Moving up the value chain – From body shopping to offshore development to consulting
Indian IT industry started making its initial footprint in the international market in 1980s when the core business value proposition was cost arbitrage which is still today an important driver for the growth of the industry. As the Indian IT firms and their professionals gained significant experience in software development over the next 10-15 years; 1990s marked the emergence of offshore development centers in India where value proposition was focused around cost arbitrage as well as high quality of service delivery. Over the next decade Indian IT firms were recognized as global leaders in IT services. By early 2000s as the competition got tougher, most of the global IT players started looking at another lucrative but challenging business opportunity of IT and Business consulting by leveraging upon their strong global customer base. Consulting made perfect business sense for them in the highly competitive market by bundling IT services with consulting and vice-versa. For the last decade, Indian IT firms have been doing significant business in consulting area by successfully competing against global (IT) consulting firms.
“Pure play IT services” customer base is set to decline over next 10-15 years
Pure play IT services like application development and maintenance work account for major revenue (around 35-40%) of most IT firms in India. Thanks to consulting and system integration business which was adopted in early 2000, now accounts for another 30-40% of business for top IT firms. Traditional IT services markets are beginning to reach maturity levels and at worse customer base which are in-house IT departments of MNCs is on decline. With the advancement in mobility and cloud computing, employees in any MNC are more comfortable in using readily available apps on their tablets and mobile phones rather than relying on traditional IT systems in their office for business and personal needs. Realizing the ease and flexibility of using applications on personal devices, IT departments are not shy to add ready-made applications in their technology mix to achieve productivity and efficiency in the business while cutting down their IT spend. Vivek Wadhwa notes that “it takes decades to update legacy computer systems, and corporate IT departments move at the speed of molasses. So, Indian outsourcers have a few more years before they see a significant decline. They certainly won’t see the growth and billion-dollar deals that have brought them this far.” It is very much expected that over next 10-15 years mainstream pure play IT services business is set to decline because of disruptive transition taking place in technologies and businesses at a much rapid pace.
What lies today and in future for IT firms?
IMMENSE BUSINESS POTENTIAL FOR IT FIRMS IN TECH SECTOR AND ACROSS OTHER SECTORS
IT firms now need to explore emerging and existing markets; by expanding into solutions, products & platforms centered on contemporary and emerging technologies; and innovative business models to solve the basic and intricate customer problems. Tech companies today driven by innovation are successful and hence contribute significantly to their country’s economy. Revenue generated by software products and innovative solutions and services business is multiple times that of pure play IT services business (Ref: Graph 1) which clearly signifies the market potential in innovative technology business. SAP’s revenue for FY 2012-2013 was 22.2 Billion USD and combined revenue of top 3 IT firms in India was 25.9 Billion USD. An interesting market trend can be noted where technology companies are coming in direct competition with firms across other sectors. For instance, Apple is now the largest music retailer across the US and the world. We are already observing cross industry market potential for number of tech firms in financial services, retail, banking etc. Looking at the numbers in Graph 2, we can see that contribution and value creation by an employee in innovative technology business exceed by leaps and bounds to that in IT services business. This shows a great opportunity for Indian IT industry to achieve non-linear growth rates in innovative technology business.
THE DECADE OF SOFTWARE PRODUCTS AND SOLUTIONS FOR INDIAN IT INDUSTRY
According to Nasscom, IT services accounts 98% of approx. $ 100 billion Indian IT Industry and software products just contribute $ 2.2 billion out of it. As per research done by iSpirt; India has the potential to build a $ 100 billion dollar software product (irrespective of the model of delivery and usage) market by 2025 given that industry gets the much required support from the govt. For almost three decades, IT services have essentially dominated the Indian IT industry. A recent change in trend is being observed with surge in tech start-ups in last 1 decade from just 100 in year 2000 to 2400 product companies in year 2013 out of which 500 came into being in just last one year. Also, the experienced IT players have well acknowledged the potential in products and solutions. Though mainstream IT players been quite successful in developing and selling IP based software products during last 10-20 years. However, the need to be more focused has been realized seeing the market potential driven by technological advancements. Infosys’s 3.0 strategy talks about increasing the contribution of PPS (Product, Platforms & Solutions) business from 6.4% (4.5% coming from Finacle) to 33% in next 4-5 years by creating products for clients, co-creating products with clients and acquiring product companies. Also, a possibility has been expressed by Infosys chief, Narayana Murthi for making “Finacle” as an independent subsidiary to run it much like independent product company. Experts suggest that for IT firms to achieve non-linear growth in technology innovation business, they need to develop global products to provide industry specific and cross industry business solutions aimed at the creating value for the organizations.
EMERGING TECHNOLOGIES AND BUSINESS MODELS TO REVITALIZE AND BOOST INDIAN IT INDUSTRY
Worldwide emergence and adoption of disruptive technologies like SMAC (social media, mobility, analytics and cloud computing) has revitalized the IT industry. As per survey done by Offshore Insights, budget on SMAC by 2000 global firms will be around 15% of their total IT budgets and India is predicted to export worth $ 15 billion annual SMAC based IT services and software by 2017. SMAC has business opportunities for everyone from startups to mid-sized firms to IT giants since it is applicable to large, medium and small enterprises as well as end consumers. This puts these recent emerging technologies into the mainstream business lines of IT firms with deals amounting to multi million dollars. Emerging cloud computing based software as a service delivery models are gaining popularity worldwide. As per the report “Global SaaS Market Growing—Driven by CRM, Mobile Deployments” SAAS market will grow by 16.8% from 14.3 Billion USD in 2012 to 21.3 Billion USD in 2015. Currently, US account for 60% of global SAAS revenue. Technology firms need to embrace the upcoming business models with their offerings to be successful in this dynamic technology product business as the competition will now be more intense as the landscape is now open to all tech firms irrespective of their sizes. Another set of challenging emerging technologies like artificial intelligence, robotics, 3D & 4D printing are on backstage of Indian IT industry that can provide immense global business opportunities given that technology entrepreneurs realize this potential at the right time and master these technologies to serve immense global market shaping up in future.
With traditional IT services markets on the decline; and contemporary & emerging technologies revolutionizing the businesses and the lives of people in the most innovative ways as ever; another big opportunity lies before the Indian IT industry in terms of immense business potential coupled with possibilities of non-linear growth in coming decades such that it can contribute a greater share to country’s GDP. With established Indian IT firms focusing more on products and solutions like never before; and more and more innovative technology start-ups coming up, India is on the way to be among global leaders in technology in this decade.
I am the Chief Editor of Saastras media site. I love to write and talk about product management, marketing, and digital sales aspects related to Enterprise Software and B2B SAAS products