Disruption is the Name of the Game

Spending on technology services will rise, and for IT services companies, the India-linked opportunity will begin to look more interesting


The first wave of Indian tech startups was constrained by the narrow reach of wired Internet. The next one will have a far larger market to tap, as India becomes the second-largest base of mobile Internet users in the world by 2016. And, in the coming decade, India could become one of the most interesting test beds for innovation globally, enabled by a set of disruptive technologies with the potential to transform the country. New entrants that can build scalable businesses and established companies nimble enough to change their core business models will benefit. A research from the McKinsey Global Institute indicates that, like the rest of the world, India too is likely to experience the rapid diffusion of disruptive technologies in the coming decade. A set of 12 technologies is seeing a rapid reduction in costs, rising performance levels and growing adoption, indicating potential for widespread use in multiple forms. In the next 10-15 years, these technologies will affect a large number of workers, consumers and businesses in India, and have a significant economic impact. The most ubiquitous of these is likely to be the mobile Internet, which has the potential to be used by 700 million to 900 million people in India by 2025. Other digital technologies that could be disruptive for India are cloud-based services, the automation of knowledge work, digital payments and verifiable digital identities. Beyond digital technologies, rapid advances in energy — such as unconventional oil and gas, renewables and advanced energy-storage technologies — genomics, advanced geographic information systems and intelligent transportation and distribution systems will enable better knowledge and control of the physical world and more efficient resource management. Combined, these technologies act as building blocks for a set of disruptive services that can boost the reach of basic services, raise productivity in manufacturing and farming, move goods and people more efficiently, improve access to clean drinking water and stable power supply. For instance, remote health services using the mobile Internet for diagnostics and monitoring could improve healthcare for 400 million poor and rural Indians, and mobile payments could help 300 million unbanked Indians gain access to banking services and credit. Some 90 million farmers could get higher prices for their crops and reduce post-harvest losses with access to real-time pricing data, and more than 50 cities in India could have better transportation and more efficient power and water metering systems. The annual economic impact of such applications could be $550 billion to $1 trillion in 2025. That’s 20 to 30 per cent of India’s incremental economic growth from 2012 to 2025 and up to six times the current revenues of the IT services sector. The potential for value creation of this magnitude is good news for entrepreneurs. These technology-led opportunities make entering new markets easier. India’s young citizens — equipped with personalised, mobile connectivity and information delivered in intuitive, picture- and voice-based forms — will be open to trying new products and services and willing to shop around. Entrepreneurs will see the cost of launching a new businesses fall dramatically with the advent of cloud-based applications for marketing, communication, sourcing, payroll, accounting and other functions. They will be able to tap the talent pool in a more flexible way, with large numbers of freelance and virtual workers, who could be engaged via the Internet. Access to capital will improve due to the growing interest of venture capitalists and other private equity investors. But ideas cannot remain pilots forever — businesses need to achieve national scale in order to generate material impact. Established scale-based players that are nimble enough to rethink their strategies in the context of digital disruption will be well positioned to succeed. But their traditional assets such as well-located branches, strong brand names and low-cost factories may be rendered less valuable. For instance, banking, hospitality and retail businesses may find that their brick-and-mortar properties turn into liabilities in the face of online competition, forcing them to dramatically reshape their channel mix: by some estimates, certain European banks have already shut down 40-50 per cent of their branches without affecting their market share. Manufacturing companies will be compelled to rethink their plant and channel strategies as it becomes possible to reduce lead times by 50-70 per cent due to big data analytics. Robotics will enable a 25 per cent reduction in the cost of assembly. Whether attacker or incumbent, businesses will need to meet and exceed ever-increasing customer expectations brought on by disruptive technologies. Customers want to control and shape their relationships with vendors; shoppers want to specify not only colour, style and size of the garment they buy but the time and place of delivery, and they want to track their order until it reaches them. In some cases, they are highly involved, even at the design stage. As businesses try to meet customer expectations, they will need to rely on more and more data to make decisions. The frequency of data-based decision-making will increase, and smart organisations will gather data from every customer interaction to refine their delivery. Spending on technology services will also increase. In 2013, Internet-related expenditure by consumers, enterprises and the government, as a share of GDP, was 2.1 per cent in India, much lower than that of China at 4.4 per cent and the US at 4.3 per cent. India will catch up, and for IT services companies, the India-linked opportunity will begin to look more interesting. However, IT providers will need a different model to serve customers effectively. They may need to be ‘advisers’ on digital strategy and help clients identify, evaluate and shape their digital investments in addition to delivering on digital projects. And they may need to develop ways of sharing risks with clients, for instance, through pay-per-use pricing models, outcome-based contracts, or co-investments in new digital businesses.