A new STPI to promote innovation?

    The purpose of STPI (Software Technology Parks of India), as stated on their website is to “promote the development and export of software and software services”. Under the STPI scheme, a software firm can get a ten year tax holiday on their profits from export of software and software-related services. The tax holiday scheme is obviously to promote and encourage the software export business, and has been quite successful. According to NASSCOM estimates, the IT and BPO sector accounts for around 6% of India's GDP in 2009 and 2010. However, a troubling trend has been that these Indian software firms have been concentrating largely on software services, rather than invest in software products. A quick look at TCS and Infosys' revenue break up from Q3 2011 (Sep 30, 2011) and 2010 whole year, respectively, reveals this disproportionate skew towards services.

To understand the reason for this services-skew, it may be necessary to first define how a software product and a software service differ. A software product is, essentially, licensed. The buyer does not get the intellectual property rights to the software, but a license to use it. The seller of the software product is still responsible for defending the IPR in the software, as well as indemnifying the buyer of any infringement claims by a third party. A software service, on the other hand, does not involve any kind of licensing. It is a pure sub-contracting of software activities from the buyer to the provider of these services. In these cases, usually, the service provider does not own any intellectual property rights to the software being delivered. The service provider gets paid as the service is being produced.

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.