8 - Indian IT Firms: The Push for Innovation

Summary

Introduction

This chapter deals with the development trajectory of the major Indian information technology (IT) software service companies. They have established themselves through their initial innovation of the global delivery model (GDM), where they combined high-cost, on-site work with low-cost, off-site work in India in order to cheapen the cost of providing IT services. Whilst they started out at the low complexity end of programming in IT services, they have faced increased competition as the GDM has been copied by other IT service providers, including the global majors such as IBM and Accenture. The end-toend service provision capabilities of these global majors have enabled them to take up the important managed service function, where they provide an entire IT service to a client. At the same time as the Indian IT majors failed to move into managed services, higher salaries have also eroded their margins. This decline in margins has forced some of them to change their business models, so far based largely on labour arbitrage. In dealing with declining margins, they have the options of either developing as IT product companies, such as SAP or, as in a recent development of Infosys, moving to innovate and automate the service delivery function.

The next section lays out the global IT value chain. We then locate Indian IT firms within the IT GVC. The limitations of this location are discussed in the context of the Airtel outsourcing decision. This is followed by a brief discussion of the trends in earnings. Ways of responding to the declining trends are also discussed. The next section discusses the upgrading strategy and its link with employment strategy. The concluding section tries to draw broader lessons on the nature of upgrading and the role of the state.

IT Services GVC

IT services production has its own production network or value chain, which does not vary with the type of client. Its production stages can be summarized as in Figure 8.1.

The high-end of IT services production is that of consulting, conception, and architecture and design. This is the beginning of the process. Whilst customers have a role to play in setting the requirements, this first step in IT services is increasingly outsourced.