Saturday, June 17, 2006

Software service - disruptive innovation

Think software and the names that spring to our mind are the Microsofts, the IBMs, perhaps the Yahoos and the Googles. Also in the same league are the SAPs, the Oracles and the like. Somehow, except for the stock market, there is a huge set of people out there who still dont think that the IT services model is any good because it does not have a product, or has too few products. They would like to see perhaps an Infosys OS or a Wipro Office or perhaps a TCS search engine - which is when they will accept that these are software companies. But, few, if any will give credit to these companies to creating a disruptive innovation model right under the very noses of the biggies like EDS, Accentures and the consultants. But the truth is, that is what they have done. A classic David who has given the Goliaths a run for their money.

If one analysed this using the five forces model by Porter, heres what you would get (or thereabouts). From a country perspective, prior to the launch of the "services as a business model", there was very little going for the IT services industry. It was mostly composed of bodyshoppers who sent out people on various visas to the US. To take the example of perhaps 20 years ago, they did the same work that "travel agents" did (and still do) for sending people to the Gulf. Somewhere along the way, companies realized that they could do more than just send people to the US as staff. They focussed on getting entire projects, Y2K was a great opportunity to do so and then just thought bigger and bigger.

Theoretically those visa providers to the Gulf could have evolved as low cost infrastructure service providers and morphed into a big construction firm back then, but then they werent really used to looking beyond their noses.

At that time, the threat of competition was virtually nil. Because, nobody viewed them as competition, they were partners. They helped the Accentures and the McKinseys implement the IT solutions. They helped companies plan for fluctuations in staffing; staffing without staff on their roles.

The threat of substitutes, again was marginal, since what would you really substitute a low cost service with - which was their basic premise? Also remember Y2K, when everybody needed people to tweak the 2 digit date with a 4 digit one.

Buyers could never get together and bargin, except for a large company like GE which gave huge chunks of their work to competing providers. Even today departments in many large companies dole out small projects unknown to each other. Ditto for supplier power, since there is no "supplier" for this industry per se.

Substitutes was another of the possibilities that was low, since ITES was emerging as a substitute to inferior bodyshopping/contracting without the headaches.

Rivalry among the players was few and far in the early days, since the market was so large, that there was (and still is) enough space for all the players.

So, while sections of the media berated the IT coolie model, these companies began to gain more businesses, make more money and get listed on some prestigious exchanges. INFY , WIT for one. As time went on, the Accentures realized that these guys are getting smarter and in the guise of IT projects are slowly learning the tricks of "reengineering", "business processes" and were stealing business from under their nose. The time when the Accentures came to set up their own centres in India was really the acknowledgement that this model is really a model and not a short term cost thing. So, for those who are looking for disruptive business models, take a look at the Indian IT servics industry and it is as disruptive as it can get.

Even today, the industry is relatively stable, though I foresee that in future, the range of substitutes available for the service industry will increase by leaps and bounds. Processing and software deployment could be automated, so the days of having a few hundred people on call to do maintenance work will be numbered soon. The companies seem awake to the future and are doing a lot more things than just rest on their laurels. They also seem to be inspiring newer entrpeneurs.

But while we wait for those days, our companies are doing more as can be seen in the set of acquisitions they have been making. So, hopefully, over the next few years, we will see the software service companies grow organically or inorganically into something else or into something more. What? Guesses welcome.

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