The Service Game is Over

Lot of young enthusiastic to be entrepreneurs come to seek advice and funding on some core service capability, to develop in India and service the global market. Develop in a Rupee market, sell in Dollars, Euro or Yen. They are also very motivated by the fact that there are no taxes on foreign exchange earnings. However little do they realise that this market has become very mature, dominated by big players, with high barriers of entry for new players. Lets analyze, by dividing the evolution of the Indian software industry in 3-4 stages.

Stage 1, the 70s early 80s: The big 5 all started more that 25 years ago, when the U.S. and India were connected on very high cost telecommunication lines, Salaries in India were 5-7% of U.S. costs, it was viable to send someone offshore to customers site, the world then was a much larger place. The margins were superb and the fact you can develop software in India was a new concept. Many of the fortune 500 had many Indian employees but few had developed or outsourced to India.

Stage 2, 90s to the start of dot com hysteria in 96 : As costs increased, the big 5, in parallel acquired customers, workforce and an expanding sales team. As projects got delivered successfully, customer relationships became deeper and reputation became more solid with every project delivered. Over time, they fine tuned their processes and delivery with every passing year and projects delivered. By this time, most fortune 500 companies had some experience in dealing with Indian software companies. This was the last time any software company of any appreciable size today was started.

Stage 3, 96 to 2000, the dotcom boom : The reputation of India and Indians sky rocketed. What mattered for companies was fast growth, profits, margins did not and it was all about page views and eye balls. The other big sword hanging over fortune 500 was the issue of Y2K. Indian companies milked both these global trends and flourished. Even a 2nd class commerce graduate, who spoke some English, had multiple job offers. Any new startup in Silicon Valley had an Indian in the founding team. The India story was no longer a novel story. Salaries sky rocketed, 40-50%, yoy

Stage 4 : 2000 to now : There was a depression in the software industry with Indian companies posting flat growth for 2 years. Remember Infosys froze increments for two years and did not replace attrition. The VC industry was recovering from the deep wounds of the dot com bust. These two years were very critical where American industry was looking at ways to cut costs and VCs were looking at new ways to stretch the dollar. The big 5 kept investing in expanding, at the same time maintaining the relationships. Two new trends evolved, Business Process Out sourcing and stretching the dollar with off shore software development. The big 5 had no differentiation in their services, it was only number of people and deep customer relationships. Starting salaries by now were 30% of U.S., gap narrowed with seniority and merged at top management level.

My conclusion, the big 5 can no longer differentiate amongst themselves, salaries are increasing 25-30% which is already 30% of U.S. salaries, the cost to company per salesman is 100-150K per year and long sales cycles. For someone starting from scratch, barrier of what is mentioned above, plus zero reputation, no relationships, no base for references and referrals. So guys please look else where for new opportunities. It is not about high risk, it is a non starter.

Sharad Sharma responds on Orbit Change with, No, Entrepreneurship in IT Services is not Over!

Let me clarify, Software as a Service is not the Service, the big 5, have built their business to what it is today. Software as a Service is Application Developments dispensed via the web.

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