Preparing for Attrition and Planning for Growth

As job market shows sign of clear revival, it is time to prepare for the hiring binge. Naukri.com JobSpeak Index for Nov 2009 is up 8%+ month-on-month. More importantly, it is up 15% for HR professionals, which is a leading indicator of hiring activity throughout the economy.

Recruitment is highly cyclical. In a downturn, first reaction is to stop all future projects and hiring. Hiring is also a long lead time activity. The whole process involves several steps – approval of the requisition (internal company processes), creating a Job Description, sharing it with consultant/internal hiring team, collecting resumes, short-listing candidates, interviewing, final decision, making the offer and waiting for the candidate to join. The whole process can take a minimum of 2 months to anywhere between 6 to 12 months. Therefore, if you are planning to hire for 2nd or 3rd Quarter 2010, you need to start now.

If you head the HR department of a company, this is what you may want to consider –

1. Restore all benefits which were withdrawn over the last 18 months.

2. If promotions were denied or salary increases postponed, consider them at the earliest.

3. Create a list of critical executives and make sure there is enough protection in terms of compensation (vis-à-vis market) and stock options (value of unvested stock).

4. Seek an estimate of attrition over the next six months, from the heads of businesses.

5. Seek hiring requirements from heads of business

6. Identify hiring targets by skills and role. Break the target by campus recruitment and lateral hiring

7. Seek high level business approval for hiring budget. If hiring team does not have sufficient resources, hire the recruiters first.

8. Ask the question – is the business willing to wait for a few months for new hire to join, if a critical resource leaves. If no, is it ok to hire for expected attrition?

9. Performance reviews happen in most companies in either the First or the second quarter of the calendar year. Attrition increases in and around this time. A large number of MBA aspirants (or for another post graduation course) leave in the second quarter. Take these factors into account.

Wish you a happy head-hunting in 2010!!

Standards are Essential for Lowering the Cost of Software

For decades, companies have resisted the need to adopt standards. Microsoft Office 2007 is the first version of MS Office which fully documents its file format. Prior to this version, software applications relied on their interpretation of MS Office format to build an import filter. For example, you could not import Word documents in OpenOffice without losing a part of the content or spending plenty of time in reformatting the document. Similarly, Adobe Photoshop does not retain layers when exporting to other formats except PSD, for a graphic designer that is a critical loss of information. If the content is locked in a proprietary file format, it is unlikely that a customer will move to a competing application. High cost of migration means customer continues to pay for maintenance and operating system linked upgrades.


DITA is another standard which has become widely accepted (thanks to OASIS and strong support from IBM). Translation and consistency requirements make it essential for the content to be structured and componentized. Moving the content to smaller topic based chunks stored in XML format makes it easier for companies to author, manage and publish content in a distributed and collaborative team.

Similar is the case with content management systems. While WebDAV is a well supported standard, it is very low level standard and a large amount of logic needs to be wrapped around this standard for achieving a good functional integration. However, a new standard is in the works and we may see more competitive intensity increase once the standard gets acceptance.

Standards reduce the cost of switching software from one vendor to another. This opens up opportunities for smaller and new companies to compete on features and functions. If you are buying software, insist on standards compliance even if the vendor is a large company. Your successors will thank you for making that decision!!

Free News Content- For how long?

Internet has benefited enormously because of free content. Since competition is really fierce between content providers and consumers can switch with one click, pricing of online content for newspapers and magazines is easier said than done. However, there are recent reports about Microsoft’s Bing negotiating for exclusive news content deals.

In this post, I try to draw a parallel between pay channels and free channels on DTH platform. Several channels in recent past have become pay channels. Almost, all channels after they became pay channels, offered their services for free for limited durations. Also, even after they become pay channels they have introduced “teaser promotions” for limited durations to gather more subscribers. Switching from free content to paid content is about trade-off between advertisement revenue and subscription revenue. If executed right, both can increase.

CNBC TV18 is one of my favorite channels and until six months ago, I had the package from my DTH provider which included it by default. I did not care if it was pay channel or a free one. However, with price competition in DTH service providers, I moved to a no frills package and it became apparent that I cannot buy this channel standalone, I need to buy a whole bundle which was fairly expensive. When the price became apparent, I considered the plus and minus of not taking the channel. From an analysis point of view, the channel’s coverage is the best. Competitors like NDTV Profit were also pay channels. UTVi was free (for limited duration), however, news coverage lacked depth and anchors had little knowledge or expertise. At the same time, UTVi served the limited purpose of information on share prices and charts, and I shifted to online transmission of CNBC TV18, its website moneycontrol.com and newsprint to make up for analysis and insight. For the moment, if I assume that moneycontrol.com or its online transmission was paid for, will I pay for my DTH package? Most probably yes, I like the content CNBC TV18 delivers and will probably pay for it, if I cannot get it for free on another alternate channel.

The point I want to make is about competition among delivery channels and how consumers trade off online with print and TV. It will help CNBC if it kept the access to http://www.moneycontrol.com and online transmission of CNBC TV18 free for some-time to have larger number of viewers during early growth stage of product adoption. Even though, it may lose some of its paid subscribers on DTH platform. It may want to switch to pay per use or subscription model for online content during the maturity stage.

In the Indian context, we are probably entering the second stage of growth in online content with 3G round the corner. My hypothesis is that online business channels will the first ones to benefit – if you can watch CNBC TV18 on your mobile phone while going from one meeting to another, in your car, or in a lift, you will probably do so.
Disclaimer – I am an investor in shares of TV18 network which owns and runs CNBC TV18.

ULIP vs Mutual Fund

A lot has been written on why ULIPs are expensive and how Mutual Funds combined with term plan provide a low cost insurance cum investment option. However, this choice ignores the important element of taxation here.
1. ULIP offer a fund of funds option. That means, you can switch between debt fund to equity fund and vice versa, without an incidence of taxation. In mutual funds, that is a major hindrance. The moment you switch, you need to pay short or long term capital gains (on debt schemes currently). Fund of funds options from mutual funds don't give a choice to an investor, the choices are automatically determined based on valuation (Dynamic PE fund) or fixed allocation is used.
2. Returns from ULIP are tax free as long as sum assured is 5X the annual premium.

With new direct tax code (if it becomes law in its current form), mutual funds will become unattractive from tax savings perspective, both short and long term capital gains will attract marginal tax rate. Also, ULIPs will require 20X annual premium as the sum assured. On that other hands, fund management charges for ULIPs must decline below 1.35% (after IRDA norms) effective 1st Jan, which is significantly cheaper than mutual funds.

I am therefore seeking a low cost ULIP plan which also has low mortality charges (20X cover).

45 Lessons

I am not the one who forwards chain e-mails. However, I retain an interest in philosophy. I got this e-mail from an old friend who recently reconnected with me after a few long years and somehow it struck a chord with me. I am therefore sharing it with everyone.
Written By Regina Brett, 90 years old, of The Plain Dealer, Cleveland , Ohio "To celebrate growing older, I once wrote the 45 lessons life taught me. It is the most-requested column I've ever written. My odometer rolled over to 90 in August, so here is the column once more:
1. Life isn't fair, but it's still good.
2. When in doubt, just take the next small step.
3. Life is too short to waste time hating anyone...
4. Your job won't take care of you when you are sick. Your friends and parents will. Stay in touch.
5. Pay off your credit cards every month.
6.. You don't have to win every argument. Agree to disagree.
7. Cry with someone. It's more healing than crying alone.
8. It's OK to get angry with God. He can take it.
9. Save for retirement starting with your first paycheck.
10. When it comes to chocolate, resistance is futile. (something I disagree with)
11. Make peace with your past so it won't screw up the present.
12. It's OK to let your children see you cry.
13. Don't compare your life to others. You have no idea what their journey is all about.
14. If a relationship has to be a secret, you shouldn't be in it.
15. Everything can change in the blink of an eye. But don't worry; God never blinks.
16. Take a deep breath. It calms the mind.
17. Get rid of anything that isn't useful, beautiful or joyful.
18. Whatever doesn't kill you really does make you stronger. (something I disagree with)
19. It's never too late to have a happy childhood. But the second one is up to you and no one else.
20. When it comes to going after what you love in life, don't take no for an answer.
21. Burn the candles, use the nice sheets, wear the fancy lingerie. Don't save it for a special occasion. Today is special.
22. Over prepare, then go with the flow.
23. Be eccentric now. Don't wait for old age to wear purple...
24. The most important sex organ is the brain.
25. No one is in charge of your happiness but you.
26. Frame every so-called disaster with these words. 'In five years, will this matter?'
27. Always choose life.
28. Forgive everyone everything.
29. What other people think of you is none of your business.
30. Time heals almost everything. Give time time.
31. However good or bad a situation is, it will change.
32. Don't take yourself so seriously. No one else does.
33. Believe in miracles.
34. God loves you because of who God is, not because of anything you did or didn't do.
35. Don't audit life. Show up and make the most of it now.
36. Growing old beats the alternative -- dying young.
37. Your children get only one childhood.
38. All that truly matters in the end is that you loved.
39. Get outside every day. Miracles are waiting everywhere.
40. If we all threw our problems in a pile and saw everyone else's, we'd grab ours back.
41. Envy is a waste of time. You already have all you need.
42. The best is yet to come.
43. No matter how you feel, get up, dress up and show up.
44. Yield.
45. Life isn't tied with a bow, but it's still a gift."

Cheapest ULIP Plan

For the last 5 years, I have been tracking ULIPs (Unit Linked Insurance Plan). I visited sites of all major insurance companies and concluded that these products were too expensive. With very high administrative charges and premium allocation charges, ULIPs just did not match Mutual Funds. Fund management expenses were as high as mutual funds and in some cases, even higher.

Last year, one plan which caught my attention, that was Bajaj Allianz's IGain. It is available only online and there is no agent selling this policy. My queries got answered from their call center and product managers over e-mail and phone. Brochures were self explanatory and online illustrations helped me understand the charges better. The key points I liked
1. No premium allocation charge (for annual premiums more than Rs 2 lakhs)
2. Administration charge capped at Rs 100 per month or whereabouts
3. Mortality charge declines as the fund grows. For a sum assured of 5 times annual premium, in 5 years, mortality charge declines to zero. By the 6th year, my major expense was fund management charge alone.
4. Choice of midcap fund as an investment option. This option was not available in any other ULIP plan at that point in time. Also, in case of mutual funds, I found an entry and exit load in the range of 2 to 3% and fund management charge in excess of 2.25%. IGain asked for 1.75% as expenses.
5. No charge of switches, partial withdrawal and surrender of policy (after a certain duration).

I took 3 months after I got my queries answered from Bajaj Allianz to make a decision in favor of investing in this plan. I waited for any surprises and did not find any.....!

I recently compared IGain with ICICI Prudential LifeStage Pension which despite having no premium allocation charge, lost out on high fund management charge and administration charge. So much so that IGain offers tax benefits, free insurance (5X) and still delivers more returns.

I am now waiting for IGain expenses to further decline (post IRDA norms). Will Bajaj Allianz oblige? We will know in January 2010.

Update (4th January, 2010) - Bajaj Allianz has announced IGain II, which has essentially reduced fund management charges to 1.35% for most equity funds.  There is no change in mortality charges (disappointing!), however, on the plus side, policy term has been extended to 30 years. The net yield worked out to be 8.55% (using 10% IRDA benchmark), which is pretty good comparing it with mutual funds and other ULIPs.

Now, the hiring binge

The world economy is entering the third phase of its recovery – real growth. Stability has returned to markets and investment projects are being discussed and debated. With investment comes the need for additional resources to implement them and create lasting enterprise value. This recession was probably the deepest and at the same time, its time span was much shorter than the previous two recessions. All leading economic indicators are running ahead of their expected numbers. I cite two anecdotal cases that suggest hiring is back.

1. In month of August, one of the placement consultants told me that he had one of the best fortnights in last 2 years. He placed more candidates in that fortnight than he ever did. In the middle of the recession, having the best time!! And just FYI, he operates in technology and in the US.
2. Analytics Outsourcing has become a hot area. A large number of outsourcing organizations in India are jumping over each other to hire in large number. In some cases, the total number of unfilled positions exceeds the current strength. Attrition is beginning to show up. In fact, managers are finding it hard to spare time for interviewing candidates. If there is a shortage of resources, team is busy in execution and cannot spare time to interview. If they can’t hire more resources, load increases further as customers don’t wait for them to deliver.

Agreed, these are probably two isolated cases. However, there are clear indications that hiring is up and it is time to plan for attrition while planning for new areas of investment. It is time to gear up for the next round of hiring binge. War of talent never ended, it just became more sophisticated and challenging.

SOA - Bridging the gap between Services and Products

Every marketer will agree that there is a service element in almost every Product and every Service delivery needs to have standard processes to ensure reliability and predictability which brings it closer to being a product. When it comes to software, differentiation between product and services is disappearing in the way they are created and offered and not just sold. Google is a product which delivers Search as a service, SalesForce.com delivers enterprise software as a hosted service. When customers purchase SAP and Oracle, they need IT service companies to implement and customize the product for specific requirements of their enterprise. Large enterprise software has been criticized for being too rigid and not flexible enough to adapt to a corporate specific need. For example, Indian tax structure is probably unique and requires specific handling, any implementation of enterprise software needs to take care of this aspect.

Service Oriented Architecture is about to the change the world of software - more from the inside and less from the outside. In the short run, Customer's customer may not see the change while the software changes from within. However, it might mean lower revenue for IT service companies and higher share for product companies like SAP, Oracle. By standardizing on web-services protocol for product integration, customers are trying to bring in a plug-and-play model to enterprise software. Once SAP and Oracle are also written using SOA, it should be possible to remove components of SAP and replace them with Microsoft (for example) if the customer likes that piece from Microsoft. This will free enterprises from lock-in that SAP or Oracle enjoy in terms of IT Infrastructure.

A large part of IT expense is wasted on rip and replace - removing a piece of software which has outlived its existence and needs. If all products are written using SOA, duplicate components can be removed/disabled and a real plug-and-play of software components can happen.

SOA is also likely to accelerate the trend of commoditization of software and will create opportunities for new players to enter into enterprise product space. Each organization will compete with another at component level and a smaller company providing a smaller piece can also find a place in the IT infrastructure. In my view, Indian IT Service companies should not miss this opportunity to move into the software product space.

Wipro ties up with Oracle

When I saw the headline Wipro ties up with Oracle to build industry specific solutions, I was optimistic that it will co-development of intellectual property and a step towards building products. However, I was disappointed when I read the release - it said - "The industry specific solutions (communication, retail, consumer products, hi-tech and industrial manufacturing) developed are designed to leverage Oracle platforms and provide faster time to market at lower cost of ownership for our clients."

Wipro building solutions on Oracle platform does not help it create products. I was hoping that Oracle with co-invest along with Wipro and jointly take the solutions to market. The agreement does not envisage the strategic role that I initially thought it did.

That said, I firmly believe that Service Oriented Architecture provides an one-time window of opportunity for IT service companies to move into the product space. This market discontinuity will last for at least 5 years. With all product companies developing SOA products, they will certainly need large number of partners who can customize, implement and re-use some of the solutions. However, the biggest opportunity lies in gradually creating and expanding suite of SOA based product offerings. It is time that Wipro, TCS and Infosys stepped up their efforts to build products and not become just a implementation partner of Oracle, IBM, SAP or Microsoft

War for Talent Never Ended

The current global recession has created a series of challenges for companies across the globe, including in managing their talent. One key challenge was managing costs through workforce reduction. Layoffs are a problem anywhere in the world and in India, it becomes complicated because of lack of experience in handling these challenges. While reduction in variable pay-outs is now seen as acceptable and most companies implemented this reduction, only a few Indian companies acknowledged layoffs and did not hide behind performance as the reason for layoffs. At the same time, several companies came up with innovative solutions, for example, Satyam created a virtual bench which was a good solution for the unique problems faced by the company.

While campus hiring is efficient (good quality talent acquired at a low cost), it restricts the flexibility that organization has. For example, several companies froze salaries last year and got caught in a catch-22 situation. Because of competition for hiring in the campus, same company had offered a 10% salary increase over existing salary. Now, since the existing employees are denied an increase, a new joinee will get higher pay than employees with 1 year experience in the organization. Such an anomaly is a serious management challenge.

Nevertheless, one should not forget the basic fundamentals of talent retention. Growth, performance oriented culture, good HR practices, training and development remain the most important factor in retaining good talent. Employees seek growth and without enabling their intellectual, career and financial growth over business cycles, it is difficult to attract and retain talent. You pay for follies during the good times when economic recession bites. In the talent market, you pay for excesses during the recession, when good times arrive.

War for Talent never ended. In a recent article, McKinsey highlighted the increasingly global nature of competition for talent. When IBM ramps up its headcount in India from less than 10,000 to over 100,000 in less than 6 years, one needs to wonder how will other companies manage to fill the gap left. War for talent is fought at several levels. At times, it is about numbers and at times, it is about about who and not how many. One of the most visible symbols is the legal battle between Microsoft and Google when Microsoft VP moved to Google in China.

While recession creates a perception that talent is abundant, it is often misleading. Recessions don't last forever. Even though this recession seemed the worst to hit in decades, the fiscal and monetary policy response has been equally strong. Unlike last recession in 2001 to 2003, the decline was not gradual - at the same time, recovery has been equally sharp. US GDP growth of 3.5% in 3Q CY09 may look a statistical aberration, however, one cannot ignore the fact that it is a significant growth number. Indian economy is already back on a strong growth curve. This Diwali season was probably the best ever for most consumer companies.

It's now time for everyone to re-orient their mindset from cost cutting to growth.

Enabling an ecosystem of partners

No product company can sell without partners. Customers need training, consulting, plug-in development, system integration with existing computing infrastructure, additional content like templates or sample (besides the one supplied with the product) and support in terms of expertise or resources to execute. Some companies provide these services along with the product. In my opinion, a product company should act as a focal point to enable these services and at the same time, stay away from trying to deliver everything on its own. Service delivery requires a different mindset and when a product company tries to deliver services, it often takes focus the away from the core product.

Creating an ecosystem of partners for a new product is an enormous challenge. To convince a set of trainers or consultants to support your product can take time and effort. For example, when we launched Adobe Technical Communication Suite with support for new workflows, it took me a year and 1 additional release to convince some of the partners to actively support the product. Partners need to invest time in learning the product and building a business around it. Hence, they often wait for the product to pick up momentum and let initial customer queries trickle in. Often ver1.0 of a new product falls short of customer expectations and the teething problems get resolved only when the ver2.0 arrives. From a corporate perspective, it is important to support the product in the interim. For that purpose, me and my team extended ourselves to user forums, extensive posting on blogs and direct resolution of queries from leading customers and potential partners. However, it is equally important to gracefully vacate the space and let partners take over.

Once an ecosystem of partners is established, it creates a virtuous circle and make the product self sustaining. If a product provides for extensible framework, partners can build plug-ins, templates or scripts which can add to the functionality of the product. This can open up new customer segments, while making customers more loyal to the product.

Several initiatives are required to create a vibrant ecosystem-

· Recognition of partners for their contribution – These can be done by providing unique titles like “Guru”, “Most Valued Professional”, “Master”, “ Black-Belt” and so on. This provides added motivation to the partners

· Training material and product information – Partners expect up-to-date and accurate information to be made available to them. At times, information cannot be disclosed because of confidentiality or corporate policy. In such a scenario, I have often used “statements indicating intent or product direction”.

· Invitation to conferences – Partners want to acquire more expertise in the product and they welcome any invitation to events which can help them do so.

· Honest relationships – Last, but certainly the most important, most partners care for an honest relationship with the company. I have seen partners leave a competitor and join us because we are upfront and honest in our communications.

While at Adobe, I had a good fortune to work with over 25 partners across the globe – from US, Germany, UK, Australia, Israel and so on. I take this opportunity to thank them for their wonderful help and support.

Web 2.0 for Product Decisions – Using Google Analytics

Increased community participation on the internet (Web2.0) has significantly reduced the cost of reaching out to customers. User forums, blogs, mailing lists, LinkedIn/Facebook/Yahoo/Google Groups etc enable customers to seek information and help. As discussed in the previous post, Blog is a powerful medium for product companies. Blog audience may or may not be logged in. Comments are posted by handful of audience, while most viewers tend to be passive listeners. While feedback from comments is the most valuable, Google Analytics also provides rich amount of data for a product company to make intelligent decisions. Here are a few examples –

1. Information about viewers operating system, browser, screen resolutions, Flash versions – There are several websites or industry surveys which provide the system information for consumers or enterprises at large. However, if you have a blog focused on a particular product and expectedly, the viewers of the blog can be considered as potential or existing customers of the products. The data pertaining to the blog is hence more relevant when making decisions to support operating systems or browsers. For example, we used the declining share of Windows 2000 among the viewers to confirm the decision to drop support for this operating system. In addition, screen resolution enabled a choice of User Interface toolkit which required a higher resolution to reduce screen clutter.

2. Search keywords which lead viewers to the blog – Based on the ranking of keywords which viewers are searching for and the viewers that reach the blog by clicking on the results for these keywords provide a lot of data on positioning of the product. For example, we discovered “XML” and “XML authoring” as important keywords which led to more traffic for posts on FrameMaker. A blog is an important tool in positioning of the product – more important for a new product where perceptions can be changed with relative ease. Search keyword data provides an important indicator if there is a correction required in the positioning.

3. Leading referrers to the blog – There are several ecosystem partners we used to work with and they had their own websites. A large number of them posted a link to our blog. This data provides important information when combined with timing of peak traffic from a particular website and the context.

4. Top content viewed – This is very simple statistic and provides an important source of information. For example, we found that a post of Windows Vista support was most viewed (even after 1 year of posting). This also enables you as a blogger to understand what topics you should focus in your future posts.

There are several other statistics which can be looked for specific interpretation – for example, bounce rate, geographical distribution of viewers and so on. In forthcoming posts, I will discuss other Web 2.0 mediums and how they can be used for making product decisions.

Blog - A powerful communication medium for product companies

Blog is a powerful communication medium, extremely relevant and important for product companies. Products are often sold globally and even if product team is based in the US, at least 50% of customers are several time-zones away in Europe and Asia. This is more applicable when product team is based in India.

Customers can be reached through several mechanisms, advertisements, e-mails, user forums, web-site and now through blogs. However, very few customers opt to receive e-mail announcement making this medium ineffective. Advertisements don’t reach everyone, are too expensive and suffer from credibility problem. Company web-site is important reference for most customers however, processes required to maintain quality and legal/marketing hawks don’t allow for frequent updates of the company web-site. While I have used user forums for also collecting feature requests from existing customers, user forums are dominated by how-to and support issues and are certainly not the best medium to discuss long term product directions. That’s why, a blog is important. It can be updated frequently and is not seen as official document even though corporate policies need to be adhered to. In my opinion, product managers can and should use blogs to share their opinions and thoughts about the products. I have used blog (refer to Adobe TechComm Blog) for several things –

1. Understanding the importance of a particular workflow – For example, I posted on review workflow in technical communication and waited for comments, monitored page views and also any discussions triggered by my blog post on mailing lists or any competitive reaction. Sharing an idea or thought and measuring the reaction can help provide information that is often hard to get.

2. Repositioning the product(s) – Blog audience tends to watch every post and interprets the focus of the blog as the focus of the product. Hence, the blog should talk more about your strategic thrust areas rather than non-descript issues. For example, I talked a lot about review workflow, Technical Communication Suite, Product Integration, DITA and so on. These were strategic areas of focus and my blog reflected the same.

3. Making a point about competitive positioning – When we started our efforts to revive RoboHelp, RoboHelp lagged in some of the feature sets and we were constrained by Adobe policy of not disclosing product roadmap or pre-announcing features. Through our blog, we focused on product quality, range of features in which we were better than competition and also drop a hint that next version will be available sooner than later.

4. Make announcements about product direction – This can be somewhat tricky if the company follows the policy of not committing on future versions or sharing a product roadmap. However, if you provide the context, say that that particular area is of “strategic importance” and mention that “it is natural for anyone to expect” the future direction, you have guided the audience without violating the policy guideline. I know this is like walking the thin line, however, product often needs support from the management team to deflect criticism from competitors and ecosystem partners.

5. Setting up customer or partner meetings – If you are travel, it is important to meet key customers and key partners in that trip. Collecting information about competition, customers, and partners is an important role played by product managers. This cannot be achieved remotely and requires an intensive engagement. I have often used blog to announce my travel plans and seek customer meetings.

6. Explaining complex features or rationale for a decision – Product demos can be posted through blogs. This comes handy if there are misconceptions about certain product features. For example, I saw a blog post criticizing the product for not having a particular workflow in the feature. Since I knew it existed, I posted a product demo on the blog in less than an hour. This helped correct any negative perceptions about the product being propagated.

I have only provided a few examples to illustrate the utility of a blog for a product company. I am sure there are many more instances where a blog can help. Do share in your perspective.

The fact that my blog (Adobe TechComm Blog) is now being kept alive by my team members is heartening and reinforces my belief in the power of this medium.

IT Services Company transforming into IT Product company – Dream is now Closer to Reality

IT Products have an exponential growth and profit potential. Strong software products earn margins upwards of 80%+, compared to 20%-30% for IT service companies. Margins can exceed 90% if India is the development center and world as the market. However, moving from services to software product requires a significant change in mindset.

• · A service is delivered based on custom specifications provided by the customer. A product is sold to millions of customers based on product requirements gathered, prioritized and implemented by the product company.
• · The use interface designs and functional specifications are no longer provided or approved by the customer, however, they need to be designed by the company based on its own understanding.
• · Creating a product requires in-depth understanding of the domain, competitive offerings, pricing environment, sales channels and support issues. In a services delivery environment, these are low priority or non-issues.
• · Since there is no fixed delivery timeline in a product development environment, it is easy to get lost in constant refining of the product. At the same time, it is important to undertake extensive beta testing program before the product is released.
• · Managing the expectations of customers is equally important. Version 1.0 seldom delivers everything customers want. There is always a plan for ver 2.0 and 3.0 even before the first version is released.
• · Product development requires upfront investment without any contract or customer. It is the biggest mental block service companies need to overcome. Losing short term profitability to build long term dominance in the category requires risk taking which only an entrepreneurial leader can take.

Today, several start-up companies and MNC companies are running their global product businesses from India. In fact, a product which makes less than $20million revenue is no longer viable in the US. Cost of development, sales and support of any software product can exceed $10mn in the US, which in India comes down to $3million.

There are several Indian companies who are attempting to move from services to products. The business reasons are obvious- High margins, customer lock-in, insurance against rupee appreciation and wage inflation. Engineering skills are available in plenty. Program management, product management, user interface design, documentation, installation and licensing technology and skills are also available as several product companies are now present in India.

Opportunity exists! Are you willing to bet your future on product development?

TCS reports better earnings growth than Infosys

TCS reported strong earnings growth in 2Q09, much better than its peer and nearest competitor Infosys. Unlike Infosys, TCS is more diversified in terms of its geographical presence. TCS bids and competes against IBM and other multinational companies for services contracts in the domestic market, unlike Infosys which has been completely missing from the large Indian market. With IBM winning multi-billion dollar deals from companies like Airtel, Indian software companies cannot afford to ignore domestic market anymore.

TCS has done a better job of spreading its development resources across the globe, for example, it has a subsidiary in China. Longer term, Indian software service companies need to spread development resources across all major low cost countries, India, China, Poland, Russia, Brazil and so on. This will become important as currencies become more volatile and pricing becomes uncertain. Currency hedging provides only short term respite, building capabilities across new geographies is the only long term solution. Let's take Walmart or Pharmaceutical companies for comparison, these companies use multiple sourcing base which gives them huge advantage. Indian software service companies should stop being India centric if they want to survive, grow and prosper in the longer term.

TCS is best positioned to take this challenge of geographic diversification. It is time to forego margins for a few years in order to build a global delivery model - not just India based delivery model. If you want a software exposure and believe that Rupee will touch 39 again, TCS is your best bet...... My personal view - as always consult your investment advisor before you make investment decisions.

Indian IT Companies Cannot Rely on Cost Advantage Alone

IT Services is in vogue today. Hardware companies are trying to re-invent their business models. IBM is clearly the most shining example of this strategy. HP, Dell and Xerox are latest imitators of this strategy. Today, IBM has built a services business through organic growth and strengthened it through alliances with partners like Cisco, SAP and with acquisition of Price WaterHouse (Business Consulting) and Daksh(BPO). At the same time, IBM has also shed its hardware business gradually by selling desktop hardware business to Lenevo and hard drive business to Hitachi.

Before the emergence of Indian software service companies, large-scale outsourcing deals were dominated by IBM and EDS. These deals typically have whole IT departments being hived and sold off worldwide and often the vendors absorb 1000s of employees from the customer’s IT department. Some of the strengths of IBM are – its presence across 100+ countries, it boasts of some of the best HR practices (making it easier for employees from organizations to get absorbed) and its experience in handling the most complex and intricate systems. However, huge cost arbitrage between Indian service companies and US based vendors has caused a major shift over the last 6-8 years. At the same time, Indian software companies have acquired companies in US and Europe for specialized domain knowledge (Wipro is a case in point), spread their offerings to span almost all areas of IT services and also invested in geographical breadth and depth. TCS clearly has emerged the torch bearer for global delivery with geographically spread delivery centers.

By 2003, it was clear that US based vendors needed to accept or embrace India as a key delivery center, else they risked losing their key clients. The challenge was enormous, because client facing organizations were reluctant to position the Indian centers. They will often quote based on US/Europe based delivery centers until client brought it one of the Indian vendors to beat down the price. While Indian companies threatened IBM on price, Accenture added IT services to its pre-eminent position in management consulting. That’s when a major shift in strategy happened. IBM acquired PriceWaterHouse to nullify Accenture’s advantage. In addition, over the last few years, IBM, Accenture, EDS and HP have created a major presence in India and their global delivery centers are almost at par with Indian vendors.

While IBM ramped up its global delivery centers in India, Indian service companies acquired companies with specialized domain knowledge and set up delivery centers in countries including China. Despite these efforts, the gap between IBM and Indian service companies still exists. IBM continues to enjoy strong competitive advantage because of its immense experience across hardware, software and services. Having nullified the cost advantage of Indian companies, IBM can bring its domain expertise (from Price WaterHouse) and strong thought leadership in new technological areas. If nothing works, IBM can also steeply discount its software offerings like WebSphere and DB2. Through innovative deals with Airtel and other telecom companies in India, IBM has also demonstrated its ability to take business risks which elevate its status from a vendor to a partner.

While IBM’s competitive edge works well in large and complex IT outsourcing deals, there is little to differentiate when it comes to vanilla projects. Almost all vendors have strong customer references, key skill sets, global delivery capabilities, resources to ramp up delivery and relationship with top clients. The decision in that case invariably happens on price. With rupee threatening to strengthen (after a scare in 2007-2008), Indian companies have a major challenge at hand.

Infosys revenue growth has been muted for last 4 quarters. Now that revenue growth seems to be back, margins appear at risk with rising rupee. What will drive the next phase of growth for Indian IT Service companies? How can Infosys become the next IBM? Do share in your thoughts.

Hi Everyone

Hi Everyone

I am starting this new blog – to share some of my random thoughts, to openly reflect on them on events, strategies, state of business and economy. I am planning to focus on three areas – managing products globally from a remote location (my experience in Adobe), IT industry (my experience in IBM, iSOFT and Adobe) and the global economy (as a citizen, as a student of finance and my experience with ICICI Securities as an equity analyst). I do hope to bring a fresh perspective in some of these areas. Most of my thoughts have been shaped probably by my experience over the last 15 years – it will be a good idea for you to visit my LinkedIn profile .

Cheers

Vivek Jain