GenAI Giants vs. Traditional IT: The Battle for Dominance
With Solutions and Opportunities for Young Engineers
This useful article written by Mr. Siddharth Pai — cofounder of Siana Capital in the Mint newspaper dated 30th April,2024.
Important Points from the Article are appended below:
1. Existential Threat to Indian IT Services Firms: Generative Artificial Intelligence (GenAI) companies, led by giants like Google, Meta, Microsoft, and OpenAI, are seen as an existential threat to traditional Indian IT service providers such as IBM, Infosys, and Wipro.
2. Information Asymmetry: GenAI companies have a significant advantage in terms of knowledge and access to advanced technologies compared to traditional IT service firms. This creates an information asymmetry that affects negotiations, innovation capabilities, and market competitiveness.
3. Implications of Information Asymmetry: Information asymmetry can lead to adverse selection, moral hazard, and market inefficiencies, as per classic economic theories. It can also skew the innovation capabilities of traditional IT service companies and affect their attractiveness to talent.
4. Tech Gap and Knowledge Gap: Traditional IT service companies face challenges in accessing cutting-edge AI technologies and methodologies. There is not only a technological gap but also a knowledge gap between GenAI companies and traditional IT firms.
5. Impact on Innovation and Market Share: GenAI companies are at the forefront of innovation and are defining the direction of the AI market. They require less maintenance from service providers compared to traditional software solutions, potentially reducing the market share of traditional IT service providers.
6. Talent Attraction: Top AI researchers and engineers are more inclined to work with companies at the cutting edge of AI technology, leading to talent attraction challenges for traditional IT firms. Meanwhile, Indian IT services firms rely heavily on low-cost, fresh graduate hires.
7. Need for Strategic Interventions: Bridging the gap between GenAI companies and traditional IT service providers is essential for fostering a competitive and inclusive AI market. Strategic alliances, partnerships for AI development, and continuous AI training for existing employees are suggested interventions.
Solutions and Opportunities for Young Engineers:
1. Continuous Learning: Young engineers should prioritize continuous learning and skill development, particularly in AI and machine learning technologies, to remain competitive in the evolving market.
2. Exploring Opportunities with AI Leaders: Seeking opportunities to work with leading AI companies like Google, OpenAI, or Microsoft can provide young engineers with exposure to cutting-edge technologies and valuable experience.
3. Specialization: Specializing in niche areas within AI, such as natural language processing or robotics, can enhance the attractiveness of young engineers to potential employers and increase their market value.
4. Collaborative Projects: Participating in collaborative AI projects or research-sharing initiatives between IT service companies and AI leaders can provide young engineers with opportunities to gain practical experience and contribute to industry advancements.
5. Networking: Building professional networks within the AI community and attending industry events or conferences can help young engineers stay updated on the latest trends and opportunities in the field.
Overall, young engineers should be proactive in seeking out opportunities for learning, collaboration, and specialization within the rapidly evolving AI landscape to position themselves for success in their careers.
I also found this thread especially useful:
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FULL TEXT:
As earnings announcements from Indian and other information tech- nology (IT) service providers have been making headlines, people who have seen their dismal figures have been asking me why generative artificial intelligence (GenAI) companies seem like an existential threat to Indian IT services firms. It’s simple. They ‘know’ more.
Along with OpenAI, giants like Google, Meta and Microsoft lead the AI development race and thus shape the discourse and access to these technologies. This starkly contrasts with traditional IT service companies such as IBM, Infosys and Wipro, which appear to be playing catch-up. This information asymmetry has significant implications and is by classic economic theories.
INFORMATION asymmetry occurs when one PARTY IN A tRonsaction has more or superior information than another. This concept WAS CAPTURED IN A SEMINAL work by George Spence and Joseph Stiglitz. Akerlof. Michael Soof Nobel Prize in Eco-nomics s for their analyses of markets with asymmetric information. In their view, such asymmetries can lead to adverse selection, moral hazard and market inefficiencies. As the chief buy-side negotiator for global clients seeking to dole out billion-dollar con- tracts to these service providers, I made a liv- ing straightening out such asymmetries for many years. Back then, IT firms with specialized knowledge could withhold information from buyers, leading to an unfairly negotiated deal that benefited the service provider. With a specialized sourcing negotiator on the buyer’s side (who has been a service pro- vider before), the client would no longer be at a disadvantage.
In today’s context, firms like Microsoft, OpenAI and Google have amassed vast data sets and advanced algorithms, bolstered by substantial R&D budgets and strategic partnerships. Their rapid progress in developing GenAl, machine learning models and neural networks is already well-documented.
Conversely, despite their formidable tech provide cand client networks, traditional IT service companies need help in accessing cutting-edge Al technologies and methodologies. This gap is not just technological. There is also a knowledge gap. And so an information asymmetry now exists between these two types of IT firms. The pioneers of Al operate in a milieu where the latest break throughs, be they in natural language pro- cessing or robotics, are part of their internal discourse well before they reach the broader market (including IT service providers).
This asymmetry can skew the innovation capabilities of IT service companies. Let’s not forget that the latter often rely on established technologies. An SAP or Oracle creates a software product such as Enterprise Resource Plan- ning (ERP), and a Wipro or an Infosys provides the services needed to inte- grate and maintain it. Now companies like Google or Open AI are creating new technologies, positioning themselves at the forefront of innovation and defining the direction of the Al market. The difference between those ERP solution providers and GenAl providers is that at the end of tech integration they need little maintenance from service providers going forward. Like the praying mantis, they would devour their mate-the IT Services programmers, i.e., who integrated their systems into their clients’ technology portfolio.
Separately, with superior AI capabilities, companies like Microsoft can offer more advanced solutions to clients, attracting business that might have gone to traditional IT service providers. I would not be sur- prised to see a Google or an OpenAI consulting arm bloom. This would consolidate power and market share among firms leading the AI revolution. As a result, investors are more likely to place their bets on companies at the cutting edge, exacerbating the disparity between Al innova- tors and traditional IT ser- vice providers. The effect of information asymmetry can already be seen in their diverging valuations.
There is also a stark difference in the attraction of talent. Top AI researchers and = engineers are more inclined to work with companies at the cutting edge. This often means choosing companies like OpenAI or Google over traditional IT firms. Meanwhile, most low-cost service providers look to hire fresh graduates, especially in India, where we have far more engineers graduating each year than there is demand for. This has granted Indian IT services firms the luxury of paying abysmally low wages, but at some point, these businesses need to realize that they get what they pay for. At current wages, what they get is a bunch of young employees who, though armed with shiny new degrees, need prolonged training before they can be of any use to clients.
Drawing lessons from economics, it is clear that this disparity could widen without strategic interventions, affecting not just individual companies, but the broader eco- nomic landscape. Bridging this gap is essen- tial for fostering a competitive and inclusive Al market. The hope is that IT service companies can form strategic alliances with AI leaders to gain access to advanced technologies and expertise. Partnerships for the development of specific AI applications or research-sharing will probably help.
Enhancing the skills and knowledge base of existing employees through continuous AI training and machine learning can improve the capacity of IT service companies to compete on a more equal footing. As the field evolves, so must the strategies of companies looking to stay relevant in the AI era.
