Scale and IT Services in Asia

The McKinsey Quarterly earlier this year published a research brief asking "Can China Compete in IT Services?"  Briefly the argument of the authors was that China is disadvantaged in competition with Indian IT services providers because its industry is more fragmented.  I’d like to take a contrarian view on this.

Fragmentation may actually be an advantage, especially if it means higher specialization.  One of my concerns about the way the Indian IT services industry is evolving is its propensity towards monoliths who try to do everything for everyone.  Especially if we are talking about leading edge software development, specialization is critical.  It is very difficult for a single company to develop world-class skills in all areas of software development, particularly if we include deep business domain expertise as a requirement.

Now, admittedly fragmentation can be challenging in the marketing and sales side of the business.  Fragmentation becomes an advantage only if there are more specialized customer relationship businesses that focus on acquiring customers and orchestrating the more specialized expertise available from a variety of independent software providers.  What the Chinese industry needs is the equivalent of Li & Fung or Taiwanese ODMs for the software industry.  By the way, that is a role that the major Indian IT services providers themselves might play in China, but only if they adopt a different mindset.  They must begin to appreciate the value of independent specialization and resist the temptation to try do do everything themselves.