Economic Value Added (EVA) Shyamlal R Sharma

MBA (Marketing) 2004-06 Sardar Patel University VV Nagar, Gujarat-388 001 E-mail: shyamsharma_2001@rediffmail.com / rock_0021@yahoo.co.uk By

Introduction What is Performance Measurement (PM)? Historically, PM systems was developed as a means of monitoring and maintaining organisational control, which is the process of ensuring that an organisation pursues strategies that lead to the achievement of overall goals and objectives (Nanni, et al 1990). PM plays a vital role in every organisation as it is often viewed as a forward-looking system of measurements that assist managers to predict the company's economic performance and spot the need for changes in operations. In addition, PM can provide managers, supervisors and operators with information required for making daily judgements and decisions. PM is increasingly used by organisations, as it enables them to ensure that they are achieving continuous improvements in their operations in order to sustain a competitive edge, increase market share and increase profits. Traditional measures Traditional PM has mainly been financial measuring ratios such as ROI (Return on Investment), RI (Residual Income), and EPS (Earnings per share). These metrics accounts for the costs associated with capital and help firms spot areas in which capital is being invested unprofitably. Although these financial data have the advantage of being precise and objective, the limitations are far greater, making them less applicable in today's competitive market. Organisations, that have adopted the traditional PM, have experienced great difficulty in trying to fit the measures with increasing new business environment and current competitive realities. While the traditional financial metrics are value-based, they are nonetheless lagging indicators. They offer little help for forward-looking investments, where future earnings and capital requirements are largely unknown investments such as new product introductions and capital or new market entry. This will lead to narrow short-term decision-making based on bottom-line financial results. On the other hand, most of the criticism of traditional PM stems from their failure to measure and monitor multiple dimensions of performance, by concentrating almost exclusively on financial measure (Brignall and Ballantine, 1996). They solely concentrate on minimising costs and increasing labour efficiency while neglecting other operational performance measures such as quality, responsiveness and flexibility (Skinner, 1974) Therefore focusing on financials to the exclusion of all other factors can produce distortions such as low cost and high margin productions unnecessarily. However, despite the criticisms made on traditional financial measure, many companies still use them to measure performance. Many organisations, even until the end of 1970s, operate performance under central control, through large functional department. Thus, allowing managers to use slowreacting and tactical management control system such as 'budgets'. These budgeting measures

mainly focus on short-term value creation as it only attempts to control and improve existing operations. However budgeting systems are inflexible for today's dynamic and rapidly changing environment organisations still continue to use them. This is because implementing new measures designed to manage strategy and not control is very difficult. Moreover, most companies motivate their worker through reward system. Rewards can be financial such as cash payments, bonuses or share options and non-financial such as promotion. Traditionally, employees are rewarded with bonuses at the end of the year once a specific target has been achieved. However, this reward system causes short-termism as employees are seen to narrow down their focus by just targeting the 'rewarded' goal. They may not take other factors, such as quality and service into consideration. Hence leading businesses to run without long-term vision. EVA (Economic Value Added) EVA (Economic Value Added) was developed by a New York Consulting firm, Stern Steward & Co in 1982 to promote value-maximizing behaviour in corporate managers (O'Hanlon. J & Peasnell. K, 1998). It is a single, value-based measure that was intended to evaluate business strategies, capital projects and to maximize long-term shareholders wealth. Value that has been created or destroyed by the firm during the period can be measured by comparing profits with the cost of capital used to produce them. Therefore, managers can decide to withdraw value-destructive activities and invest in projects that are critical to shareholder's wealth. This will lead to an increase in the market value of the company. However, activities that do not increase shareholders value might be critical to customer's satisfaction or social responsibility. For example, acquiring expensive technology to ensure that the environment is not polluted might not be of high value from a shareholder's perspective. Focusing solely on shareholder's wealth might jeopardize a firm reputation and profitability in the long run. EVA sets managerial performance target and links it to reward systems. The single goal of maximizing shareholder value helps to overcome the traditional measure problem, where different measures are used for different purposes with inconsistent standards and goal. Rewards will be given to managers who are able to turn investor's money and capital into profits efficiently. Researches have found that managers are more likely to respond to EVA incentives when making financial, operational and investing decision (Biddle, Gary, Managerial finance 1998), allowing them to be motivated to behave like owners. However this behaviour might lead to some managers pursuing their own goal and shareholder value at the expense of customer satisfaction. Unlike simple traditional budgeting, EVA focuses on ends and not means as it does not state how manager can increase company's value as long as the shareholders wealth are maximised. This allowed managers to have discretion and free range creativity, avoiding any potential dysfunctional short-term behaviour. Rewards such as bonuses from the attainment of EVA target level are usually paid fully at the end of 3 years. This is because workers' performance is monitored and will only be rewarded when this target is maintained consistently. Hence, leading to long-term shareholders' wealth. Cola-Cola is one of the many companies that adopted EVA for measuring its performance. Its aim, which was to create shareholders wealth, was announced in its annual report. Coca-Cola CEO Roberto Goizueta accredited EVA for turning Coca-Cola into the number one Market Value Added Company. Coca-Cola's stock price increased from $3 to over $60 when it first adopted EVA in the early 1980s. In 1995, Coca-Cola's investor received $8.63 wealth for every dollar they invested. Most companies refer to stock price increase as an outcome of implementing EVA. However, empirical studies have found that traditional accounting measure have provided a similar, or even better result

in increasing stock performance (Dodd J and Johns J 'EVA reconsidered'). EVA is a financial measure based on accounting data and is therefore historical in nature. It has the same limitations as other traditional accounting measures and cannot adequately replace all measures within the company especially the non-financial ones. Due to the historical nature of EVA, manager can benefit in terms of rewards or be punished by the past history of the organisation (Otley, David Performance management 1999). Dodd J and Johns J see the balanced scorecard as one approach to overcome the potential problem of using a single financial measure such as EVA. How Companies Have Used EVA
Name The Coca-Cola Co. AT&T Corp. IBM Herman Miller Inc. Timeframe Early 1980s 1994 1999 Late 1990s Use of EVA Focused business managers on increasing shareholder value Used EVA as the lead indicator of a performance measurement system that included "people value added" and "customer value added" Conducted a study with Stern Stewart that indicated that outsourcing IT often led to short-term increases in EVA Tied EVA measure to senior managers' bonus and compensation system

4 Ms of EVA As a mnemonic device, Stern Stewart describes four main applications of EVA with four words beginning with the letter M. Measurement EVA is the most accurate measure of corporate performance over any given period. Fortune magazine has called it "today's hottest financial idea," and Peter Drucker rightly observed in the Harvard Business Review that EVA is a measure of "total factor productivity" whose growing popularity reflects the new demands of the information age. Management System While simply measuring EVA can give companies a better focus on how they are performing, its true value comes in using it as the foundation for a comprehensive financial management system that encompasses all the policies, procedures, methods and measures that guide operations and strategy. The EVA system covers the full range of managerial decisions, including strategic planning, allocating capital, pricing acquisitions or divestitures, setting annual goals-even day-to-day operating decisions. In all cases, the goal of increasing EVA is paramount. Motivation To instill both the sense of urgency and the long-term perspective of an owner, Stern Stewart designs cash bonus plans that cause managers to think like and act like owners because they are paid like owners. Indeed, basing incentive compensation on improvements in EVA is the source of the greatest power in the EVA system. Under an EVA bonus plan, the only way managers can make more money for themselves is by creating even greater value for shareholders. This makes it possible to have bonus plans with no upside limits. In fact, under EVA the greater the bonus for managers, the happier shareholders will be. Mindset When implemented in its totality, the EVA financial management and incentive compensation system

transforms a corporate culture. By putting all financial and operating functions on the same basis, the EVA system effectively provides a common language for employees across all corporate functions. EVA facilitates communication and cooperation among divisions and departments, it links strategic planning with the operating divisions, and it eliminates much of the mistrust that typically exists between operations and finance. The EVA framework is, in effect, a system of internal corporate governance that automatically guides all managers and employees and propels them to work for the best interests of the owners. The EVA system also facilitates decentralized decision making because it holds managers responsible for-and rewards them for-delivering value. The EVA Concept of Profitability EVA is based on the concept that a successful firm should earn at least its cost of capital. Firms that earn higher returns than financing costs benefit shareholders and account for increased shareholder value. In its simplest form, EVA can be expressed as the following equation: EVA = Net Operating Profit After Tax (NOPAT) - Cost of Capital NOPAT is calculated as net operating income after depreciation, adjusted for items that move the profit measure closer to an economic measure of profitability. Adjustments include such items as: additions for interest expense after-taxes (including any implied interest expense on operating leases); increases in net capitalized R&D expenses; increases in the LIFO reserve; and goodwill amortization. Adjustments made to operating earnings for these items reflect the investments made by the firm or capital employed to achieve those profits. Stern Stewart has identified as many as 164 items for potential adjustment, but often only a few adjustments are necessary to provide a good measure of EVA.[1] Measurement of EVA Measurement of EVA can be made using either an operating or financing approach. Under the operating approach, NOPAT is derived by deducting cash operating expenses and depreciation from sales. Interest expense is excluded because it is considered as a financing charge. Adjustments, which are referred to as equity equivalent adjustments, are designed to reflect economic reality and move income and capital to a more economically-based value. These adjustments are considered with cash taxes deducted to arrive at NOPAT. EVA is then measured by deducting the company's cost of capital from the NOPAT value. The amount of capital to be used in the EVA calculations is the same under either the operating or financing approach, but is calculated differently. The operating approach starts with assets and builds up to invested capital, including adjustments for economically derived equity equivalent values. The financing approach, on the other hand, starts with debt and adds all equity and equity equivalents to arrive at invested capital. Finally, the weighted average cost of capital, based on the relative values of debt and equity and their respective cost rates, is used to arrive at the cost of capital which is multiplied by the capital employed and deducted from the NOPAT value. The resulting amount is the current period's EVA. EVA Calculation and Adjustments As stated above, EVA is measured as NOPAT less a firm's cost of capital. NOPAT is obtained by adding interest expense after tax back to net income after-taxes, because interest is considered a capital charge for EVA. Interest expense will be included as part of capital charges in the after-tax cost of debt calculation.

Other items that may require adjustment depend on company-specific activities. For example, when operating leases rather than financing leases are employed, interest expense is not recorded on the income statement, nor is a liability for future lease payments recognized on the balance sheet. Thus, while interest is implicit in the yearly lease payments, an attempt is not made to distinguish it as a financing activity under GAAP. Under EVA, however, the interest portion of the payment is estimated and the after-tax amount from it is added back into NOPAT because the interest amount is considered a capital charge rather than an operating expense. The corresponding present value of future lease payments represents equity equivalents for purposes of capital employed by the firm, and an adjustment for capital is also required. R&D expense items call for careful evaluation and adjustment. While GAAP generally requires most R&D expenditures to be expensed immediately, EVA capitalizes successful R&D efforts and amortizes the amount over the period benefiting the successful R&D effort. Other adjustments recommended by Stern Stewart include the amortization of goodwill. The annual amortization is added back for earnings measurement, while the accumulated amount of amortization is added back to equity equivalents. Goodwill amortization is handled in this manner because by "unamortizing" goodwill, the rate of return reflects the true cash-on-yield. In addition, the decision to include the accumulated goodwill in capital improves the real cost of acquiring another firm's assets regardless of the manner in which the acquisition is accounted. While the above adjustments are common in EVA calculations, according to Stern Stewart, those items to be considered for adjustment should be based on the following criteria: Materiality: Adjustments should make a material difference in EVA. Manageability: Adjustments should impact future decisions. Definitiveness: Adjustments should be definitive and objectively determined. Simplicity: Adjustments should not be too complex.

If an item meets all four of the criteria, it should be considered for adjustment. For example, the impact on EVA is usually minimal for firms having small amounts of operating leases. Under these conditions, it would be reasonable to ignore this item in the calculation of EVA. Furthermore, adjustments for items such as deferred taxes and various types of reserves (i.e. warranty expense, etc.) would be typical in the calculation of EVA, although the materiality for these items should be considered. Unusual gains or losses should also be examined and eliminated if appropriate. This last item is particularly important as it relates to EVA-based compensation plans. Strategies for increasing EVA Increase the return on existing projects (improve operating performance) Invest in new projects that have a return greater than the cost of capital Use less capital to achieve the same return Reduce the cost of capital Liquidate capital or curtail further investment in sub-standard operations where inadequate returns are being earned

Advantages of EVA EVA is more than just performance measurement system and it is also marketed as a motivational,

compensation-based management system that facilitates economic activity and accountability at all levels in the firm. Stern Stewart reports that companies that have adopted EVA have outperformed their competitors when compared on the basis of comparable market capitalization. Several advantages claimed for EVA are: EVA eliminates economic distortions of GAAP to focus decisions on real economic results EVA provides for better assessment of decisions that affect balance sheet and income statement or tradeoffs between each through the use of the capital charge against NOPAT EVA decouples bonus plans from budgetary targets EVA covers all aspects of the business cycle EVA aligns and speeds decision making, and enhances communication and teamwork

Academic researchers have argued for the following additional benefits: Goal congruence of managerial and shareholder goals achieved by tying compensation of managers and other employees to EVA measures (Dierks & Patel, 1997) Better goal congruence than ROI (Brewer, Chandra, & Hock, 1999) Annual performance measured tied to executive compensation Provision of correct incentives for capital allocations (Booth, 1997) Long-term performance that is not compromised in favor of short-term results (Booth, 1997) Provision of significant information value beyond traditional accounting measures of EPS, ROA and ROE (Chen & Dodd, 1997)

Limitations of EVA EVA also has its critics. The biggest limitation is that the only major publicly-available sample evidence on the evidence of EVA adoption on firm performance is an in-house study conducted by Stern Stewart and except that there are only a number of single-firm or industry field studies. Brewer, Chandra & Hock (1999) cite the following limitations to EVA: EVA does not control for size differences across plants or divisions EVA is based on financial accounting methods that can be manipulated by managers EVA may focus on immediate results which diminishes innovation EVA provides information that is obvious but offers no solutions in much the same way as historical financial statement do

Also, Chandra (2001) identifies the following two limitations of EVA: Given the emphasis of EVA on improving business-unit performance, it does not encourage collaborative relationship between business unit managers EVA although a better measure than EPS, PAT and RONW is still not a perfect measure

Brewer et al (1999) recommend using other performance measures along with EVA and suggest the balanced scorecard system. Other researchers have noted that EVA does not correlate as strongly with stock returns as its proponents claim. Chen & Dodd (1997) found that, while EVA provides significant information value, other accounting profit measures also provide significant information and should not be discarded in favor of EVA alone. Biddle, Brown & Wallace (1997) found only

marginal information content beyond earnings and suggest a greater association of earnings with returns and firm values than EVA, residual income, or cash flow from operations. Finally, a key criticism of EVA is that it is simply a retreaded model of residual income and that the large number of "equity adjustments" incorporated in the Stern Stewart system may not be necessary (Barfield, 1998; Chen & Dodd, 1997; O'Hanlon & Peasnell, 1998; Young, 1997). The similarity between EVA and residual income is supported by Chen and Dodd (1997) who note that most of the EVA and residual income variables are highly correlated and are almost identical in terms of association to stock return. Bibliography Berry J. (2003). Economic Value Added. Computerworld. McLaren J. (2003). A Sterner Test. Financial Management. Taub S. (2003). MVPs of MVA. CFO. King J. (2002). Metrics for the Book. Computerworld. Paulo S. (2002) Is EVA Fiction? An Academic Comment. Corporate Finance. "EVA Clients Outperform the Market and Their Peers" (2002). EVAluation. "How to Structure Incentive Plans that Work" (2002). EVAluation. Aggarwal R. (2001). Using Economic Profit to assess performance: A metric for Modern firms. Business Horizons. Ray R. (2001). EVA: Theory, Evidence, A Missing Link. Review of Business. "EVAluating M&As How to avoid overpaying" (2001). EVAluation. Shand D. (2000). Economic Value Added. Computerworld. Kudla R. J. (2000). Making EVA Work. Corporate Finance. Prober L. M. (2000). EVA: A Better Financial Reporting Tool. CPA Journal. "Case study: NIIT, Paying for value" (2000). Business India Intelligence.

Shyamlal R Sharma
MBA (Marketing) 2004-06 Sardar Patel University VV Nagar, Gujarat-388 001

Indian Software Industry Moving Up The Value Chain? Jaydeep Chakraborty Chitrita Bhattacharya
E-mail: u105072@ximb.ac.in Student Xavier Institute of Management Bhubaneswar-751 013 E-mail: u105080@ximb.ac.in By

Executive Summary

Indian software companies have been in the business of application development and maintenance for global clients for a decade now. This model of doing business has been a high revenue generator so far bringing a high return on investment (ROI). However, in this age of competition, price undercutting and rise in salaries, this model may not yield the desired returns for long. Figures prove that had market forces been solely allowed to influence the revenues of Indian software companies, they would have been in the red since 2003-04. The depreciation of the Indian Rupee and the infrastructure facilities provided by the Government at a low cost have so far minimized the effects of these market factors. Therefore, it is imperative that Indian software companies look at the higher end of the value chain to sustain themselves and improve their profitability. There are two broad ways Indian software companies can move up the value chain consulting and product development. Indian companies have built up substantial domain knowledge through application development and maintenance to get into the business of consulting. However, as a first step, they need to metamorphosise their image of low cost back-office service providers to product developers and domain consultants. Product development, on the other hand, is a high risk business. This is because the product might fail in the market thereby sinking the entire investment made on it. However, the pros far outweigh the cons. By not getting into the business of product development, Indian companies are likely to miss the exponential revenue growth associated with successful products. The major areas where Indian software companies can make their mark are o E business o Open source software o Domain specific proprietary software. Many Indian companies are already trying to scale up the value chain. Companies like I-Flex, Wipro and Infosys generate some part of their revenue through product development and consulting. Many smaller companies are also joining the bandwagon. This augurs well for the future of Indian software. Our paper explores these possibilities with respect to changes in existent business and revenue models and suggests possible measures that can be adopted to derive greater benefits by scaling the IT value chain. The scenario so far Over the past decade, Indian software companies have been providing offshore development worldwide. This was a feasible business model given the business environment then. However, business today is more competitive. Software companies are faced with rising costs and huge billing pressures for their traditional businesses. It is therefore time to take the next step and move up the value chain. This would require a right mix of infrastructure, operations and business intelligence. The perception of India being just a low costs solution provider needs to be upgraded to a perception of better value. Moving up the value chain is also imperative now as India now faces competition from countries like China, Russia and Poland. India is also losing its cost advantage its USP for a long time due to rise in wage rates in the software industry. To understand the reasons for the high wage arbitrage,

the key lies in analyzing the following forces acting on the wage rate arbitrage. o Price undercutting by competitors. o Shift towards offshore development due to an increased understanding of the cost structures of Indian companies among its customers. o The low barriers to entry in this industry means increased competition from companies in India and abroad. o Increase in wage rates in the industry and also the issues involved with the retention of talent by companies. The advantages of low cost would perhaps last for another fifteen years. After that, we cannot survive unless we innovate. Therefore, increasing competition and increase in billing rates are the factors that will eventually force the Indian software companies to move up the value chain. A look at the following data on revenue productivity depicts the urgency required on the part of the Indian software companies to move along the value chain. A comparison of Revenue Productivity (Figures in $) FY01 Revenue Productivity per employee 57002 Employee Cost 28285 Other Cost 13953 Profit 14765 Source India Infoline Here, we see that left to the market forces completely; the Indian software companies should have made losses from FY 2003-04 onwards. One of the reasons it has not happened is the depreciatiation of the rupee. Another reason is that many Indian software companies, particularly the tier I companies have successfully lobbied with the government to provide them with huge infrastructure facilities at rates substantially lower than the market rates. Therefore, we conclude that Indian software companies can maintain profitability by either going up or by going down the value chain. Moving down the value chain might appear attractive in the short run as it means shifting the projects to offshore from a mix of offshore- onsite model. This means the expenses will be in rupees while the income will be in dollars. However, the major flaw of this argument is that the customers of the companies do not reduce their billing rates so that the companies continue to enjoy huge margins. This is an impossibility as we can see from the current situation. Therefore, the only logical way to keep up profitability is to move up the value chain. Product development is a high risk - high gain proposition. On the positive side, if a company is successful in developing a hit product it can experience an exponential growth in revenue and profits. On the flip side, there are chances of the product failing in the market. There is also a chance that the product is marginalized by a superior product of the competitors having same attributes, providing same benefits and similar value proposition. Most Indian software companies stayed away from product development to earn handsome margins on relatively lower investments thereby reducing risks. Strengths that Indian software industry can leverage FY02 59852 35356 14790 9706 FY03 FY04 62845 65987 44195 55243 15677 16618 2973 (-)5874

India produces thousands of software engineers yearly. This huge pool of manpower is well versed with English - the language of international communication. As companies worldwide pack in more functions of cars, consumer electronics etc into the chip, the need for embedded software is increasing. This is clearly one of India's core strengths. Through Application Development and maintenance (ADM) Indian companies are acquiring domain knowledge. To beat the competition, the companies today are providing high - end services like package implementation, IT consulting and systems integration. The industry is moving towards more domain intensive solutions. This is in line with the Indian software industry's movement up the value chain. The industry needs to build on this and move to the next higher level. A typical high end IT project in India consists of three stakeholders the Indian software company, the client whose expertise is normally not technology (e.g. banks) and a consultant hired by the client. This consultant (normally a company with expertise in the domain of the business of the client and also in technology) advises the clients on the technology to adopt, the software package to implement, the customizations required to suit the requirements of the client business etc. In short, the consultant acts as the project manger for the client. Indian software companies are trying to move into this area by leveraging on the domain expertise they have gathered over the years. However, Indian software companies are still not perceived as having sufficient skills to move into this area. They therefore need to develop such expertise. This is the reason for the need of high end application development; something that businesses believe is worth investing in. Opportunities for moving up the value chain The Indian software companies have built up huge cash reserves by earning huge profits over many years. They therefore have the financial muscle to invest in development of high end products and technologies. E business consulting is an area where Indian software companies can command premium prices. This offers these companies an opportunity to improve revenue productivity. E-commerce offers a wide variety of new and expanded channels and other opportunities to grow revenues for a company. These companies can exploit the ubiquitous, global nature of the World Wide Web to access new customers in new markets almost as easily as they serve local customers. The very nature of the medium is well suited to creation and delivery of electronic products and services that do not exist outside the e-commerce arena (e.g., online gaming, music downloads, etc.). Ebusinesses generate these revenues in an integrated fashion and turn those revenues into profits. Strategic Business Model Target customers Financial institutions like Insurance Companies, Cooperative Societies, etc. Benefits * Increased reach to customers * Digital services in the form of transactions and data validations * Increased communication of services and promotions * Products to manage backend services of online companies * Enhanced customer data management for targeted sales promotions * Improved inventory management.

Retail sales Brick and mortar companies

* Improved supply chain management Potential sources of revenues: The revenue opportunities represented by e-business can be classified into three broad categories. These are: Enhanced access to customers Enhanced sales to existing customers Electronically enabled products * Companies using E-business can therefore look towards a larger customer base which can drive up their volume sales and subsequently their profitability. * These companies can also expect a higher customer lifetime value from their existing customers. * Enabling the customers to design the product according to their requirements also represents huge potential sources of revenue. Such a product can therefore be much in demand with the customers of the Indian companies developing them and represent major sources of revenue. Open source software development is another area where Indian software companies can venture into. It has wide scope with opportunities of converting open standards into actual software, increased reliability and robustness combined with rapid bug fixes and customization of the software at the user's own schedule. In addition, peer and public reviews ensure enhanced security. Strategic Business Model Target customers Banking , other financial institutions and service sectors Retail chains Benefits * Enhanced security * Customized solution * Reliable and robust performance * Improved inventory management * Enhanced customer data management for targeted sales promotions * Development of web based library systems * Development of content management systems

Academic institutions

Potential sources of revenue: In case of open source software development, revenue is generated in mainly two ways: The first is where the company which develops the product gives it away to the users. The users are then are allowed to modify the product and resell it. The modified product however, still carries the company's brand name. The company also provides after sale services. The other way is generally used where the software is necessary to drive hardware. The customers i.e. the hardware companies buy these open source software to get better drivers and cheaper interface tools. Continuous innovation by the company developing the open

source software is therefore necessary to maintain its revenue flows. Domain specific proprietary software is also a largely untapped market. Here, the Indian software companies can leverage upon their domain expertise in banking, telecom etc to develop products which suits a wide range of needs of different companies. Potential sources of revenue: The product being proprietary in nature, will earn royalties for the company when being used by the customers. The company therefore does not have to give up its control over the software while at the same time it can generate a steady flow of revenues.

Challenges likely to be faced while trying to scale up the value chain Over a period of time, Indian software companies have acquired the image of being application maintenance shops who take projects from international companies by quoting the lowest prices possible. This image hinders their being considered for high end jobs where rates are high. Indian companies also need to retrain their human resource pool so that they are able to work in the changed environment. This apart from being a big technological challenge is also a major HR challenge. Except for a handful of Indian companies, most do not work to develop products as of now. Therefore, to move up the value chain, these companies would have to reorient their business models. For smaller companies trying to enter this market (the tier II companies) generating the revenue to start such operations in a big way is a challenge. Product development being a high risk game might not find much favour with venture capitalists. The recent measures taken Companies worldwide are trying to find ways to do business better and more efficiently. They are looking for ways to use technology in order to maintain their competitive advantage. Many software companies are already getting into product development and consulting in a big way. I-Flex generates about 63% of its revenues from Flexcube, while for TCS the figure stands at about 66 crore. Smaller companies like Polaris and Orbitech are also following suit. About 37% of all the products developed are sold in the domestic market. Product exports constitute only about 2% of the total software exports. This indicates to the enormous opportunities that beckon the Indian software companies in their quest to move up the value chain. REFERENCES www.indiainfoline.com www.management.itmanagersjournal.com www.gatewaytechnolabs.com www.crmbuyer.com www.stylusinc.com

Jaydeep Chakraborty
E-mail: u105080@ximb.ac.in

Chitrita Bhattacharya
E-mail: u105072@ximb.ac.in Student Xavier Institute of Management Bhubaneswar-751 013 Source : E-mail November 18, 2005