Kishore’s Law – From Commodity Trading to Capacity Leasing
Having seen why the average Indian software programmer can be validly considered as a commodity, let us now compare (and contrast) typical commodity trade with the Indian software industry. In this process, some significant differences emerge which at first sight seem to prove that the Indian software industry does not indulge in commodity trade.
I take the position that the similarities outweigh the differences and the Indian software industry needs to implement certain specific model changes to move away from a commodity trade.
Let us first look at how commodities are sold. Commodities are sold outright in the spot market (the futures market is irrelevant for this discussion). This means ownership changes hand as a result of the trade. In contrast, the software service industry engages in a capacity leasing model. This is a major difference.
In a leasing model, an Indian software company enters into agreements with customers (typically outside India) to lease out infrastructure, people and supporting processes over a finite period of time. In other words, deals are structured as capacity lease agreements.
This model is clearly far superior to a one-time sale model. In this model, the same individual can earn repeat revenue for the company. Multiple, concurrent billing to different customers is usually avoided by all reputed players (think of this as “serial monogamy”!).
At the same time, this model is far more complicated than a straight commodity sale and hence far too respectable to be classified as “body-shop”.
How does commodity transform into capacity? This takes two types of investments:
- investment in infrastructure and
- investment in supporting engineering processes
The investment in infrastructure is impressive and visible for all to see. Most customers who use the services of the Indian vendors do not have such facilities themselves! Moreover, no commodity trader anywhere in the world has ever created such infrastructure for his commodities!
The investment in processes conformance has tangible representations in the form of ISO and CMM certifications. This investment, more than the infrastructure, has gone a long way in building the confidence of the leasers in the capacity that is being leased out.
The following equation represents this transformation of commodity to capacity.
Capacity = Commodity + Campus + Conformance
- Kishore’s Law
Both these investments clearly elevate the Indian software play far above a straight commodity trade play. The sheer scale of these investments (thousands of acres of campus space spread across multiple cities and now even countries; and tens of thousands of people trained to conform to ISO and CMM processes) raises this capacity leasing business far above a straight commodity trade.
Yet, a swing back to commoditization occurs due to one crucial aspect of most such capacity leasing deals – a lack of accountability for, and worse, interest in, the final results.
A typical commodity seller takes no ownership for how his commodity is used by the buyer, post-sale. For example, someone who sells potatoes does not concern himself with what the buyer uses the potatoes for – to cook and eat, to eat raw, to make potato chips, whatever.
Most Indian software companies are in danger of falling into this mind-set. It is only too easy (and tempting) to not really care what the capacity they have leased out is being used for by the customer, as long as the revenue pours in. The middle managers in the leasing organizations also have a vested interest in keeping the leased capacity suitably low down the value chain – programming as opposed to design; execution as opposed to planing; following as opposed to leading.
With the ongoing crisis in world financial markets (which is sure to become a widespread global economic slump in the coming quarters) and a resulting vendor focus on utilization and billability (and buyer focus on job security), there is every likelihood that this tendency will continue. Vendors who avoid this tendency and voluntarily restructure their contracts to take accountability for final results stand to gain significant mind-share.
How can vendors make themselves accountable for final results? That will be the topic of my next post.
