IT Industry, Shifting Value Chains and Creative Destruction

IT industry is not dead nor is it going to die but the shape we have got used to seeing it might alter in ways we may not have visualized. This is the beauty of creative destruction.

To quite a few, it borders on an obsession to write obituaries of Indian Information Technology (IT) industry every time it sneezes.

For some, underpinnings of IT industry portend something wrong. Low cost advantage is unsustainable. Manpower inputs ostensibly suffer perennial quality problems. Further it is purportedly struck at the lower rungs of the value ladder. A perpetual strategic myopia apparently hinders its long term growth potential. The inherent rigidities deter adaptability to changing undercurrents like analytics, mobility, cloud etc. Transformation from service driven to product driven software economy is likely to remain a mirage. Capital deepening will shift jobs and processes back to Western world. Lack of sufficient domestic demand makes the sector over dependent on exports. The domestic protectionist lobbies in the West might be the proverbial last straw affecting the IT business in India. All these and more are cited to suggest the end game for the Indian IT industry.

Yet, for all the epitaphs, the three and half decade old industry is still thriving with its worth crossing $100 billion and growing.  It remains the prime career choice for students graduating in engineering and host of other streams. Comprising IT services, IT hardware and IT enabled services (ITES) the industry consists of not only domestic firms, but also a number of overseas firms having a strong presence with their operations based out of India.

Irrespective of the nature of the industry, client pressures constantly drive prices southwards. Simultaneously, client expectations of quality constantly revise northwards. Expertise in business process knowledge may be an asset, yet its leverage as a key resource is constrained by the pace of diffusion of knowledge and tacit learning.  Innovation costs have risen while shrinking shelf space.  The vulnerability is thus due to inability to prevent imitating or adapting its business/manufacturing process nor ceding shelf space to its substitutes. The outcome is a commodity trap. Firms seek to unceasingly metamorphose to avoid trapping themselves in the vicious cycle.   IT industry is no exception.

Industry value chains exist both in terms of horizontals and verticals. Verticals develop a value hierarchy within themselves. In the IT services segment, if the infrastructural services occupy the lower echelons, software development stands above in the value chain.  The top positions in the pyramid are occupied by software R&D, IT consulting etc. In the ITES segment, call centers, transcription services, document management, recruitment services etc occupy the lower steps in the pyramid. Business Process Outsourcing (BPO) of which these form a part occupies lower rung of the ladder below the Knowledge Process Outsourcing Services (KPO).

Despite criticism about Indian firms’ failure to capture the top portions of the value pyramid, India has managed to capture space at all levels in the pyramid. This in itself is a key forte going forward lubricating possible upward progressions.

Yet value chains rarely remain static. In a digital product lifecycle, the product having attained a critical mass gets disseminated swiftly. They are continuously threatened by new services that seek to replace or subsume them. Besides, the price is racing towards zero. Moreover, the value ladder is akin to sticking onto a greasy pole. Commoditization of higher value-add products see them slide down the pyramid thrusting the ones below further down the pyramid.  New products and services replace the older ones and in turn are replaced by the emergent products and services. Commoditization compels the firms innovate to sustain at the apex. The ubiquity of these scarce resources often renders them immaterial or marginal in the longer run.

In May 2003, Nicholas Carr published a piece in Harvard Business Review (HBR) titled ‘Does IT Matter?’ His premise was simple. IT industry was essentially an infrastructural industry analogous to railroads and electricity. Yet over a period of time, lowering costs made IT pervasive. To Carr, the pervasiveness of IT made it invisible undermining the competitive advantage it initially provided. Without doubt, the strategic value or potency of IT increased manifold. Yet since every firm built its foundations on IT, the withering away of the competitive advantage was inevitable. Value creation now had to happen over and above the infrastructure services that dominated the industry panorama hitherto.  With the rise of the cloud, Carr’s analysis assumes even greater significance. Do IT service providers continue to enable their users to possess the strategic advantage that gives them necessary differentials to succeed? As these products and services experience diminishing returns, the IT services and enabled services will have to look elsewhere.

Harvard professor, Lynda Applegate forecasted the emergence of networked business models built on the IT enabled internet economy (see link).  The expansion of the internet entailed the businesses broadly classified into two categories: firstly the business built on the net and secondly the businesses that provide the platform to perform business on the net. If web presence of the firms and e-commerce sites like Amazon represented the former, the latter could be illustrated through companies like IBM, Toshiba, Intel etc. The amplification of the internet economy saw businesses built on the net command higher value generation and capture relative to the platforms that supported them. In more ways than one, platforms became immaterial substituted by business model of the businesses on the net.

A decade or so later, there are indications of emergence of newer value chain dynamics. Internet interfaces, by default are a norm rather than scarce exquisite specialty. Incidentally, the rise of remote IT services itself was a legacy of internet penetration and diffusion. For IT services or enabled services firm, the added value stems from the disposition of its users to pay for the product or service. This desire in turn is a corollary of the perceived value, the outcome being a movement of investment towards new value generators that create unique market positioning. IT industry is precisely experiencing the same.

Contemporary IT industry is less about infrastructural production and more about the business that proliferate using IT. New avenues in social media, analytics and big data, mobility, software products etc. are driving value creation in the industry. The evolutionary trajectory makes the stars of the yesteryears move towards the periphery. As industry encounters the Schumpeterian steamroller, host of new entrepreneurial opportunities open up new prospects. The agile entrepreneurial environment will see the rise of new faces in the industry. The industry in the current form and structure might not remain the same. Firms are unlikely to grow perpetually at 10%+ each year.  There might be only handful of large firms that would have grown 10% year over year consistently for 10 year period. Even if the growth rate is reduced to 5%, the numbers are unlikely to increase much. Firms are unlikely to be perpetual, nor are the processes, products, inputs etc.

There would be reinventions and recasting of value chains and each segment would coexist with parallel offerings to different segments. For the individual firm however, mapping its evolutionary trajectory in terms of it robustness and security of core assets and core activities might be in order. It would be worth reiterating, IT industry is not dead nor is it going to die but the shape we have got used to seeing it might alter in ways we may not have visualized. This is the beauty of creative destruction.