Tuesday, January 18, 2011

The Software Value Chain

Today's Economic Times carried a headline today - “I-T Dept Issues Order: Infy must pay Rs. 400 Cr tax for onshore work”. While I cannot comment on who – the I-T dept or Infosys – is right here, the article opened up an old debate on product vs services software firms, and the concept of “body shopping”. It was interesting to hear this term “body shopping” again. Around the year 2000, when I joined the software industry, this was something that was most discussed by engineers huddled around the cafeteria table during coffee breaks. Everyone had an opinion, mostly negative, on body shopping. Some even ranked companies on a body shopping index... “Oh, XYZ? 100% body shopper!” 
Although it sounds like something taboo, body shopping is nothing but selling the competency of a software engineer, rather than selling software. A team in a US, EU or Korean company lacks people to do their software build & testing. An Indian company has software engineers available with build & testing competency. Deal is struck, and everyone is happy. Especially the Indian company, since it is a low-risk, low-investment, good-return scheme. In other words, a way to make a quick buck. The company need not invest in R&D or Intellectual Property development for this, neither does it need to do product development or marketing (besides a powerpoint presentation stating how many engineers with what skills they have). No surprise then that 80% of software revenues where from this model back in 2000. This also earned the Indian software industry the tag of “Service companies”, reflecting the fact that they provided services to the software industry of more developed countries, rather than sell software. 

The article also touches upon another cliched term - “moving up the value chain”. Somewhere down the line, the industry realized that their business model was hugely dependent on the dollar vs rupee exchange rate. They had a business as long as it was cheaper to hire engineers in India than in the developed world. The bigger companies also wanted to do something that their competitors did not. The fact that this business model was easy to copy lowered the barriers for entry, and everyone was into this. By “moving up the value chain” the Indian software companies were trying to break out of services mode of working, and go into selling software products. Some even wanted to move higher up the value chain by providing consulting services rather than plain old software services (another way of making quick & bigger bucks). Unfortunately, the lure of the quick buck model is too much for these companies to climb up the chain... Infosys, for e.g. still earns 94% of it's revenues from services.

DISCLAIMER: Infosys has been used as an example as it's quarterly earnings were recently released to the public. In no ways does this post pass any judgment on Infy. Rather Infy is used as an example representing the larger Indian software industry.

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