BNET: What are the hallmarks of the way the software is developed in India?
Arora: Software is known for being a very innovation intensive industry. In India, the industry developed very differently than it did in the US. It started out and to a considerable extent remains focused on software services-they provided engineers who could be hired out to port software from, say, a mainframe to a client-server environment. They were not developing new programs or doing what engineers would generally consider to be very exciting things, but they provided very important services for businesses. From there, they've gone from strength to strength to take on more ambitious projects, to the point where now a company might outsource its entire data center operations to an Indian company.
In 1997, I did a survey of Indian companies where I asked them about their most important export project. The most important project for the median company involved something like four to five people working for maybe six months-about a million dollar project. Now, we see these projects becoming multi-year projects that can hit a billion dollars. There's been a tremendous growth of capabilities.
BNET: Have the Indian companies shown signs of building their capabilities to innovate?
Arora: The industry is not "high tech" as a scientist or engineer would consider it. This has been a tremendous source of angst on both sides of the US-Indian economic relationship. American policymakers are concerned that innovation is moving overseas and the Indian policymakers are concerned that their country is not innovative enough since they are doing service work. But it's an industry of very substantial size, around $50 billion depending on what you include in it.
You may see some innovations where specific deep technical understanding is needed; they might develop a low power chip or a software development tool. It's much harder sitting in India to identify an opportunity and then develop something that a business in America needs. It's just difficult for someone 10,000 miles away. This distance from "lead users" has been a substantial challenge for them, even for consumer applications as well. If you are an Indian company, you have little chance of decoding what American teenagers would like; by the time you've figured it out, some other innovator has already developed it.
There are a few examples of where Indian companies have led a field. i-flex started out doing retail banking software and they had an interesting strategy of targeting India and other Commonwealth countries that were based on the British banking tradition. When they achieved substantial success, the world took notice; they essentially had the most retail banking installations in the world and were in some of the countries where people expected the most growth, like India and Nigeria. They were acquired by Oracle for a substantial amount.
BNET: How do you describe the organizational capabilities of Indian firms. Is it a story of them doing things differently than American firms-practices that can be instructive-or are they simply hiring a bevy of engineers very cheaply?
Arora: You put your finger on what I think is an issue which has not been given nearly enough attention. There is no denying access to cheaper engineers was the start of the Indian software industry. Pretty quickly the world figured this out. Motorola and Texas Instruments set up subsidiaries by the mid-80s. But the Indian firms evolved capabilities that were especially well-suited for the conditions in India and the country's resource endowments. If you wanted to set up a software subsidiary in India in the 1990s, what would you find? Lots of young, smart and inexperienced software engineers. There's a big bulge of people with two to three years of experience. People with five to seven years of experience are pretty thin on the ground, because many are employable anywhere in the world. Indian firms have developed abilities to use inexperienced engineers who don't know much about software to provide very sophisticated sorts of services to clients. This has been the major innovation; it's not "high science," but rather the use of very sophisticated techniques and tools. They deliver products that places like IBM and Accenture used to provide with a much more experienced workforce.
Next week, we'll learn more about the kinds of management techniques which have allowed India's technology companies to thrive.