BANGALORE, INDIA: The subprime crisis and the subsequent meltdown has been the subject of much discussion in the recent past. The magnitude of the crisis, the impact it has had on what we thought were rock-solid institutions and the ripple effect across the globe have been mind-boggling.

What I’d like to focus on, in this article, is the impact  this will have on the Indian IT services industry and the opportunities it is likely to throw up for companies operating in the Third Wave. Before getting into the impact of the crisis, let’s look at the Three Waves of Indian IT.
 
Three waves of Indian IT industry
When we look at globalization, specific industries in emerging economies typically go through three waves of evolution. The electronics industry, first in Japan, then in South-East Asia and now in China, are good examples of this. In the first wave, companies in emerging economies typically act as component suppliers to developed countries that manufacture the complete product.

In the second wave, the local industry gains enough expertise to provide cost-effective contract manufacturing services, of either the entire product or major sub-assemblies. The third wave is when a set of firms start marketing these products under their own brand, initially within their own countries, and then going international.
 
We can trace the evolution of the software services industry in India using a very similar paradigm.
 
Wave 1 (Proving Capability through People): Started in the 70s and 80s and peaked in the mid-90s; it established the competence of the Indian software professional and the industry got results largely through staff augmentation.
 
Wave 2 (Offshore Development): Established India as a destination for low-cost, high-quality programming services. The catalyst was the Y2K bug and Indian companies’ success in delivering these projects in a cost-effective manner. Many Fortune 1000 companies discovered that moving their application maintenance and on-going development activities to India was viable and attractive.

The Second Wave of Indian IT started in the mid to the late 90s, and is at its mainstream phase today. Like all mainstream markets, this is characterized by the emergence of a few leaders, namely the Tier 1 IT companies, who demonstrate high rates of growth and profitability and increasing market share.
 
Wave 3 (Strategic Value Delivery): Which is emerging, will be characterized by Indian companies moving up to high-value, IP-led services that are strategic to the customer and hence command premium, value-based pricing. As we have seen, the industry is already facing a severe shortage of talent (as opposed to mere numbers), rising attrition levels and increasing salary costs.