From services to products, SaaS could be the panacea for Indian IT’s future growth
October 8, 2020 5:20 AM
At a time when the Indian IT services industry is facing a first principles challenge from the advent of automation, SaaS may be a panacea for future growth
At a time when the Indian IT services industry is facing a first principles challenge from the advent of automation and simpler cloud infrastructure, SaaS may be a panacea for future growth. (Representative image)
By Rohit Bhat & Suraj Subramaniam
A decade ago, hardly anyone outside the Indian techno-entrepreneurial scene would have heard of Software-as-a-Service (SaaS). Today, IT industry body Nasscom estimates Indian SaaS revenues at ~$3.5 billion and forecasts it to grow six times by 2025, calling the industry a trillion-dollar opportunity. At a time when the Indian IT services industry is facing a first principles challenge from the advent of automation and simpler cloud infrastructure, SaaS may be a panacea for future growth.
Let us look at what SaaS is and the drivers for its growth. Back in the 1980s and 1990s, any company selling software to a client would generally host it on local servers at the client’s premises. By the early 2000s, the advent of the internet (remote public connectivity) and cloud computing (ability to expand and contract computing resource on demand) changed this dynamic. They enabled companies to run a single version of their software in a remote cluster of servers serving multiple clients rather than having to install an instance of the software for each of their clients. Doing this drastically reduced the cost of building and maintaining both the software and hardware. The US companies like Salesforce began to “rent out” their software for usage, rather than selling the licence, converting the upfront capital expenditure of software purchase into an ongoing operating expense. This significantly reduced the hurdle for a business to try new kinds of software.
Along the way, the reduction in custom-built software also enabled the standardisation of APIs (the interfaces through which different pieces of software speak to each other). Low-end maintenance process work, such as error fixes, traffic management, security and customer support, started getting automated via artificial intelligence (AI)/machine learning (ML) algorithms and bots. Simultaneously, large centralised cloud service providers (like Amazon Web Services) began increasing their share in the pie and replacing IT services players who managed the on-premise IT infrastructure, enabling smaller SaaS companies to build software without worrying about their own hardware costs. In short, the technological changes plaguing Indian IT services are the same ones propelling SaaS.
The first successful wave of Indian SaaS companies emerged as startups targeting (primarily the US) small and medium businesses (SMBs). Many of these companies, like Zoho, Freshworks and Wingify, served the unmet sales, marketing, scheduling and ticketing needs of small businesses. In some ways, these companies exemplify the textbook strategy that Indian IT services and pharma companies followed—fast “genericisation” of existing higher-priced products leveraging India’s low-cost knowledge worker pool. Moreover, selling from India via phone or chat (also known as “inside sales”) was cheaper than doing so from the US, and it helped that both India and the US shared similar digital marketing channels to generate leads—Google search words, online community forums and digital advertisements. Arguably, this has been the core thesis of many VC investments in the Indian SaaS space.
The second wave of SaaS startups targeted larger corporates or the “enterprise” as it is referred to in industry speak. Generally speaking, the founding teams of these second-wave SaaS startups tended to have deep tech experience or experience selling into the US enterprise—either in IT or consulting. A few of them had products and expertise that were relevant in the mobile or AI era where Asia was often at par with the US, if not ahead of the curve. One of the reasons for this is that the first device an Asian field staff (say, a telecom worker) is exposed to is often the smartphone, while their US counterparts have used laptop-based software for years. Examples of successful Indian upstarts in this wave include Druva (enterprise security and data protection software), Icertis (enterprise contract management), and Zinier (field service management).
While it is generally believed in the software industry that upstarts have an edge in winning innovation battles against incumbents, scanning the list of global SaaS category leaders in a recent Nasscom report, one sees both the old and new—especially where the enterprise is a customer. Success stories like Salesforce, Workday, Shopify, Slack and Zoom (all born 1999 or later) jump out. However, you also see companies like Microsoft, Fiserv, FIS, SAP, Oracle, ADP, Adobe and Intuit, who were all founded 1984 or before.
Closer home, there are several examples of last generation IT companies that had built products that were offered as part of the overall services package to the client. A select few (who managed to achieve IP-led pricing instead of labour-led pricing) to either improve product focus or unlock value started separating these products businesses from their services parent. Infosys acquired a product company Edgeverve in 2014 and merged its core banking software, Finacle, into it. Similarly, the founders of Polaris sold their old services business to focus on its core banking system software at Intellect Design. IT player Mastek spun out its insurance SaaS business (Majesco), listed it on the Nasdaq, and is currently pursuing a strategic sale to a US private equity firm at a handsome valuation. All the IT services offshoots mentioned here are leading products in their categories, i.e., SaaS is for everyone, not just upstarts.
From a business model perspective, SaaS reduced maintenance costs, lowered the hurdle for customers to adopt products, and provided better long-term visibility of revenues owing to its subscription nature. However, little else differentiated it from the old license model of selling software. That has recently started to change. An ongoing third evolution of SaaS in India is following a different adoption model, which is being dubbed as SaaS 2.0 in the US. In the early part of this decade, you began to see the “consumerisation” of technology within the enterprise. Departments within companies had already started buying software as needed without getting CIO approval—eg the marketing department buying a campaign automation tool; but this new wave has been truly bottom-up, targeting small teams or even individuals. Github (a collaboration tool for developers) and Slack (Whatsapp for the workplace) are global examples of viral spread within the enterprise. In a similar vein, we are also seeing increased adoption of open-source software within companies, especially with the proliferation of startups.
India is building promising expertise in this area as its own product ecosystem matures. The country has plenty of domestic startup companies who serve as testbed customers; there is a growing base of good product managers, designers and engineers from consumer tech backgrounds, and a thriving VC ecosystem willing to make long term bets that see little immediate revenue. The result is the emergence of Indian SaaS 2.0 startups such as Postman (a collaboration software where developers can “test-drive” APIs), Julia Computing (a startup commercialising and supporting Julia—an open-source programming language now being used in high-performance contexts such as NASA and air traffic control) and Hasura (a next-generation database query software designed for more complex datasets like social media).
Overall, we think something special is happening in the Indian SaaS space today. Many things seem to be coming together at once. Many entrepreneurs have toiled for years to build world-beating products from India. The Covid-19 pandemic has lit a fire to this market opportunity. “Two years of digital transformation in two months”, as Satya Nadella put it. Can we grab this trillion-dollar opportunity?
The authors are Managing Partners at Airavat Capital. The authors and funds managed/advised by Airavat Capital have investments in SaaS companies. Views are personal