The Long Revolution: The Birth and Growth of India’s IT Industry

By the mid-1980s, word had spread that India had a good talent pool and it came much cheaper. Besides mainframe and minicomputer vendors who were using Indian software engineers extensively, partners American OEM software vendors too began working with Indian firms to get products developed cheaply for thier markets. Another new segment opened up when a large software customer decided to set up a fully-owned subsidiary to develop software for internal use. This was CitiBank, which had worked with several Indian software firms earlier. Apparently, the bank had been toying with the idea of setting up a software wing since 1979 but did not due to the difficult political and economic environment. (54) The liberal policy measures unveiled post-1980 gave an impetus to the move.

Citibank set up a software unit at SEEPZ in 1984 with capital expenditure of Rs 2 crore for ‘export of software for the computerization requirements of Citibank worldwide’. Paul P. Glaser, Senior Vice President hoped that the unit would be able to develop a large chunk of the $ 250 million worth software that the bank bought every year for its global operations. (55) The bank also expanded its ‘City Cash Manager Electronic Banking’ service, which had connected 17 Indian banks by terminals to their accounts in New York, London and Frankfurt. The new facility called COSL was inaugurated by EC Chairman Sanjeevi Rao on 28 October 1985. The unit was named Citicorp Overseas Software Limited (COSL).

The unit, in its formative years, developed software for internal use of the bank in America and other regions. Soon it diversified into banking products for non-Citi customers. MicroBanker was one such product. It was modelled on the mainframe platform used in Citibank, but found customers among banks in developing markets in Asia and Africa. During 1989-90, COSL emerged as the third largest software exporter, next to TCS and TUL. The gap between number two and number three, however, was wide with TUL at Rs 29 crore and COSL at Rs 9 crore. (56) The PC-based MicroBanker covered branch banking operations - front office automation, funds transfer, electronic delivery system, accounting, trade and investment tasks. It was priced at $120,000 for a LAN of ten terminals and $200,000 for 20 terminals. (57)

In 1992 a software engineer, who had joined the company in 1989 after spending nearly ten years in TCS, made a radical proposal to the management. He wanted to float a separate company to take up further development and marketing of MicroBanker, because he noticed that the company was no more interested in promoting this product. The man was Rajesh Hukku, a Kashmiri brought up in Rajasthan and an engineering graduate from BITS Pilani. In TCS, he was part of the team that developed the country’s first LAN product called Fast Access Local Computer Network (FALCON) in December 1984.

Hukku and his two colleagues - R. Ravishankar and Deepak Ghaisas - could convince Citicorp Venture Capital to invest $400,000 and also absorbed about 150 employees from COSL. The new venture Citicorp Information Technology Industries Limited (CITIL), initially marketed MicroBanker and then developed a new suite of products under the Flexcube series. These products were sold to a large number of banks in the Middle Eastern and African markets. The prefix Citi helped open many doors for it, though Citi bank itself was not a major customer. In 2000, the company was renamed as i-flex, dropping the Citi prefix. By now, its flagship product, Flexcube, had become a widely accepted banking product globally. (58)

The Citi Venture’s 41 per cent stake in i-flex was acquired by the US software giant Oracle in 2005 for a whopping $650 million. In August 2006, Oracle increased its ownership to 55.1 per cent from 52.5 per cent by paying another $125 million. The parent company, COSL, continued to serve the needs of Citi bank and its subsidiaries. It was eventually sold to Chennai-based software firm, Polaris, in 2002.

Initial impetus from foreign firms

The initial software writing skills in India developed in parallel to hardware design innovation. In the era of mainframe computers, software came bundled with hardware. Application software had to be written specifically for each computer. Since all commercial computers came from multinationals, software writing skills also developed on these computers with the help of US firms. This made IBM and ICL storehouses of programmers. When TIFR acquired the large mainframe from CDC, it got its scientists trained in programming at CDC. Subsequently, these skills spread to others through training and hands-on experience. Initial training skills in programming developed at the IITs through interaction with IBM, which supplied computers, and faculty from collaborating American universities. Both IBM and ICL operated data centres where customers could hire computer time and get customized applications developed for their use. A number of data processing personnel in large corporations cut their teeth in software writing at these centres. Till the early 1970s, most of the Indian programming professionals owed their skills and experience to IBM, ICL and, to some extent, CDC.

In the mid-1970s, a number of minicomputer companies started selling through Indian companies. PCS sold products of Data General and later formed a joint venture with it. Datamatics tied up with Wang Laboratories, Hinditron had a joint venture with Digital Equipment Corporation called Digital Equipment India Limited, and CDC later teamed up with DCM Data Products. IDM, which inherited IBM’s data centre business, became a reseller for Prime Computers. Similarly, ORG had a tie-up with Sperry.

All these American minicomputer firms came to fill the void left with the exit of IBM, but found the market sluggish and small. They did not see enough margins to justify offering their full suite of products and services. In order to maintain economically viable operations, they began using local talent to write software for computers sold locally. This made them realize that not only were Indian engineers cheaper but the quality of software they wrote was very good. So multinationals began using them for customers back home. This helped them subsidize their hardware business in India. The Indian partners, in turn were exposed to international class programming, marketing, customer care and other processes. In this whole process, programmers also understood the game and began thinking of becoming entrepreneurs. The seeds of an Indian software industry were thus sown in the late 1970s and early 1980s.

In the early 1970s F.C. Kohli convinced Burroughs to farm out some software development work to TCS. He says: ‘The main thing is that you needed somebody to test you out, and they (Burroughs) could test us out.’ At the same time, pioneers like TCS learnt a lot from technical journals, professional societies like IEEE and through interaction with leading American universities. For instance, TCS benefited from the migration and conversion tools developed at the Carnegie Mellon University, says Kohli.

Ramadorai also attributes the early development of capabilities in TCS to its association with Burroughs: ‘Burroughs was one of the top three companies in the world in terms of fundamental concepts in micro-programming and software architecture. It was at the forefront of software engineering thinking on operating systems, which we learnt by working with Burroughs. We trained the initial batch of engineers in these technologies through application development jobs for Burroughs and third parties. This is how we built up our expertise.’ (59)

In the same way as multinationals discovered the Indian software talent, Indian companies partnering with them as well realized that they could operate on their own in the area of software development. PCS is a good example of this trend. ‘When we started selling Data General machines here and began talking with them closely for a joint venture to manufacture computers, they saw the pros of India. There was a lot of business exchange, and we started doing software work for them including operating systems. That’s how our software stream started,’ Naren Patni commented on the initial phase of partnership with Data General. (60) ORG Systems, a division of Ambalal Sarabhai Enterprises, took up distributorship of mainframe computers of Sperry Systems (which merged with Unisys in 1988) after the exit of IBM. ‘We developed P1024 protocol, which Sperry used in its mainframes worldwide. We also developed several systems software products for them,’ recalls K.R. Trilokekar, who joined ORG Systems in 1978. (61)

Since the domestic market was small, the Indian companies had to look to export markets for survival and growth, right from the beginning through their dealings with minicomputer vendors. After the advent of the PC, demand for commercial software packages and applications rose in the US as the market moved towards standard hardware and software from proprietary systems. So Indian companies also did not want to remain tied to hardware vendors and started seeking independent customers.

But taking up export assignments was not easy. Indian companies did not have the necessary hardware and software tools as well as basic infrastructure to take up any meaningful work. So the best way to leverage it was go to the customer site and work there using their computers. TCS and PCS had been doing this in the 1970s and this became a dominant way of doing software business in the 1980s. The industry gave this model the name of ‘body shopping’. Software firms had to hire the right people, train them for a brief while, send them to American clients to execute projects and then they would come back. This was a high margin business. Two Tata companies - TCS and Tata Burroughs (which became Tata Unysis in 1986) - accounted for nearly 70 per cent of exports through body shopping.

In body shopping or manpower contracts, customers would typically buy ‘hours’ and not a total project or product with the associated management and value-added technical services. The contracts mostly related to routine tasks of coding, debugging, data conversion and migration rather than higher-skill tasks of design, analysis and project management. These contracts were short-term (6 to 18 months), and low in risk, value addition and investment; yet they made up for 70 to 80 per cent of export revenues. This, as a World Bank study pointed out in 1994, did not lead to the expansion of the domestic knowledge pool; training costs were high as programmers would stay back abroad; those who returned lacked experience in large-scale project management. (62)

The market conditions somewhat changed with the new computer and software policies announced in 1984 and 1986 respectively. Imports of hardware and software were liberalized, though the actual import of hardware still took time. New software packages and tools started becoming available when software was brought under the Open General Licence (OGL). Companies began exploring offsite development, or remote software development as it was called, as opposed to onsite development work and body shopping. But still there were impediments such as high telecom costs, etc. In this post-1986 phase, software companies set up links with American clients, got hooked to their large systems and began working from India. American companies went the other way round - they came to India and set up software development facilities, taking advantage of high skills and low labour costs. The number of software companies in the market also grew, mostly looking at exports, because of low entry barriers. The number of companies with sales exceeding $ 1 million grew from 15 in 1990 to 44 in 1992. And 27 of them exported over $ 1 million each in 1992. (63)

Software exports rose from about Rs 100 million (Rs 10 crore) to Rs 1 billion (Rs 100 crore) by 1991, which was still a minuscule per cent of the global software market. During the decade of 1980-90, the Indian software industry took shape and exports to the US and Europe began in a modest manner. We have seen how software companies were founded, picked up skills and business through interaction with foreign collaborations and joint ventures. In the wake of size constraints and import restrictions, these companies innovated a method of exports ‘body shopping’ and onsite services. The real breakthrough in software exports came in the post-1991 period, with the advent of the Software Technology Park scheme.

54. Heeks, Richard, India’s Software Industry: State Policy, Liberalization and Industrial Development, Sage Publications, 1996, page 245

55. “Citbank to set up unit at SEEPZ”, Dataquest, August 1985, page 32.

56. A Report on the Evolution of IT Industry in India, Manufacturers Association for Information Technology, New Delhi, January 1992, pp. 75-79.

57. “COSL - The 1989 Ace Performer at SEEPZ”, Dataquest, June 1989, page 27.

58. Garg, Ashish and Sharma, Anupendra, “How they did it: Rakesh Hukku and I-flex,” Sandpaper, accessed online at www.bitsaa.org on 21 December 2006.

59. Ramadorai, S., “Innovation as a way of life”, Research By Design, Ed. Shivanand Kanavi, Rupa & Company, 2007, page 2.

60. Interview with Narendra Patni, Mumbai, 27 November 2006.

61. Note from K. R. Trilokekar, November 2006.

62. Hanna, Nagy, Exploiting information technology for developmnent: a case study of India (World Bank discussion papers: 246), 1994, page 32.

63. ibid, page 31