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June 20, 2005

From contractors to designers

Whether Indian IT services companies make this shift and embrace innovation and R&D based excellence will determine whether India will "find its place in the sun in the years to come", argues Sanjay Anandaram, Managing Director of Indo-US cross-border VC firm JumpStartUp, in a recent Businessworld article.

Anandaram draws an interesting parallel between the state of the Indian software services industry and contract manufacturing (which is the domain of companies like Flextronics, Solectron, etc.)
Worldwide, CM companies, under margin and revenue growth pressures, have been morphing from original equipment manufacturers (OEMs) to original design manufacturers (ODMs). Today, the entire design, development, sourcing, manufacturing, testing, packaging and shipping is undertaken by the larger ODMs, leaving customers like Cisco to manage the customer, channel and marketing relationships.

Some ODMs are venturing into launching their own brands (Haier, BenQ) in carefully chosen markets. Complex technological products from PDAs to PCs to digital cameras to phones to networking gear are being increasingly supplied by ODMs from Taiwan and China. More importantly, these companies are investing heavily in innovation in technology, marketing and business models! (See 'Low Premium Software Services'.) Indian IT services need to see the writing on the wall and start investing in innovation now, when they have the luxury of enviable margins and revenue growth.

Investments in R&D, sales and marketing and business development activities have to dramatically increase. Such investments take time to fructify, but they will stand the Indian companies in good stead when growth starts tapering off. The past 10 years have seen the Indian IT services industry successfully perfect the equivalent of the CM business model, but will the next 10 years see them perfect the equivalent of the ODM model? After all, pay-offs from investments in soft infrastructure like R&D, culture, and mindsets take a lot longer than investments in hard infrastructure like land and buildings.

DISCLOSURE: Sanjay Anandaram has a small investment (in his individual capacity) in TSJ Media.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.