> MONDAY 2 JANUARY 2012

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Moving up the value chain

Faced with competition from low-cost locations and inefficiencies associated with unwieldy growth in head count, Indian IT companies are exploring non-linear growth strategies NON-LINEAR GROWTH INITIATIVES
TCS: 9% OF REVENUE
Growth model Software products Platforms and solutions Usage based pricing Key initiatives TCS Financial Solutions (strategic business unit), managing the TCS BANCS suite of banking products Diligenta (insurance policy administration platform) iOn: SaaS (software as a service) initiative for Indian SMBs where monthly fee based on actual usage of IT resources on the cloud Bank-in-a-box: Core banking solutions offered on the cloud for rural and cooperative banks

PREETI KHICHA

re you willing to provide me with more value-added services so that we can work as partners, rather than deploy five employees who can churn out 10 lines of code at the cheapest rate? This is the new language that clients of the Indian information technology companies are beginning to speak, leading them to change the way they conduct their businesses. Indian IT bigwigs are at an interesting intersection. Cost arbitrage, which has been the model on which these behemoths built their businesses, is no longer the only trump card to success. Granted, as an industry IT has played a key role in putting India on the global economic map; now the question uppermost on the industry leaders minds is how to move away from linearity where growth is inextricably linked to the number of people or man-hours to a more non-linear model which thrives on improving productivity and institutionalising their innovation. What is challenging the status quo? The biggest challenge is that as the wave of globalisation spreads, global consulting companies like IBM, HP and Accenture have been able to replicate the delivery model of their Indian counterparts, leading to the business becoming commoditised. They have set up offshore centres in India, encroaching into what was once the domain of the Indian IT companies. The IBMs and Accentures already had a strong front end, so going backend was not difficult for them. All you needed was low cost people, whereas the technology and brand was already there, says an analyst at BNP Paribas who wishes to stay anonymous. The other challenge is managing a huge task force. If IT services companies have to maintain the current levels of growth in the future, employee growth will need to explode. The top four cumulatively employ about 0.5 million people: TCS about 2 lakh, Infosys upwards of 1.3 lakh, 1.2 lakh from Wipro and 75,000 from HCL Technologies. But, ever wondered about the challenges of managing an increasingly large employee base? Rising wage costs, large capital expenditure on infrastructure for employees, the lack of skills are just a few of the woes of mass hiring. With the linear design, costs also continue to spiral. As the industry matures, pricing needs to be constant. So unless you create hyper-productivity through the creation of intellectual property or differentiated skills, methods and frameworks, margins will be squeezed, which will eventually impact the profitability, says Sanjay Purohit, senior vice-president, global head of products, platforms and solutions, Infosys. If you go by numbers, non-linearity is still a while away. The top four IT majors, TCS, Infosys, Wipro and HCL Tech, clocked 22.4 per cent, 24.9 per cent, 25.2 per cent and 29.2 per cent CAGR respectively (in dollar revenue) between FY 2005 and 2011, whereas headcount CAGR for these four companies over the same period has been 27.7 per cent, 23.6 per cent, 19.6 per cent and 20.8 per cent respectively,

implying no major improvement in more efficient you cannot get a higher productivity per employee. rate for them in the effort-based But IT services companies are look- model, says Rajiv Sodhi, senior corpoing at ways to change and are explor- rate vice-president and chief customer ing newer models to help them make officer, HCL Technologies. Sodhi says the leap. For top tier IT companies like a large section of mature customers Infosys, Wipro, HCL and TCS, already would like to opt for this pricing model 8-10 per cent of the revenues come they would rather pay for the scope from non-linear initiatives. The target of work than the number of hours put now is to scale this up to a quarter of in. But to move away from time and revenues in the next couple of years. material pricing, scope of offering Take the example of needs to be broadened. Infosys, the second Building products and largest IT services platforms is another way company by revenue, in which companies are where work began broadening their offeralmost two years ago. ings. At Infosys, developPurohit believes to creing products and platate non-linearity, it has forms is a strategic thrust to work on a number of area which got a renewed areas. One of the areas focus when the company is pricing, where one unveiled the Infosys 3.0 has to move away from vision a few months ago. time and material Under Infosys 3.0, the pricing to transac- India has a services target will be to achieve tion-based pricing. culture which is where equal revenue from three So Infosys is working streams consulting we want to build the on different types of non-linear model and systems integration, pricing, from fixed- PHANEESH MURTHY platforms and solutions, price pricing which is and business IT services. CEO, iGATE Patni the most primitive The products and form of non-linearity platform development to transaction and outstrategy at Infosys will come-based pricing, have four legs. The first where clients are is to incubate through incharged based on tanhouse research and gible business outdevelopment. Second, comes like revenue co-create with customers growth and market and use products and share, irrespective of platforms across the maremployee strength. ket. Third, explore partWe are training our nerships to develop platsales force to sell the forms like digital marketnew pricing models ing platform together We prefer to partner with our customers. with communications with a company that This requires a lot of firm WPP, or the HR platalready has a solution confidence building, form co-developed with and do not want to explains Purohit. reinvent anything Oracle. Last, the objective According a report by RAJIV SODHI is to acquire companies JP Morgan India, that have these capabiliSenior Corporate Vice-President Infosys has already ties, explains Purohit. and Chief Customer Officer, HCL converted 40 per cent Currently, Infosys has Technologies of its existing client nine platforms like the base to embrace new Infosys Edge (Brand engagement models, Edge, Social Edge etc) contributing 6 per cent series of platforms, and to revenues. This will some are in the incubahave to increase to 25 tion stage. The focus on per cent to maintain platforms has worked as a the overall margins, strategy for us to move but require deal sizes towards outcome-based to get much larger. pricing, claims Purohit. Companies like Infosys is also eyeing the TCS, and HCL Tech products space, which are increasingly lookbrings in licensed reving to experiment The product enue. The product with new pricing development strategy is development strategy models other than to identify each industry rests on identifying traditional effort- industry verticals where vertical where we can based models build products. Seven are we can build products (US$/hour billing), already developed and SANJAY PUROHIT says a June 2011 Senior Vice-President, Global some more are in the report by Nirmal Head of Products, Platforms and pipeline, says Purohit. Bang Securities. At Solutions, Infosys Among them are mid-tier IT services banking software prodfirms like iGate Patni too, the change uct Finacle, developed in-house, in pricing models is underway. After which has done well according to anaUS-based iGATE acquired Patni lysts. Flypp is another in-house softComputers, the company is moving ware developed at Infosys, which is a towards an outcome-based pricing ready to launch application software structure. The company is targeting 30 for mobile operators that allows monper cent of the revenues to come from etisation through ready to use experithe new pricing structure by 2017. ential applications across devices. Moving away from the time and For Infosys, collectively, products material based pricing is critical. If and platforms bring in around 8 per you are using productivity as a lever cent of non-linear revenues, and for non-linear growth, as people get strategically we want to take this up to

a third of our revenues over time, says Sanjay Purohit. On its part, iGATE Patni wants to drive non-linearity in the services business rather than products. India has a services culture which is where we want to build the non-linear model, says Phaneesh Murthy, CEO, iGATE Patni. The companys industryfirst business outcomes model ensures that you pay for results only and not for the effort, time and manpower that go into achieving the outcomes. This model is driven by iTOPS (integrated technology and operations platforms), which means the company shares the risk with customers on technology, investments and demand variation in their business. As the companys website explains, while iGATE Patni makes upfront investment in building the technology and process platforms, the client pays only for using the infrastructure, much like paying for electricity or cooking gas that we use in our homes. For example, a client sourcing mortgage services typically pays us for only for the number of loans funded, which is the desired outcome. We will not license the technology, says Murthy. While some of these are being developed in-house, others are being sourced from the marketplace and layers of IP will be built on it. HCL Technologies too has been working on various products and platforms in the last few years. In 2008, it launched AEGIS, a home automation solution empowering users to control multiple appliances, manage media, optimise energy consumption and enable secured homes. Likewise, in 2009, it unveiled ITS ecall (intelligent transportation system emergency call), a vehicle installed system that sends automated text to emergency services when a car meets with an accident. The product gained traction in the US market, claims the company. Acquisitions to build the product portfolio is another lever used by companies. TCS and HCL Technologies have done a few successful acquisitions. Infosys Purohit says the company is looking at acquisitions closely. Geographic areas will not be a constraint for acquisition targets, but the focus will be on what the intellectual property is and how we can leverage it, says Purohit. Acquisitions have been a key part of growing the software product business at HCL Technologies. For example, the company acquired UK-based SAP consulting company Axon three years ago, which, it claims, has helped improve revenue per employee. However, it is essential that the acquisition is rightly positioned. If you do not leverage it properly, the revenue and growth will be diluted, says Sodhi. In terms of products, HCL is not looking at spaces where products are already available. We prefer to partner with a company that already has a solution and do not want to reinvent anything, says Sodhi. TCS, the largest IT services company by revenue, is using a mix of both organic and inorganic growth to drive non-linear initiatives. For example, last year the company launched iON, a fully integrated cloud based solution for small and medium businesses. This was developed in-house and is expected to contribute 5 per cent to

INFOSYS: 11% OF REVENUE

Growth model Software products Platforms and solutions Key initiatives Finacle core banking product BPO: Procure to pay, newspaper in a box Retail: Shopping Trip 360, allowing retailers to analyse customer shopping habits Mobile applications: Flypp (cloud based app platform for mobile operators) Infosys Edge series (iEngage, iTransform) Infrastructure management services

Usage based pricing

HCL: 12% OF REVENUE

Growth model Platforms and solutions Usage based pricing Key initiatives Platform-based BPO: Telecom expense management Infrastructure management services

WIPRO: 11% OF REVENUE

Growth model Platforms and solutions Key initiatives Platform-based BPO: Payroll, procurement Retail: Shrink management solution, enabling reduction of wastage Mortgage, loan origination platform Infrastructure management services Solution accelerator: Standardisation of work flow, greater reusability of tools and components leading to lower people and cycle time Cloud-based offerings: SMB clusters identified, mainly auto ancillary, gems & jewellery, regional rural banks, healthcare (India), monthly payments

Usage-based pricing Delivery model

Technology innovation

Source: Nirmal Bang Institutional Equities

TCSs total revenue in the next five years. Inorganically, the company acquired UK-based platform Diligenta in 2005, and it has constantly invested in it to reach the level it is today. BaNCS, similar to Finacle, is a banking software developed by TCS, which contributes 4 per cent to the companys turnover. So besides software products, will hardware products find their way to the list? MindTree has experimented with a 3G Android smartphone, but dropped plans to take it to market realising it was no cakewalk. Getting the technology right for hardware is one aspect. Handling sales, distribution and marketing is a different ballgame altogether, says Rustov Ravanan, chief financial officer, MindTree. Many echo a similar view. Murthy of iGATE Patni believes jumping onto the hardware domain might be too early for Indian IT services companies. I believe the product culture in India is very different and developing products for India is completely different from developing products for the US market. We do not understand the culture of usage. Also, the cost culture in a service-oriented company is different. In a services company, the bulk of the costs are people related; in a product company costs are driven by sales and marketing. We have not made that leap yet and still do not have many successful product examples, says Murthy. Thus, players like Infosys are looking at stepping into this domain with caution. We will look at developing hard-

ware products in niche areas. For our ShoppingTrip 360 degree software, we might work on developing sensors and chips, explains Purohit. And we will only look at the B2B space rather than the B2C area. Recruiting the right kind of talent is another step in moving towards nonlinearity. For example, at Infosys, there is a well-thought out talent plan which includes lateral hiring. That said, finding the right kind of talent is a challenge. It is not like India is flooded with talent like it is the Silicon Valley or certain parts of Europe, says Murthy. But going non-linear is no easy task. Often, clients are comfortable with the time and material pricing model as what you see is what you get, says Purohit. But, Murthy of iGATE Patni claims outcome-based pricing in services will catch on just like it did in manufacturing. The other challenge is about reorientation in culture, which requires investments in processes and management bandwidth to implement the change. It is like asking to change tyres of a fast-moving car in a car race, where if you stop or slow down you may lose out, explains Sodhi. Kapil Dev, founder and principal consultant, IT consultancy company Coeus Age says some companies like Wipro and Infosys have brought in new management in the hope to infuse new thinking into the companies. While the groundwork has begun, it might be a while before the results begin to show.