Go Vertical,IT

Attracting IT investments:the key issues

Roopen Roy

Inspired by Jane Austen one could chime in with irony: it is a truth universally acknowledged that an Indian IT company which is in possession of a strong Balance Sheet must be in want of subsidized urban land. Many state governments have played the land card deftly. States competing for IT investments have honestly begun to believe that the only competitive weapon in their hands is the ability to dole out cheap land in prime locations.

The new avatar of SEZs has made the issue more complex. At its peak, there were over 500 SEZ proposals aiming to convert 150,000 hectares of farmland .Not surprisingly, some of these proposals have run into rough weather. Conversion of farmland for SEZs and industries have faced stiff opposition in Haryana, UP, Maharashtra, Chhattisgarh, Punjab, Orissa and other states and, most spectacularly, in West Bengal.

Is cheap land the tipping factor that attracts IT industries to a state? Is it time for IT companies to re-envision designs that make efficient use of space? A company that will create 10,000 jobs in a state needs no more than 1 million sq. ft. of built-up space. Why should it demand a hundred acres of urban land at a highly subsidized rate to set up its campus?

The rough split of IT revenues of Indian companies and global companies in India is 55:45. Global companies like IBM, Accenture, EDS and Deloitte operate out of leased premises and do not own campuses built on subsidized land. Our Indian IT giants themselves operate out of leased facilities in North America and Europe.

Last month I was in Iowa which is a farming state in the US with area of 56,000 sq.miles and a population of 3 million. I met at breakfast the owner of a “small” farm which grew corn for animal feed. The “small” farm measured 500 acres. Most commercial farms in Iowa are between 1500 and 3000 acres and some are much larger. It made me wonder why our IT and BPO giants were not flocking to Iowa to set up their large campuses. In a flash the answer came to me : the key issues were the cost and availability of talent and the delivered cost of acceptable infrastructure.

It has not been proven by any study that a sprawling low-rise IT campus improves either the creativity or productivity. I am not convinced that the productivity of programmers in the high rise buildings of Malad, Mumbai or Salt Lake, Calcutta are any different from the rolling campuses elsewhere in the same state.

Oracle’s home base consists of a cluster of high rise cylindrically shaped buildings. SAP has an impressive bank of contiguous buildings in the sleepy town of Walldorf. I have not seen putting greens or athletic tracks or golf carts in their campuses. On the point of innovation and creativity, it is worth remembering that the Harvard Business School campus is all of 35 acres.

I hold the contrarian view that the state governments should focus and invest on exactly those issues that are critical to the success of IT companies rather than woo companies with the promise of unlimited, cheap land. And the top three issues are: talent, innovation and low-cost/high quality infrastructure

The recent Nasscom study predicts that by 2020, the addressable market for global sourcing of IT will increase from the current $500 billion to $ 1.6 trillion. The export component of the Indian IT industry is expected to grow to a minimum of $175 billion from the current $60 billion –an almost three-fold increase. The upside is even higher. According to the study, focused initiatives and innovation-led growth could lead to additional revenue of $135 billion. On the other hand, the domestic revenues could be as much as $65 billion in 2020. In an optimistic scenario, our IT industry has the potential of attaining a size of $375 billion by 2020 - more than 5 times its current the size. The most interesting data point is the co-relation between the availability of talent pool and the size of the industry measured in $ billions. If our talent pool count is 10 million in 2020 we are likely to reach a size of $175 billion. If we are successful in our focused initiatives, if we become one of the top 3 innovation hubs in the world and have a talent pool of 13.5 million then potentially the size of our IT industry would be between $225 billion and $310 billion.

I would also argue that 5-star resort-like campuses will prove counter-productive in the future for the IT companies themselves as they begin belt-tightening. The report recognizes that India’s market share can decline by 10% in 2020 and be lost to other aspiring nations that include China.

The global market will demand 5-star services at a 3 star cost. Both from a social standpoint and in the enlightened interest of the IT industry ,campus and building designs must aim to be low-carbon and efficient in the use of space. We should seriously examine the strategy of going vertical i.e. construction of tall buildings. And states should go back to their core responsibilities of improving infrastructure, investing in education and enabling innovation. Those countries and states that excel in talent,