Many years ago, an analyst asked me this question: ?Would you like a car or a car service station?? Well, who would think of a service station when confronted with a gleaming, new four-wheeler. He then got up from his chair and said: ?Why would you then look admiringly at software services firms, which do just that?service.? That point stayed hit, though his views looked unreasonable at that time.
The truth is India?s $100 billion information technology sector has been a showpiece industry for us in the last 30 years. Certainly over the last two decades, it has put the country on the international business map, having earned immense global respect besides billions of dollars in foreign exchange. But there is no denying the fact that it is today at a crossroads. By the end of this decade the nature of the global IT business would have have undergone tremendous metamorphosis. Servicing cannot be the be-all and end-all of the new era of software.
But are India?s top notch IT firms up for the new game?
Companies like TCS, Infosys and Wipro have built empires on the linear model of business, by perfecting the global delivery model. You add more employees, you reap more revenues. The company with the largest workforce wins. However, it is now clear that the days of linearity are numbered. Nasscom says the Indian IT sector will be worth $200 billion by year 2020. If that has to happen, the linear model has to break. Revenues from products, consulting, mobility, cloud and analytics have to take wing. As of now, most Indian IT vendors secure less than 10% from non-linearity. And that is just not good enough.
Wipro CEO TK Kurien is a firm believer that the linear model will crack. He says there are enough signs of that happening already. A sector that has been used to 30-40% growth year-on-year is today struggling to keep the level above 20%. Industry chieftains have started to realise that they have to look inwards for solutions. Accelerating a non-linear growth curve will be a good start. The non-linear model, which is basically revenue growth without having to increase the headcount, has the potential to save costs for the client but also raise the revenue productivity per employee. Indian IT vendors will soon reach a stage where adding more employees will no longer be profitable. Staff training is already a huge cost for them.
There is some strategic shift blowing in the wind. A company like Infosys is looking to derive nearly 30% of its revenues from non-linear sources by the end of this decade. Hence, it has formulated a product strategy. Finacle, its global banking software product, has been a success, but it would need more such products. Wipro, on the other hand, is betting on consulting and analytics. The days of depending on offerings such as application, development and maintenance (ADM) are over. That?s why TCS, India?s biggest IT company, has put down non-linear revenue growth as something of strategic priority. TCS has laid emphasis on software products, platform-based BPO services and its IT-as-a-service business.
Software as a service (SaaS) is a software application delivery model through which an enterprise vendor develops a web-based software application and then hosts and operates that application over the internet, for use by its customers. The customers do not need to buy software licences, but only have to pay monthly fees for its use. This has become a huge rage globally, and Indian IT vendors have picked up the game well. Platform-based BPO services, where pricing is outcome based, have been a big success as well. Cognizant too has started to big bet on non-linearity. After having gained enormously on global service delivery, Cognizant is now employing an outcome-based model and is now concentrating heavily on cloud-based offerings. This is the future.
With companies like Infosys missing its revenue forecast time and again, and firms like Wipro barely able to provide a decent guidance, it is clear that the system needs an overhaul. Infosys executive co-chairman Kris Gopalakrishnan and Wipro CEO TK Kurien have in recent interviews with FE admitted that what worked in the past may not work in the future.
But to give the devil its due, it has been a remarkable journey for the software sector. In 1991-92, the industry had revenues of $150 million. By the end of that decade it had moved up to nearly $6 billion. Today it is a $100 billion giant. Sometimes, a giant too requires some help. The Indian government has been neglecting the sector of late. But that was not the case earlier. Way back in 1986, the government had formulated its software policy and a couple of years later it established the Software Technology Parks of India (STPI) scheme. But in recent times, the Union Budgets have not been very kind. The STPI scheme has expired and MAT has been a drag on margins. Industry body Nasscom has been trying to convince the government of going easy on the sector, but to no avail.
The fact is Indian IT is looked upon as a mature industry now. This is reflected in the sober wage hikes. One can no longer expect the government to come to its aid. The sector has to now realise it is time to go up the value chain and FY13 may well be the harbinger of change.
dj.hector@expressindia.com