Wednesday, August 24, 2005

The need for a quality bias

In India everything seems to happen four years later than you expect it to happen. I'm trying to figure out if there is a way to speed things up. The all too often discussed reasons of red-tapism, inefficiencies of our legal system and ineffectiveness of our governmental agencies are becoming a rather boring and fruitless part of social conversations in our country. I don't want to be part of such conversations.
I think it's this bias towards cheaper products and services that seems to slow down the economy, making it poorer. It's a cycle that feeds low quality and perpetuates poverty. Now I'm not suggesting that the guy asking for a higher price for his services is necessarily a better vendor but the guy who made a lower offer had probably overlooked contingencies or factored in an excess amount of luck in drafting his offer. Cash flow problems that result from unaccounted contingencies lead to delays in implementing projects and sometimes into projects that never end. I can hardly think of a project in India that finished anywhere close to the scheduled date and within budget. I have no objections to buying products cheaply but excessive focus on costs can make us victims of low quality. Everybody is for quality but provided it is also at the cheapest possible price. Businesses ending up buying low quality products because of their excessive focus on the purchase price may end up with a) Lesser number of customers b) Cost overruns due to frequent maintenance or replacements and c) A higher cost in supporting and selling it's products and services. Gary Hamel and C K Prahalad in their book 'Competing for the Future' warn businesses of lower profitability from- 'A downward spiral of customer expectation where, ever poorer service begets ever lower expectations and ever more price sensitivity.' Most people trying to reduce cost by focusing on the purchase price, end up with contrary results. Excessive focus on purchase price has kept higher quality vendors away from the Indian market and resulted in a drain of high quality professionals to markets where quality is better appreciated. So the Indian market now has abundance of low quality products and service vendors willing to work at lower margins. Lower margins in turn leads to – a) Poor investments in product improvements b) Use of capital equipment for longer than their recommended life span c) Under budgeting for planned and capital expenditures, leading to higher unplanned and unexpected expenditures in maintenance and emergency replacements. So these vendors who start out as low cost alternatives eventually pad up their price to cover for all the unexpected maintenance and repairs. That's a double whammy - low quality at high costs. True sometimes what starts out as poor quality, in time improves as has been the case for Japanese and Korean products that started at the lower end of the product sophistication and moved up to occupy the top slots. But that happens only when there is overriding quality vision driving businesses. In the absence of such a vision, external market conditions play an important role in determining the fate of a business. Right now the Indian market place breeds low quality at high cost. That's bad news for Indian businesses in a rapidly integrating global marketplace. Unless we as businesses and consumers change our buying habits, Indian products and services are likely to fall into a mediocrity trap. Quality doesn't necessarily mean high costs; in fact many times it means lower costs. The paradox is that the lower cost may be hidden beneath a higher initial purchase price.

Linux software needs a friendly face

Microsoft has switched it's battle tactics from the not so successful one of calling Linux a cancer that spreads to anything it touches to one that focuses on the cost factor - the total cost of ownership. A little while ago, a Microsoft sponsored study by IDC compared the total cost of ownership (TCO) of Linux and Windows software. IDC used a five-year timeframe, which is a typical lifecycle for many IT implementations of server operating systems, and interviewed IT executives and managers at 104 North American companies in multiple industries who have used both operating systems. The study has added some weight to Microsoft's argument that Linux is not as cost effective as popularly perceived. So while the study acknowledges Linux as offering advantage over Windows in workload/hardware utilization and lower up front costs of licensing. In the areas of network infrastructure, print serving, file serving and security, participants reported between 11 to 22 percent savings over a five-year period -- primarily as a result of Windows' significantly lower IT-staffing costs. The findings show that investment in resources to engineer products that are comprehensive, easy-to-use, and deliver value 'out of the box'' for key IT scenarios is paying off for customers in the form of lower TCO. The study shows that lower cost of learning and managing, deployment and repair all add up to a lot of saving. IDC's findings show that factors such IT-staff-skill requirements and long-term supportability, have a far greater impact on the overall cost of IT solution ownership. So the challenge for the people developing solution on the Linux platform is to create well-engineered and user-friendly products like those that exist in the Windows world. For example, there is no dearth of Systems integrators who can configure an email solution from freely available open source components for a small fee. Though well-designed open source components to create an email network exist, it is not enough to put together the available open source components. The email network is a complex systems and a critical communication infrastructure for an enterprise. The form in which most solutions are being offered on Linux today, is not doing much to put users at ease. A typical refrain at most organizations is ' we don't have Linux expertise around here so we'll keep away from it' Systems integrators who configure solutions based on open source components manage only to create system that could be missing on elements that are important to the customer. Making life difficult and expensive for the user and negating the initial advantage that Linux has to offer by way of low start-up costs and hardware resource requirement. That's much like buying a car that works efficiently but would need ‘expert’ help even for things like replacing a flat tyre or refueling the car.

The cost of software piracy and why free software won't work

The fall of the dotcoms has substantially illustrated the point that you can't build a business by giving away things free or below cost. But one another fact that has received lesser attention is that as a business you can't do much good if you are always scraping the bottom to find resources. Because you priced your products and services too low you couldn't make enough profit to adequately resource yourself to serve your customers well. One of the stated objectives of our company's is to promote the use of IT in India. The objective is not purely philanthropic. The intention is to work out a business model for a low cost economy. The idea is to bring the cost of software to levels that is affordable for the average Indian customer & enterprise
Consider the difference between what an average American bloke earns in a year - $32000 to what an average Indian manages in a year - $500 and you can understand why a software that costs $3000 is very expensive to an Indian - roughly the equivalent of six years of income for an average Indian. Compare that to how it turns out for an average American - less than 1/10th of his year’s income.Now you could argue with the whole premise of being able to make money selling software in India, when (a lot of people believe) software in general is free in India, given the high level of piracy. So you'd say that going after the pirates would probably improve the prospects of software business in India. In fact a recent study by IDC recommends just that, purposeful action against piracy.
But experiences from elsewhere point to the contrary, for instances tax evasion are higher when the level of taxation is high. When the cost of being on the right side of law is higher than dodging the law, many choose to dodge it. In the end you have a situation that is rife with corruption. The long-term impact of all this is terrible.
Right now software users in India have to pay a very high price for being on the right side of law (own legal software) especially when you compare it against their earnings. So many resort to pirating software. Does it help? Not so. There is no support for such software and while it might be easy to manage consumer software, things aren't quite that simple when it comes to enterprise software. In fact acquiring and running pirated enterprise software is difficult. So most enterprises either delay buying software (in turn delaying productivity improvements) or experiment with downloadable versions of free open source software (that their IT departments are ill equipped to handle, besides the IT departments at the enterprises should be looking into the application of IT and not working at writing code to configure the basic IT infrastructure).
Software solutions at roughly 1/3rd the cost of what currently users pay for legal software with an assurance of quality and support can enable more people to use legal software. The important driver is the match between the costs and the ability of the customer to pay for it. The software companies must find a ways to do this profitably. Because if software companies don't make money they will loose interest in the customers and both would end up as losers.

Innovation often takes a long to becomes economically viable

Innovation often takes a long while before it becomes popular or economically viable. The immensely popular email first came into being more than 20 years ago. For most of the 20 years or so of its existence, the email was popular mostly amongst the educational institutions and research centers. Its popularity in the recent years has grown not just on the back of improvements in technology but also as a result of faster geographical spreading of businesses and the resulting increase in mobility of people. The need to stay connected at low costs was as much responsible for the growth of the email as was the need to exchange information speedily. Look at the solar power; decades after it was identified as a limitless and nearly free source of energy it has gotten nowhere. It's strange that sun's energy, responsible for fueling almost all of life on earth, does not even contribute to a percent of the worlds energy needs.

For Innovation to succeed, a lot of things have to fall in place before an innovation becomes a big business. Improvements in technology, change in demography and needs of the people, the service infrastructure, the cost of the product service, change in perception etc. Sometimes an innovation is pushed into the mainstream by force of regulation and circumstances. E.g. the resolve of the United States after 9/11 to accelerate the research and adoption of alternative sources of energy will push alternative energy sources faster into the main stream. The world finally seems keen on reducing its dependency on hydrocarbons for it's energy needs. Or e.g. the Indian supreme courts directive on clean fuel has suddenly pushed up the demand of CNG kits in Delhi. But these are rare and lucky events for the involved businesses and an innovation may have to wait for a longtime for such events to come by. Even after 20 years of work artificial intelligence is still of interest mostly to in academic circles.
The years 2000 and 2001 were littered with the deaths of on-line business ideas and technologies. The WAP has come and perhaps gone. E-publishing, banner ads and a hundred things in between that were slated to rake in billion of dollars have all but faded away. People found the WebTV and the Network Computer too elementary for their needs. Perhaps it was that Mobile phones and hand held devices that caught their fancy (what with the falling airtime charges). Now those few that bought the WebTV are probably looking at replacing it with the more exciting Playstations or an Xboxs. Needs and desires have been shifting. And e-books will probably take-off once the PC-Pad becomes popular.
With the accelerating pace of change, most entrepreneurs find themselves becoming victims of the race to be first to the market. In recent times that logic has driven most new businesses too far forward. Sometimes putting in place a supply capacity way in excess of the demand. Most innovators and entrepreneurs wish for a fast adoption from the market. Unfortunately in most cases the adoption happen over a long, slow and often painful period. 'People usually overestimate the change that will happen in two years time and underestimate the change that will happen in over period of 5 years' - Says Bill Gates the richest entrepreneur of them all. Entrepreneurs usually find themselves caught between the need to scale down their expectations (to survive) and being the first to the market (to avoid being run-over).

Irrespective of the end result, the innovator-entrepreneur takes a huge personal and professional risk and must be respected for that. The progress of technology and indeed the resilience of the economy is greatly dependent on the enterprise of these people. For proof look at the rising use of the mobile phones and SMS and the growing number of people visiting the newly open coffee shops. Entrepreneurs will need to learn to live through changes impacted by slowdowns, shakeouts, disruptions, demographics and god-knows-what to see their innovation through to success.

Thursday, August 18, 2005

India and Capital Efficiency

A recent study shows that Indians do about 4% points better than the Chinese as a return on investment. The scarcity of capital in the country has forced businesses to be more efficient. The return on investment for Indian companies is likely to improve further as we move up in providing higher value-add products and services and as the current inefficiencies in the system are worked out. Over the long term such a trend could translate into much higher levels of wealth creation.
However, the study has in all probability covered only public (and well established companies). Young and potentially next generation of public companies starved of capital would have to pay in terms of time to achieve scale/ breakeven/ profitability/ sustainability. Which could have a negative impact on the growth of the economy.

Wednesday, August 17, 2005

Need for a scalable training model

Without off-shoring (i.e. doing work for international clients from India as against doing work at the customers location) it would have been very difficult to achieve the scale. Given VISA restrictions, higher cost of onsite service and high attrition amongst people sent on overseas assignments (further escalating operational costs). Off-shoring was rarely considered as an option for large and complex projects, till people at Infosys and elsewhere started working on what they call a ‘Global Delivery Model (GDM)’. Bulk of the work for international clients of these companies are now done in India. The GDM blasted the key bottlenecks for growth for the IT services industry.
The next level of growth in the industry cannot be achieved without investing in building a model for rapid (and low cost) selection and training. Today despite a large workforce in India, it is hard to find enough well trained people to support the growth. The situation is similar in almost all fast growing sectors like retail, textile, media, airlines, infrastructure and so on. Without enough well trained people there is likely to be a rapid deterioration in performance standards, which would seriously damage the prospects of growth.
It’s incorrect to assume that universities and colleges in India are producing a substantial number of qualified people to support the growth. And it is stupid to expect that they will be able to rapidly improve the quality of training to match the needs of a fast globalising economy. More importantly with the current framework of education it is unlikely that the gap between what is taught at these schools and what is really needed at work can be narrowed any time soon.
Interestingly hidden in this lies a large opportunity for entrepreneurs to build systems, tools and businesses for rapid (and low cost) selection and training.

Saturday, August 13, 2005

Entrepreneurial India

India ranks relatively high in entrepreneurial capacity, according to the Global Entrepreneurship Monitor (GEM) project's India Report. The findings say that India, with more than 85 million businesses, is the most entrepreneurial country by volume.
But lack of physical infrastructure, educational support, and R&D investments and transfers has resulted in most businesses remaining extremely small.
Most businesses in India remain local businesses fighting with other local businesses for a share of the small local market. Businesses of all sizes find it difficult to scale in India mostly because of a highly fragmented market resulting from artificial barriers, imposed by a poor transport infrastructure and a complex web of local taxes, against free movement of goods and services in the country.
It's the lack of job opportunities that forces people to start these very small businesses in search of livelihood. The biggest employer in India today are hawking, rickshaw pulling and corner grocery stores. All of which would qualify as businesses but are unlikely to scale and create substantial wealth.
However there is a big positive resulting from this high volume of entrepreneurship. It has helped keep some terrible social and political problems from happening.

Friday, August 12, 2005

Our hope

When we started our company to create high technology products in India, we were driven by the belief that some of us would have to go outside the popular trend in India of providing cheaper labor to the world, to creating useful and affordable technology and products for use in India and across the world market. Our hope is that we would some day become a model for change in the industry and business in the country and inspire entrepreneurs everywhere. Our hope is that we as a company will play our part in laying the foundation for the next level of prosperity for the world.

Bet on people's enterprise

I think the Finance Minister is right in pushing for a higher level of lending and lower interest to the Small and Medium Enterprises (SMEs). While many may disagree with the mechanism for implementing it, the principle idea behind it cannot be faulted. The chances are that a SMEs of today will become the billion dollar corporation of tomorrow.
The popular argument is, that the reasons banks are not lending to this sector and charging high interest rates for whatever little they lend, is because of the high incidents of Non Performing Assets (NPAs) amongst SME borrowers. The real reasons for the NPAs lies in high interest rates charged by the banks to the SMEs in the first place.
And the popular suggestion is, to lend credit to those SMEs that have linkages with larger units. Wrong again. A lot of large corporations in India exploit SMEs by delaying payments to them for as long as they can. In effect getting themselves financed by SMEs who borrow at high interest rates from banks. The SME is likely to succumb to cash flow shortage than lack of sales.
One has to treat lending to the SMEs and the small scale as seed capital(venture fund). The Finance minister is absolutely right in pushing for more credit to this segment even at risk of some of it becoming NPAs. The payback for India can be huge. Nearly 50% of the US GDP is contributed by SMEs. For India the ratio is 30%. Quite large considering all the problems they have to face up to in doing business here. Also an indication of how much growth potential there is in this segment. Even if the government has to write-off some NPAs that are created in the process of pushing for greater financial assistance to SMEs, it will be shortchange when compared to the colossal waste that government enterprises (the original choice as growth engines for for the economy) have inflicted on the nation. The Finance Minister is acting as a venture capitalist and as a long term investors, attempting to create some very high yield assets. This of course does not mean that one is proposing a soft stand towards willful defaulters.

Thursday, August 11, 2005

Software companies serving local markets are at a disadvantage

Interestingly while there are deep tax concessions to Indian IT services companies serving international clients, for the product companies selling software products (or providing services) to Indian customers, there are no such benefits. This goes against both the stated objectives of the government and industry associations to build a world class IT industry in India. Which in turn requires a faster growth in use of IT in India and a move up towards offering IT products.
Product companies need local markets to be able to build deep understanding of their customer’s needs and perfect their offerings. A tax concession to these companies should be seen as an investment into the future growth of the industry.

Eroding competitiveness of the IT services industry

The appreciation of the Rupee, the rapid rise in salaries (by as much as 36% y-o-y), inflation, increasing tax burden(all tax concessions to the Indian IT services companies to go in the next 7 years or so) and increasing competition form other low cost destinations countries are likely to seriously erode the margins for the software services companies in India. The remedy lies in growing the volumes, investing in training to compensate for skill scarcity (which in turns pushes salaries rapidly) and moving to deliver higher value services and products.

Wednesday, August 10, 2005

Unsustainable trends

Most young people in India today (especially in IT) are jumping jobs too frequently in search for bigger paychecks. I believe this to be both a self-destructive tendency for the individual and a serious long term damaging trend for the performance of the industry. The rising cost of salaries without a corresponding capability and productivity improvements is likely to erode the key advantage of lower cost that the Indian IT industry has been enjoying for all this while. Individuals moving from job to job are likely to accumulate less and less depth in capability even as they add years to their experience. Such people are likely to run into a dead end soon. In their desperation they are likely to try new tricks such as taking up courses to upgrade their qualifications in their bid to make it for the next higher paying jobs (a popular choice these days is management courses). What is really needed is not more qualification but building up of ones capability and performance. Capability and performance result in economic value add which can form a more sensible and sustainable basis for improving ones earning.

Build capacity

MNCs have responded to the lower cost challenge from India by putting up their development centers here and offering much higher salaries to pull away people from the Indian companies. It helps them in two ways 1. It somewhat destabilizes the challengers (Indian companies) and 2. It gives them a lower cost base for serving their customers and compete with Indian companies. Indian companies have responded by quickly upping their own salary levels (foolish but somewhat difficult to avoid for now) and pushing out towards cheaper destinations (not altogether a bad choice).
The right long-term choice however lies in training, improved processes and investment in brand building.
Currently a large part of India's potential workforce is poorly trained or unemployable (thanks to the dysfunctional education system in India). The resulting scarcity of qualified people is driving up the salary levels, quickly eroding much of the low cost advantage. If Indian businesses instead actively choose to invest in training the larger set of the not so well trained people to enable them to become more capable and employable, they will continue to have a good supply of low cost workforce. Extending their low cost advantage over a longer period of time. More importantly it can enable a huge number of people to enter the job market, lifting their earning potential. It will also force the ‘better trained’ people towards improving their performance and capability. Which would in turn benefit the industry and economy as a whole. What comes to ones mind is the excellent work done by Telco (in Pune) and Reliance (in Jamnagar) in transforming essentially agrarian local people into a very capable industrial workforce
Secondly Indian businesses must improve their processes to be able to take work form relatively junior/inexperienced staff and ride over disruptions that may be caused due to attrition. The Pioneering work done by Infosys on this stands out as an example for all to replicate.
Thirdly Indian companies must invest in building their own alternatives products and brands over a longer term to take the war to the enemy camp.

Thursday, August 04, 2005

Lack of Risk Capital

Almost all VCs operating in India seem to have come to believe that Indian entrepreneurs lack the desire to be world class and world scale players. I would think that this is an unfair judgment.
For example one of the biggest reasons why we don't have many world-class software product companies in India is because there is a lack of market size. Interestingly the reason behind it is rampant and deliberate use of pirated software by the consumers, inadequate IT spend by the enterprise customers (approx about 1% of there revenues which is amongst the lowest in the world) and presences of a large number of enterprises customers that don't pay in time, pay little or don't pay at all for the software they buy from local vendors. Given this it is impossible to have a healthy cash flow to build out thebusiness. 
The second and equally important reason is the inadequate availability of risk capital that can serves, as the buffer against the poor payment culture (as a cushion against its impact on the cash flow) especially in the initial years of the start-up, or as the resource base necessary to help target more lucrative and larger international markets. Such market conditions dampen the spirits of all but the bravest and the stupidest of the entrepreneurs.

The world needs a new economic model

An economy like that of the US cannot be created again on this planet – it borrows, buys and controls huge amounts of the world’s natural and financial resources. Attempting to create such an economy elsewhere is likely to result in acrimonious disputes. Even wars. Let alone the disastrous consequence on the environment. We are already witnessing the rise in competition and disputes for the control and access to world energy resources with the growth of energy consumption from the booming Chinese and Indian economy. Creating a more resource efficient economies is the only sensible and possible alternative. Therein also lies the biggest opportunity for the coming generation of entrepreneurs.

Indian customers killed the market for software made in India

Indian customers killed the market for software made in India by paying little, paying late or sometimes not paying at all. Soon no sensible company wanted to work for Indian customers. Mastek, TCS, Wipro, all abandoned the Indian customers for the better paying international customers. Indian customers are now paying the price by having to buy more expensive software from international vendors who incidentally outsource their work to Indian software companies.