
Business Focus
Software domestic & Export
Profitability of purely hardware focused companies like Digital India and ICIM Fujitsu
is very low (approximately 4%). Though they are showing high revenue growth
Firm like Tata Unisys, that has realized the software business opportunity and has
started providing software services though constrained by the objectives of the Joint
Venture are showing good profitability and good revenue growth
Firms focused on software business like TCS is also showing good profitability and
good revenue growth.
Era of Mushrooming (1992-1996)
Five (5) new companies joined in 1992 and nine new companies joined in 1993. All the
companies coming after 1991 had clear focus on software market. Infosys was focused on
software export and Mastek was focused on domestic software market. NIIT was focused on
training and education for software professional. Cauvery and Datasoft were also software
focused. Cauvery got badly affected by the collapse of poonam chambers in Bombay and
since then did not recover. Given below is the table showing business focus of entrant firms
to the IT industry –
Entrants in 1992
All the five firms have clear focus on software. By this time software export business has
emerged clear winner
Figure 4: New Entrants in 1991 and their business focus
Cauvery Software Engg Systems Software. Company got hit by Natural calamity.
Ltd.
Infosys Technologies Ltd.
Software
Mastek Ltd.
Software
NIIT Ltd.
Software training
Datasoft application software(I) Ltd. Software
6
Entrants in 1993
All the firms have clear focus on software. Henceforth all the firms coming in IT industry
were focused on software business and predominantly export business.
Figure 5: New Entrants in 1991 and their business focus
D S Q Software Ltd.
Kirloskar Computer Services Ltd.
Software
Software
Mindteck(India) Ltd.
Mphasis BFL Ltd.
S Q L Star International Ltd.
Silverline Technologies Ltd.
Svam software Ltd.
Vakranghee softwares ltd.
Software
Software financial Industry
Software education
Software
Software
Restructured for software. Formerly in financial and
leasing
Software
R S Software (India) Ltd.
Looking at the business focus of firms joining the industry in 1992 and 1993 we see that
between software opportunity and hardware opportunity software export market emerged
clear winner by 1992.
Unsatisfied export demand was readily available to be tapped. Competition was nonexistent. Marketing was not a problem. ‘Bodyshopping’ was a business with little
investment, less risk and no-lag period in receiving payments. Indian programmers were
well-accepted commodity and all a firm needed to do was to hire programmers. 1980s saw a
large number of computer hardware finding its way in India and this had increased the
availability of trained software programmers. Small firms had low overhead costs and were
more profitable than large companies till the competition increased due to large number of
new firms entering the industry. Export of software services was an established moneymaking value chain.
Entrepreneurial firms mushroomed. Between 1992-1996 eighty five (85) new companies
joined the industry. Graph below shows the number of firms joining the industry yearwise –
Figure 6: New Entrants trend in Indian IT Industry
No. of f irms in the Industry
No. of f irms in the
Industry
120
100
80
60
40
20
0
Ye ar
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
No. of Companies
160
140
7
Figure 7: Number of Companies joining the industry year wise
Year of Starting
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Number of new
companies
1
6
0
6
5
9
38
37
28
10
15
58
35
12
0
-28
-88
Total Number
of companies
1
7
7
13
18
27
65
102
130
140
155
213
248
260
260
232
144
Source: CMIE database
Structure of the IT Industry in 1996
Cluster analysis was performed using Revenue as the first variable keeping the number of
clusters as 3(Three). Result of this cluster analysis is presented in the Table below.
Final Cluster Centers
Cluster
1
2
3
Revenue(in Million INR)
11613.1
2803.8
154.2
No. of firms in the cluster
1
7
104
Figure 7: Industry structure in 1996
Indus try Structure Graph
Series 1
120
No. of firms
100
80
60
40
20
0
154
2804
11613
Revenue Centre(in Million INR)
Source: CMIE database
8
Looking at the graph we see that more than 90 percent of the firms are of revenue around
1.3% of the largest revenue cluster centre. Less than 7 percent of the firms are of the revenue
around 24% of the largest firm clusters. Industry is marked by few large players and a large
number of small players which mushroomed to exploit the new staff augmentation
opportunity in software services.
Most of these small companies are highly profitable. Their profit is much higher than the
bigger companies. But the profitability is reducing gradually. It was due to the software
project-staffing model of business that these companies followed. This required very little
investment and had no entry barrier. The software service industry (project staffing services)
industry was giving extra-normal profit without asking for any investment. This attracted a
large number of players at a very fast rate. This resulted in competition and reduced
profitability of the firms in this segment. Profitability of this group (smallest revenue), which
was over 20% in 1994, had fallen to 8% in 1996.
Looking at these two groups we see that hardware business is showing low profitability. Joint
venture firms that are hardware focused have shown very low profitability and at times losses.
Digital India has remained hardware focused and though they have shown good revenue
growth during these years but has shown very poor profitability.
In an attempt to exploit the growing software business opportunity 1994 ICIM Fujitsu
merged with its subsidiary Fujitsu ICIM Software technologies and starts its software
business. Fujitsu stake is raised to 50%. Software operations of the firm is small but profitable
compared to the hardware business which big in revenue and experiencing negative
profitability. In case of Tata Unisys Indian Partner wants to exploit growing software exports
opportunity but American company is primarily focused on selling hardware. As a result
Unisys has been able to export hardware to India and uses software export abilities of the
company to promote hardware sales overseas. Revenue is earned from hardware and software
operations both (Heeks, 1996). In 1996 revenue earned from software business, 1180 Million
INR , is double of the hardware business revenue, 530 Million INR. As a result firm has seen
profitability of around 10% which is less compared to the pure software focused firms but
better than hardware focused firms like Digital India and ICIM Fujitsu. Tata Unisys has been
captive supplier of the software services and is not able to pursue the software service
opportunity independent of Unisys platform.
Firms pursuing IT opportunity independently have done well both in terms of profitability and
revenue growth. Profitability (Profit after tax) of the firms have been around 20% and revenue
growth around 40%.
9
Graphs below show the trend of profitability and revenue growth during the period of
mushrooming (1992-1996).
Figure 8: Revenue growth year wise (1992-1996)
TUL
Revenue growth Yearwise
DIGI
Revenue(in Million INR)
7000
ICIM
6000
TCS
5000
4000
INFY
3000
MAST
EK
2000
1000
0
1992
1993
1994
1995
1996
Year
Source: CMIE database
Figure 9: % Profitability year wise (1992-1996)
TUL
% profitability yearw ise
DIGI
% Profit after Tax
40
ICIM
30
TCS
20
INFY
10
MASTE
K
0
1992
1993
1994
1995
1996
-10
-20
-30
Year
Source: CMIE database
10
Government’s Policy changes and its effect on Hardware business
The computer technology which had developed in US as fourth generation computers had
affected Indian Industry scenario as well. Once the cost of microprocessor came down
Domestic market size ballooned. Computer hardware demand in the domestic market picked
up especially after the growth of software export service business. Demand for computers also
came from domestic companies like banks financial institutions and lately from households.
Computer hardware consumption grew from 2.12 Billion in 1989 to 28.25 Billion in 2003.
Computer Hardware production was an emerging area. Computer hardware and peripheral
production rose from 2.32 Billion in 1989 to 12.21 Billion in 1997. Though the hardware
technology initially affected Indian industry mostly by relocating the manufacturing process
of multinationals to India but this momentum was not sustained. Lack of infrastructure,
unfavorable duty regimes and lack of incentive hindered the growth of India as a
manufacturing location. Post 1997 this demand was mostly met by imports. In fact production
reduced from 12.21 Billion in 1997 to 6.67 Billion in 2002 and imports rose from 0.09 billion
in 1996 to 17.04 billion in 2003. Whatever growth took place was in the low technology rate
of PC and printer manufacturing. Multinational majors are also not interested in
manufacturing the complete set of hardware in India, they are more in assembling of the same.
Graph below shows the trend in Computer Hardware & Peripheral Production, Imports, Total
Supply, Exports and Consumption.
Figure 10: Trend in Computer hardware and Peripheral (1988-2003)
P ro ductio n
H/W Industry dem and
Production/Consumption In Million INR
Impo rts
35000
To tal
Supply
30000
Expo rts
25000
Co nsumpti
on
20000
15000
10000
5000
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
0
Year
Source: CMIE Database
11
Period of increasing market Concentration (1997-2000)
Firms were grouped based on size (using revenue) by the cluster analysis. Revenue (in Million
rupees) and profitability (%) of all the firms for each year of the period were taken as input in
the SPSS software. Cluster analysis was performed using Revenue as the first variable and
profitability (%) as the second variable keeping the number of clusters as 3 (Three).
Profitability and revenue growth trend of these clusters were studied during this period.
Opposite to the era of mushrooming in this period we find that –



By 1996 no. of firms had increased to 112 compared to 7 in 1990. Most of these being
small entrepreneurial type. Rivalry among existing players had become intense. After
1996 smaller companies had become unprofitable. They are somehow earning just
enough to meet their expenses. Many of them are incurring losses. With no entry
barrier this segment is facing increasing no. of new firms entering the market and
increasing competition due to this.
Large companies had grown larger during the mushrooming era. In this era they
became more profitable than small companies as well. They continued to grow in their
size. After having tested Indian vendors successfully for almost a decade now the
clients wanted to do bigger business with these companies in which scale mattered and
bigger companies were preferred by client who could scale up in future and act like a
partner than mere suppliers of software services (Bhatnagar, 1997).
Reputation also became deciding criteria for indian firms to successfully compete in
the market. Size, age and reliable production processes made firms made them more
competitive. Thus market became favorable to the big companies (Banerjee, 2000).
Industry Structure in 2000
Final Cluster Centers
Cluster
1
342.9
117
2
3
Revenue
22463.8
5250.0
No. of firms in the
2
11
group
Looking at the table we see that 90 percent of the firms are of revenue around 1.5% of the
largest revenue cluster centre. 8.5 percent of the firms are of the revenue around 24% of the
largest firm clusters.
Looking at the two groups we see that hardware business continues to show low profitability.
Joint venture firms that are hardware focused have shown very low profitability compared to
their software business or independent software companies.
Digital India has remained hardware focused till 1999 and though they have shown good
revenue growth during 1996-1999 but has shown very poor profitability. It Sells off the
hardware business to Compaq India in 1999 and becomes globally focused software company.
Keeping in mind the business profile in 2001 the name is changed to Digital globalsoft Ltd.
Hewlett Packard is the main customer of the software services and gives 85% of the business
of the company. The profitability of the firm doubles to over 20% compared to earlier year
profitability after its business gets restructured to focus on software services although on a
12
reduced base. ICIM Fujitsu sees growth of its software business and decline of its hardware
business and in 1998 its software revenue surpasses its hardware revenue. Hardware continues
to be very low in profitability compared to its software business. In 2000 Fujitsu ICIM sells its
hardware business and on 16th August 2001 merges with its subsidiary Zensar technologies
and focuses completely on software business. In case of Tata Unisys Unisys divests their
40% stake in the company to Tata group in 1997. Company is Re-positioned as a total systems
integrator, and restructuring in terms of geographical location, lines of business and
technology. Post-Unisys, the company's focus is gradually shifting to software and services
and started targeting business opportunities other than those from Unisys constituents.
Company is renamed as Tata Infotech (TIL). Around 80 per cent of TIL's exports are through
the Unisys Corporation. Loss of partnership costs heavily to the firm and year 2000 onwards it
looses both on the revenue growth and profitability. Its profit is nearly around 5%,
stupendously low compared to that of similar size software firms (around 30%). Graphs Given
below shows the changes in the software and hardware business of these three firms since
1990.
Figure 11: Changes in the Hardware and Software business of Tata Infotech Limited (1990-2003)
Revenue from H/W and S/W
S/W Revenue
H/W revenue
Revenue(in Million INR)
6000
5000
4000
3000
2000
1000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
13
Figure 12: Changes in the Hardware and Software business of ICIM Fujitsu Limited (1990-2003)
ICIM FUJITSU:Rev from H/W and S/W
S/W Revenue
H/W Revenue
1800
Revenue(in Million INR)
1600
1400
1200
1000
800
600
400
200
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
0
Year
Figure 13: Changes in the Hardware and Software business of Digital Globalsoft Limited (19902003)
Digital Globalsoft
S/W revenue
4500
4000
3500
3000
2500
2000
1500
1000
500
0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Revenue( in Million INR)
H/W Revenue
Year
14
Firms pursuing IT opportunity independently have done well both in terms of profitability and
revenue growth. Profitability (Profit after tax) of the firms has been increasing and has
hovered around 30%.
Graphs below show the trend of profitability and revenue growth during the period of
mushrooming (1997-2000).
Figure 14: Revenue growth year wise (1997-2000)
6
TUL
Revenue grow th yearw ise
DIGI
Revenue( in Million INR)
25000
ICIM
TCS
20000
INFY
15000
MAST
EK
10000
5000
0
1997
1998
1999
2000
Year
Source: CMIE database
Figure 15: % Profitability year wise (1997-2000)
TUL
% Profitability yearwise
DIGI
ICIM
35
TCS
% Profit after tax
30
INFY
25
MASTEK
20
15
10
5
0
1997
1998
1999
2000
Year
15
Era of Offshore development (2001-2003)
Year 2000 was a watershed year for Indian software industry. Slowdown in US economy
reduced the IT budgets of the companies. New development project reduced and customer
became cost conscious. In this new situation it became necessary to reduce the cost. On-site
margin was reduced due to increased competition. Offshore delivery model could solve the
price pressure problem. But offshore model was feasible only for large projects and only with
reliable suppliers.
Companies that were small could not compete for offshore work. Size and Number of years in
business determined the reputation (Banerjee, 2000). Only companies like Infosys, Wipro and
Satyam and TCS were reputed for overseas clients. Most of the onsite jobs were also linked to
the offshore jobs. Smaller companies not only did not get offshore job but lost on the on-site
jobs as well (Vandrewala, 2002).
Bigger player switched over to new mode of ‘offshore development model’ to beat the billing
rate pressure. After having tested Indian vendors successfully for almost a decade now the
clients wanted to do bigger business with these companies in which scale mattered and bigger
companies were preferred by the client who could scale up in future and act like a partner than
mere suppliers of software services (Bhatnagar, 1997). New delivery model made bigger
firms more efficient compared to smaller firms who could provide services on-site. Client
relationship helped this process further.
This situation was better for niche players like SISL, Rolta, Aftek Infosys etc. They continued
to have market power due to their specialized offerings or due to their strong parental support
in marketing. Companies like Digital globalsoft was little affected due to its captive market,
its own parent company.
Looking at the two groups we see that ‘reborn’ software is showing interesting trends. By
2000 firms in both the groups have refocused and are completely software business firms.
Digital Globalsoft (earlier Digital India) has become globally focused software company. It
has tried to diversify its business to other than parent firms and earns close to 15% of its
revenue from non-parent business now. Keeping in mind the business profile in 2001 the
name was changed to Digital globalsoft ltd. After mergers of parent company digital and
compaq in US Hewlett Packard of USA is the major equity holder and customer. More than
85% of its revenue it earns by providing software services to its parent company (CMIE
database).
This partnership has proved beneficial for the firm and it has shown good growth in its
revenue and profitability. The growth in revenue is best among the firms in both the groups.
Profitability is also best among the firms in the sample. It is a captive software supplier of the
Hewlett Packard USA. This strong partnership is allowing it the expansion of its operation
and high profitability. Zensar Technologies (earlier ICIM Fujitsu) is also a joint venture.
Today RPG group and Fujitsu services each hold 39% equity in the company. It has also
shown good growth in revenue in profitability. In case of Tata Infotech (earlier Tata
Unisys) the partnership is over. Lack of partnership is making it difficult to win contracts. Its
revenue has stagnated and profitability is showing dismal performance. TIL seems to have
met the worst fate earlier partnership restricted from targeting business opportunity other than
from Unisys constituents and now when partnership is desired to take work offshore
partnership is lost(Afuah, 2001).
16
Looking at the independent software companies we see that bigger firms are doing better than
smaller companies. TCS and Infosys the larger two of the set continues to show good revenue
growth and profitability compared to the smaller domestic business focused Mastek. It has
technical, strategic and marketing alliances with Adobe systems, Aegis analytical, Microsoft,
IBM, Oracle and Sun Microsystems etc. It acts as a value-added reseller for many of these
companies’ products. It also provides comprehensive set of services and solutions on the
partner’s technologies and products. Similarly Infosys In an effort to offer value to its
customers has built strong relationships with leading consulting companies, strong regional
companies, product companies and niche players. It has built many best-in-class alliances
with product and services companies.
Graphs below show the trend of profitability and revenue growth during the period of
mushrooming (2001-2004).
Figure 16: Revenue growth year wise (2001-2004)
TUL
Revenue grow th Yearw ise
DIGI
Revenue(in Million INR)
70000
60000
ICIM
50000
TCS
40000
INFY
30000
MAST
EK
20000
10000
0
2001
2002
2003
2004
Year
Source: CMIE database
17
Figure 17: % Profitability year wise (2001-2004)
TUL
% Profitability yearw ise
DIGI
40
ICIM
% Profit after Tax
35
30
TCS
25
INFY
20
MASTEK
15
10
5
0
2001
2002
2003
2004
Year
Source: CMIE database
18
Summary
With time Software export from India was becoming more attractive. Companies in Indian
Information Technology industry were trying to change their focus to exploit this opportunity.
Software opportunities were de-linked from the hardware manufacturers in 1970 by IBM.
Firms that were joint ventures between Indian counterpart and a foreign hardware technology
leader also realized the software development competence that India had. With large number
of English speaking technical graduates it was easier to make money in software business in
India than hardware business. Especially the Indian counterpart was more eager to change
over to the software service export business like Tata Unisys. This change in the strategic
environment caused by the technology change was “Radical” in the sense that they made the
old skills and capabilities obsolete and demanded the firms to make substantial investment for
negotiating this change. These changes made the incumbent firms inefficient and favored new
entrants with software export focus. The change process got delayed in case of joint ventures
as changes were not win-win for both the partners. Incumbent JV firms continued to use
second best solution in the changed environment which was agreeable to both the partners.
They tried to go into software business slowly. In a market place characterized by high
competition these incumbent JV firms started lagging the software export focused entrant’s
performance. These Incumbent JVs either went out of market or made the investment to
negotiate the change very late. By this time they hade lost the market leadership to the new
entrants (Christensen, 1997).
Given below is the table showing top ten firms of the Indian Information technology Industry
between 1990-2004. It shows the changes in market leadership in the Indian Information
Technology Industry.
Figure 18: Top 10 Companies (Revenue) of Indian Software Industry
Rank
1
1991
CMC
1993
Tata
Sons
Wipro
Ltd.
1995
Wipro
Ltd.
Tata
Sons
1997
1999
2000
2001
2003
2004
Wipro Ltd.
Tata Sons
Wipro Ltd.
Wipro Ltd.
Tata Sons
Tata Sons
Tata Sons
Wipro Ltd.
Tata Sons
Tata Sons
Wipro Ltd.
G T L
Ltd.
G T L Ltd.
N I I T Ltd.
Infosys
Technologies
Zensar
Digital
N I I T Ltd.
Digital
Zensar
Digital
N I I T Ltd.
Satyam
Computer
Infosys
Technologies
Satyam
Computer
Digital
G T L Ltd.
Pentamedia
Graphics Ltd.
Infosys
Technologies
Satyam
Computer
Wipro
Infosys
Technologi
es
Satyam
Computer
Tata
Sons
CMC
Zensar
G T L Ltd.
Tata
Infotech
Tata
Infotech
NIIT
ICDS
GTL
CMC
N I I T
Ltd.
Tata
Infotech
ICDS
Lan
Eseda
C M C Ltd.
Tata
Infotech
Hexaware
Technologi
es
Pentamedia
Graphics
Ltd.
Siemens
Information
Systems
C M C Ltd.
MahindraBritish
Telecom
Wipro
2
3
4
5
G T L Ltd.
C M C Ltd.
MahindraBritish
Telecom
I-Flex
Solutions
Pentamedia
Graphics Ltd.
I-Flex
Solutions
Digital
Globalsoft
C M C Ltd.
C M C Ltd.
Tata Infotech
Tata
Infotech
Tata Infotech
Tata Infotech
Digital
Polaris
Software
6
7
8
P S
Data
I
9
Lan
Eseda
10
Lan
GTL
Eseda
ICDS
Source: CMIE database
Infosys
Technologies
Tata Infotech
G T L Ltd.
D
S
Q
Software Ltd.
N I I T Ltd.
Pentasoft
Technologies
Satyam
Computer
Hexaware
Technologies
Hexaware
Technologies
C M C Ltd.
19
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