Why is the shift to Wave 3 going to be difficult?

I wish I could share Mr. Sudhakar’s optimism about Indian companies just operating a switch to change their mind set to becoming a thought leader from an order taker. As I responded to him (to his remarks that I have a low opinion of Indian companies) the mind set change is not easy.

I was talking to a couple of friends in the industry, when suddenly the brainwave stuck. My thesis is that there seems to be a particular “Indian mind set” just content with supplying raw material and not getting higher in the value chain. Let me elaborate with a few historical perspectives.

For centuries, India has been selling spices to the world. But do we dominate the food market? Someone packages the spices, gives it brand power and occupies the consumer’s mind share. And the market leader in that area is McCormick that has nothing to do with growing spices.

So has it been in several areas — be it textiles, silk, pharmaceuticals and now software. The pharmaceutical industry for one, have been preoccupied with supplying bulk drugs for decades and it is now that they are slowly venturing into branded drugs albeit reluctantly.Even now most pharma companies are happy to do clinical trials for MNC drug companies, or do contract research.

It is not that the spice traders, or the textile manufacturer or the pharma industry did not intuitively understand the Wave model. They did, they saw margins under pressure, they were hungry for more profits, but they were deeply stuck in their raw material or supplier mind set. I would opine that the same is being replayed in the software services space. One can argue that globalization and the newly discovered passion for success amongst Indian entrepreneurs have changed the equation, but that’s only to a point.

Here’s what I posit: Just because one does exceedingly well in a particular position in the value chain, doesn’t guarantee that one can transition to a higher level in the value chain.

Prof Yves Doz of INSEAD has an interesting framework that explains this. He defines 3 layers of business thinking — the adaptive layer, the experiential layer and the existential layer.

The adaptive layer is the layer, where it is purely supply of commodity goods, with very little value addition, and working on a cost arbitrage or sheer availability. The availability of spices and the availability of cheaper manpower for software services fall in this category.

In the experiential layer, the challenge is to step into the shoes of the customer and create valuable products and services. The classic example is of how Nissan creates a new car for the European market. I would also consider TATA’s introduction of the Nano in this category.

The existential layer is going one level deeper — stepping into the minds of the customer. An Apple or a Nike fully understands the consumer mind — and works backwards to create products or services.

Now, if all these layers can be seen as value chains, one can understand how difficult it is to make the transitions from one layer to another. I would reckon that the ability to go from one layer to another is like crossing the chasm, and simple evolutionary mechanisms would be inadequate.

I am not in any way making a value judgment of the superiority of one layer over the other; it is just that the organizational DNA that one needs to be playing in each of the layers are vastly different and people tend to underestimate the kind of effort, energy and risk as they move from one layer to another.

Prof Yves Doz’s theory is appealing, because it captures the locus of capabilities and limitations very well.

Just as an aside: Faced with a possible slowdown in the West, Infosys’ response has been a traditional Wave 2.1 approach than the Wave 3 approach which Mr. Sudhakar passionately advocates. So has TCS with its Latin America operations.

Tags: managerial mind set, Indian IT companies, Yves Doz, thinking layers, value chain, business transitions, strategy, constraints, business model, mind set, Infosys, TCS, Nano

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Wave 3 companies business models for Indian companies

Mr. Sudhakar Ram in a new post has explored different business models for Wave 3 companies. While he has elaborated different options, he has fallen short of making a compelling case for each of the business models. I would also add that some of Indian IT services firms have played in these sand boxes for quite some time, though they haven’t made it their core business.

Secondly, if the Indian IT service firms have to make this transition, it is going to call for a transformational change in approach. It is not that the new business models are flawed, it is the transition that is going to be risky as it would be a roller coaster ride. Since Mr. Sudhakar has opened the dialog here are my comments:

IT Budget owners:

I don’t think the Indian IT service providers have the aspiration to occupy this space, and neither do they have the required ability and bandwidth to do so. Occupying this position needs a lot of lot of domain expertise, breadth and depth of functional knowledge and more importantly the propensity to take risks. Essentially, one has to assume the role of a trusted advisor to the CXO world and may be even to the Board. Even amongst global providers, barring a IBM, Accenture, EDS, CSC and a couple more, few would have the capabilities to stake a claim to become budget owners and take the responsibility to ensure alignment and business impact.

If outsourcing initiatives indeed fail, because of lack of ability of providing alignment and business impact (as Mr. Sudhakar seems to imply), despite the experience and abilities of an IBM or an EDS, I am wondering how would Indian IT service providers fix the problem. Let’s accept the fact that most outsourcing engagements fail, because of a culture clash, the promised cost savings not getting realized and various other conflicts that such a relationship often entails.

Software product providers:

Mr. Sudhakar is right on this one and a number of Indian companies — the likes of Wipro and HCL have been doing it for sometime. Wipro perhaps has a better track record in terms of doing 3rd party software product development right from the 1980s with their InstaPlan product ( a very successful project planning software of the 1980s). They would have easily done this for over 100 companies. This is no different from a typical “IT body shop” (only that it provides higher end engineering services). Yes, Indian companies do enjoy a cost advantage, but these days it is very easy for the overseas company to set up a development outfit in India. So essentially even in this case, it is just labor cost arbitrage, (maybe applied to a different sector), not defining a new line of business.

Software Solution Integrators:

Well, if the track record in the SAP or Oracle or for that matter any package implementation service is any indication to go by, most Indian IT service providers are just routinely satisfied just being SAP certified consultants and “loaning” out people for the major integrators or doing routine SAP implementation. I guess most large multinationals would still trust a IBM, Accenture, Bearing Point to do the higher end work in terms of consulting, process mapping, change management and leave the integration work to Indian companies. In fact, I had the opportunity to analyze the revenue and margin mix at a leading Indian IT service provider and found that over 70% of the revenues and 40% of the profits of the SAP practice team came from maintenance, support service and on-site placement. It is difficult to walk away from such a lucrative, low risk business and ask them to embrace a higher value added, potentially risky segment. In another instance, this Indian IT service provider has a large pool of SAP consultants in a particular area, have done over 50 projects, but still lack the higher end business process knowledge, expertise in change management, maturity in client engagement and related project management capabilities to take on a big consulting firm, despite its track record. They just can’t inspire the necessary confidence and are more more comfortable playing the secondary fiddle.

Platform services:

I agreee with Sudhakar here that it indeed is a very exciting area for Indian service companies. Some like WNS and IBM Daksh have been successful as they developed a complete platform for their respective verticals (travel and insurance respectively), but their ability to expand the platform or build alliances with other players and make it an industry standard has been found wanting. This has deterred other companies from going this route. In fact I would believe this (platform services) would eventually become the natural step in the growth plans for companies which has deep IT skills, domain expertise and BPO capabilities.

As I said in one of my earlier posts, moving beyond Wave 2 to Wave 3 or Wave 2.1 is a business imperative. I know a number of Indian IT services firms are grappling with this issue. Given that they have grown in a reasonable risk averse environment, I do not think they want to adopt something too radical and big, as they are aware they do not have the necessary leadership skills or management expertise to pull this through.

Tags: Offshoring, outsourcing, IT service providers, strategy, Indian IT companies, Wipro, WNS, IBM

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Narayana Murthy’s shares his life lessons

Narayana Murthy’s talks on various occasions have always left me inspired. In this talk at the 2007 commencement ceremony at NYU Stern, he highlights the importance of the mind set amongst many things.

He quotes psychologist Carol Dweck and clearly distinguishes between a fixed mind set and a growth mind set. One critical factor that decides whether one can cultivate the growth mind set is the ability to continuously learn — be it from one’s own experience (as Mr. Murthy highlights) or through other sources. I have often found that the courage to reflect and see the experience through multiple view points as the key ingredient in shaping one’s mind set.

Most times we analyze failures not for what it offers as a source of learning, but more often to fix things. While fixing things is necessary, we often ignore what caused the underlying failure and the kind of mind set that led to it. No wonder, sometimes we repeat the same set of mistakes. Worse, few of us even bother to analyze success, because we take it for granted that it was due to one’s abilities. We are often in a hurry to replicate it, without having understood why we succeeded in the first place.

Mr. Murthy also talks about chance events shaping one’s future, something that applies to most of us, though few of us give credit to it.

It is also amazing how he adheres to simple age old values, has his courage of his conviction and does not hesitate to take the big bold step when needed. It is the faith in oneself and of the future that act as the catalyst.

All in all, his advice is relevant not just to the students, but to leaders and managers alike.

Truly spoken as a statesman.

Tags: Narayana Murthy, Infosys, values, success, failure, learning, winning

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