Thursday, November 09, 2006

Forget value chain, diversify to prosper

WE MUST CREATE IP!”, “It is time that Indian software companies move up the value-chain and create products!” ... and tonals of a similar nature are commonplace. In fact, in the software space, ‘innovation’ has been synonymous, to most people, with ‘software product’ creation. Ergo, this clamour for getting our successful services companies to start ‘moving up’.

Please don’t. It is frightening to think of people getting into software products by ‘moving up the value-chain’.

For the past several years, I have been fighting a lonely battle against this perception of ‘value-chain’. As a nation, we have performed wonderfully in the area of IT services.The reason why we have not done so well in ‘products’ — I have always believed — is because of this ‘value-chain’ mantra. An ‘industry’ grows through two means.Existing players continuously grow and new players continuously enter.It is natural for new players to enter at the ‘bottom of the value-chain’ ... after all, they are ‘new’ in the business. Having perched ‘products’ higher up in this chain, we automatically ensure that new players will not consider this a viable space to work in. They are conditioned to believe that they need to earn their spurs, and then move up.

My knowledge of the software industry across the world may not be complete, but, I have never been able to name a single successful software products company, anywhere on the Earth, which had started as a services company, and moved up the value chain. Surely, that must mean something!

Although a digression, it may be relevant to define the scope in which I am using the word ‘products’. Simplistically, if the software can be sold through a channel (that is, third party), and the customer may not have any contact with the authoring company — then it is a ‘product’. Otherwise, it may simply be ‘branded’ software (that is, a piece of software sold with a brand name attached to it). I recognise this to be a debatable point – and therefore, felt it relevant to lay out exactly what I mean by that word.

Which point are we then missing? Should services companies not get into software products? The answer is, they may .. but not by ‘moving up’ … but by ‘diversifying’.

Without a mindset of considering it a completely different business, one which needs diversification, it is not possible to extrapolate ‘services’ to ‘products’.

Diversification automatically takes the new unit or division to the grassroots level, automatically rids it of legacy, cleans the slate of business and operational planning, recasts the approaches used to engage with channel and customers, removes the preconceptions of branding, positioning and pricing. Most importantly, it resets the engineering tools, skills, processes and architectures. It typically involves completely new management, and perhaps, entirely new teams — with only the ‘ownership’ and ‘corporate servcies’ being the linking thread.

Yes, it still remains a software business, and, therefore, it is not obvious why these changes are important.

Let me use an imperfect analogy — more to drive the point home, rather than correlate the examples used to the two businesses of ‘services’ and ‘products’. Let’s take the automobile and ship building industries. Both solve transportation problems. Both use general and precision engineering components. Both use, largely, the same core materials — metals, plastics, glass, etc. Both use locomotive power built on the same fundamental principles of fuel-based combustion engines. Both use measurement systems for a variety of tasks. One could, perhaps, create a more comprehensive list of their overlaps.

Yet, no one thinks of either industry in a ‘value chain link’ … nothing prevents a ship building company to diversify into automobile or vice-versa … but it is not a ‘natural progression’ of their growth and/or competency.

Yet, that is the way the software services’ and software products’ companies get viewed!

Grave injustice gets done to our achievements in the IT services sector when they get asked to ‘move up’. The statement indirectly reflects their ‘lower’ competence — when, in reality, their maturity has now become time-tested. It can be extremely demotivating, especially when we should actually be continuously patting ourselves on our backs.

We must recognise that these are different businesses — and not at the cost of each other. Let us encourage innovation in software products by recognising it as an industry in its own right — and not as an obscure link in a ‘value chain’. Let us create the relevant eco-system to support it — and, yes, encourage people to both start new businesses or diversify into this with green-field business plans. We have the ability to do it. Let us do it.

Publication : Economic Times
Edition : India