IT firms’ biz model could pose threat to growth

Feb 25 2013, 01:50 IST
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SummaryIndia’s software services firms embarking on developing products and platforms in a bid to get more lucrative revenue streams will find their biggest challenge coming from their own existing business models and the need to meet market expectations on a quarterly basis.

India’s software services firms embarking on developing products and platforms in a bid to get more lucrative revenue streams will find their biggest challenge coming from their own existing business models and the need to meet market expectations on a quarterly basis.

The $70-billion Indian information technology services industry has very clearly recognised that products and platforms as a vertical is the way ahead as the current way of doing business involving time and material contracts, addition of headcount in a linear fashion and other mundane tasks are increasingly getting commoditised.

However, Indian IT services companies like Tata Consultancy Services, Infosys, Wipro and Mahindra Satyam that have undertaken a ride on the tough terrains of software products will find very steep challenges in terms of conflicting business models. Sharad Sharma, former R&D head of Yahoo and Nasscom product forum chair, said that the business model of running a services company and a product-type business is completely different and companies will really struggle to make this transition.

According to industry observers, the product story in many Indian IT companies has always been subservient to services because of unpredictable revenue cycles and long gestation periods.

From a strategy perspective, one major area where the firms have failed was in ensuring separate, dedicated organisations for the products and services businesses. Senior management support, product business unit branding and its leadership have also not been consistent with the rest of the organisation.

While welcoming the move by companies such as Infosys and Wipro in forming separate groups to foster product business, TR Madan Mohan, managing partner, Browne & Mohan, a consultancy firm, said, “Until there is a clear distance between the services and product businesses and the product business is unshackled from the vagaries of the stock market, the efforts may not yield results.”

Among the large Indian IT services companies, Infosys has been the most vocal about its product and platform strategy in showcasing various solutions. Sanjay Purohit, senior vice-president and global head for products, platforms and solutions (PPS), Infosys, said, “We cumulatively secured a total contract value of over $600 million and are working with more than 70 customers in the products and platform space and this is beside Finacle, which has close to 150 customers.”

At present, Infosys derives only 6.1% revenues from products, platforms and solutions business. However, the Bangalore-based IT firm aspires to take it to 33% in the next five to seven years, which would imply some “inorganic growth because organically it is not easy to grow at that rate”, Purohit said.

However, many analysts privately wonder about the seriousness of product strategy by Indian IT companies as many of them do not boast of any board representation of individuals from such backgrounds. The presence of board members coming from a products background would certainly provide the strategic push. Industry experts feel that one of the biggest challenges these companies will face is getting the right kind of talent. Indian companies are used to picking up talent from engineering colleges or rival firms but they will have to really hunt for the right set of people who will come at a higher cost when it comes to product play.

However, there are a few who are more confident about the prospects of Indian IT services garnering better revenues from products and platforms in the future. Sundararaman Viswanathan, manager, Zinnov, a consultancy firm, said, “All these service providers have had a history with products and platforms. Infosys, Wipro, TCS have had a culture of software product development. They know what it takes to build and successfully sell a product in the marketplace and hence are quite competent as anybody else in the space.”

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