IT firms are realising that just adding to their headcount is no longer enough.
Realising that growing by just adding to its headcount (termed linear) will pose formidable challenges over the next few years, both Indian and multinational IT firms, including TCS, IBM, Infosys, Satyam, Wipro, Genpact, HCL Technologies and NIIT Technologies, are gradually planning a host of non-linear initiatives, like the reuse of assets and codes, the creation of templates and intellectual property (IPs) and the use of platform BPOs.
These initiatives, in turn, increase the IT firms’ operating margins per employee while simultaneously reducing capital expenditure for their clients. Around 40 per cent of all IT services today come as templates, notes Nasscom chairman, Ganesh Natarajan.
Take, for instance, the case of India’s largest IT services provider, Tata Consultancy Services (TCS), which has over 100,000 employees (the number has crossed 111,000). It was the first to identify and invest in various non-linear opportunities, namely, software products, platform BPO and software as a service (SaaS), as well as focus on unit-priced contracts, according to Macquarie Research Equities analysts.
Consider its deal with the Pearl Group in the UK for which it developed a life and pensions (L&P) platform which it now is re-engineering for the UK market. Nearly 2.5 per cent of TCS’ consolidated revenue is expected to come from platform BPO.
TCS has also been active in unit pricing in infrastructure management services (IMS) and transaction BPO. Macquarie analysts estimate that about a fifth of TCS’ IMS revenue and 10 per cent of its India-based BPO revenue is unit-priced. TCS also has several products — all branded as TCS BaNCS 1 which contribute around 3.6 per cent to its consolidated revenues.
Infosys’ product efforts, on the other hand, are centred on Finacle — its core banking solution. Several years ago, Infosys formed a separate banking business unit to focus on product development. Its revenue contribution is currently 3.6 per cent. The company has adopted a strategy of allying with owners of software products rather than building its own BPO platforms.
While this limits its upside, according to analysts, it is a relatively low-risk approach. Infosys BPO has said that platform BPO would constitute 25 to 30 per cent of its revenue by financial year 2010. Infosys has also launched a supply chain management (or ‘Procure-to-Pay’) platform in alliance with SAP and an HR (‘Hire-to-Retire’) platform with Oracle/PeopleSoft. Revenue flows from these platforms are yet to start. Infosys has also stated its intention to create offerings in the software as a service (SaaS)space.
TCS’ forays in managed services (providing IT infrastructure services or IT application services on a subscription basis) include a SaaS initiative targeted at the small and medium business segment in emerging markets (branded IT as a Service, or ITaaS) announced earlier this year. There is no revenue flow yet.
Global IT giant IBM, too, is moving from a labour-based to an asset-based model. It has created assets around each vertical. It re-uses these assets even as it creates “industry templates” that serve as roadmaps in understanding verticals and the players within. For instance, most telecom companies grew by acquisitions. They had customer and product databases that needed to be integrated, failing which the call centres would repeatedly call the same customer. IBM’s Telco SimpleOrder Solution allows telecom companies to capture and process customer orders. It has also developed a Fraud and Abuse Management tool, which detects potential fraud which it has sold to many insurance companies in the US.
Meanwhile, the research arm of Infosys — Software Engineering and Technology Labs (SETLabs) — is working closely with Infosys’s clients to understand their needs, and create solutions that would transform their businesses. It was recently awarded US patents for holography and mobile communications. In 2007-08, Infosys generated over 102 invention disclosures and filed 10 patents in India and the US in areas of software engineering, high performance and grid computing, business process management, and enterprise mobility.
As for Wipro, its employee strength is currently less than 75 per cent that of TCS and about a fifth of IBM’s. This provides headroom for continuing linear growth for several years and would allow Wipro to focus on increasing non-linearity in the business. The company is known for its capabilities in the infrastructure management services (IMS) space and gets around 12 per cent of its revenues from such services — it has the largest IMS practice among peers. Wipro has been able to capitalise on the experience gained over the years in managing customers’ infrastructure and offers element-based pricing (ie, payment per server, desktop, network switch, etc) for IMS contracts.
Similarly in the BPO space, Wipro offers transaction-based pricing (ie, for processing, payment per invoice, claim, etc). As part of the Infocrossing acquisition, Wipro has also got access to BPO platforms catering to the healthcare payer segment and tax collection for state governments in the US. Macquarie analysts note that around 5.4 per cent of Wipro’s revenues are contributed by non-linear business lines.
Satyam Consultancy Services, too, according to its chief strategy officer, Shailesh Shah, has concentrated on four non-linear areas — BPO, testing, engineering services and remote infrastructure management (RIM) — which is paying dividends. “Introducing consulting capability for an advisory role is another non-linear initiative,” notes Shah, adding “We have 4-5 IPs of our own.”
NIIT is also adding to its non-linear business by making acquisitions to acquire platforms, offering platform-based services and planning to offer all this in as Saas. HCL BPO, too, has moved to an outcome-based pricing model form its current input-based model. If it were to continue its linear growth strategy, it would require 50,000 staffers to become a billion-dollar business, which is unsustainable from a cost-point of view.
The maturing of the new non-linearity initiatives and generation of higher-than-average EBIT per employee (TCS generated an EBIT of $13,400 per employee in the third quarter of 2007-08 — the second-highest in its peer group after Infosys’ $14,300 per employee), predict Macquarie analysts, should provide the leeway for investments in more non-linearity initiatives.
6 months ago