Zoho's Sridhar Vembu is sounding the alarm on the future of the Indian software industry, suggesting it faces a period of significant transformation, not just a temporary downturn. He believes the challenges are far more profound than those stemming from AI or trade tariffs, pointing to deeply rooted inefficiencies within the sector.

Vembu argues that the Indian IT industry has, for decades, been operating with bloated systems, over-hiring, and a reliance on easily accessible funding, leading to a state of inefficiency. He contends that these inefficiencies were further amplified by Indian IT services companies, which, driven by fixed dollar budgets and low per-capita costs, hired in bulk. This practice, according to Vembu, not only wasted talent but also entrenched unproductive systems where billing was based on staff-months, removing any incentive to innovate or streamline processes. He stresses that a small, highly efficient team can often outperform a much larger, less focused one.

He points out that the over-capacity in enterprise software was created due to the influx of venture capital, private equity, and IPO money. Software vendors then used marketing tactics to spread fear, uncertainty, and doubt among corporate customers, leading to ever-increasing IT spending. This resulted in large enterprises in the West having layers of duplicated IT systems, requiring vast human resources to maintain. These inefficiencies were then transferred to IT services firms in India, often multiplied.

While AI is currently providing modest productivity gains of around 10-20%, Vembu believes that the real threat comes from years of accumulated inefficiencies that now jeopardize the software job market. He suggests that the Indian software job market has become heavily dependent on these inefficiencies rather than true productivity gains.

Vembu highlights the example of Indian banks and financial institutions, which, with significantly lower budgets than their Western counterparts, have achieved far greater IT efficiency. Their lack of excess funding forced them to develop lean, cost-effective solutions, making them more resilient to external pressures.

Vembu emphasizes that the current situation is not just a cyclical downturn. He believes the industry is at an inflection point, and the last 30 years are not a reliable guide for the next 30. He urges industry leaders to challenge their assumptions and rethink strategies for the future. He also cautions that India, as a major software exporter, has adapted to and even relied on these inefficiencies, with millions of jobs tied to the sector's continued expansion. He expresses concern that the IT industry has absorbed talent that might have otherwise gone into manufacturing or infrastructure.

Vembu is not alone in his assessment. Concerns are growing about the future of the software industry as AI and automation threaten to disrupt traditional business models. Analysts suggest that AI-powered software could drastically increase development efficiency, reducing the need for large teams and potentially diminishing the economic influence of software companies, particularly in countries like India that have built their economies on software exports.

Vembu's analysis suggests a need for Indian IT to focus on solving its own unique challenges and prioritizing innovation and optimization.