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E-commerce: Oldies take charge - Views on News from Equitymaster
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  • Jan 19, 2002

    E-commerce: Oldies take charge

    Times are changing. The fact that you are reading this article on the Internet, a whole world of information is to use the cliché 'just a click away'. Not only a world of information, but a variety of services and products being delivered to your doorstep. Not so long ago, a brave new-wired world was the writing on the wall.

    This was the fundamental premise that caused corporates to go on a IT spending frenzy, the launch of a billion dot coms and of course stock markets soaring new heights, so much so that many people for the first time realized something called the NASDAQ existed. However, the spending spree, the dot coms and the stock market euphoria have all gone. The investors post irrational exuberance are a lot wiser but sadly a lot poorer. Today software services industry is standing at a crossroad looking for a fast track. For the time being maintenance projects are keeping the revenues growth figures for the companies ticking. But the December quarter numbers indicate that there is a slowdown in the maintenance space also. Companies could find a way out of their woes in e-commerce solutions markets.

    A very predictable reaction to this idea would be of course ‘we heard that before’ and ‘look what we have now billions of dot gones’. Nothing to beat that, but the skeptics need to understand one thing very clearly that most of the dot coms had nothing new to offer. Theirs was the one of the oldest strategy in business - cost leadership. Offer customers goods/services at low cost. Surprisingly these were the very people who paid Indian software companies astronomical billing rates. So astronomical, that Infosys has not seen a single basis point increase in billing rates in 9 months of FY02. To quote Louis Gerstner, Jr, Chairman IBM “The collapse of dot-coms was not a failure of e-business. It was the failure of an overly narrow approach to e-business”.

    Having a presence on the Internet is not e-business. The real benefit of e-business will only be realized when the whole value chain right from the supplier, the manufacturing units, the retailers and the customers are integrated by a seamless information technology infrastructure. And now that all the dust has settled we see the old economy companies transitioning to the new economy by doing just that.

    Unilever, for example, has managed to eliminate costly supply redundancies and inefficiencies using e-procurement that gives up-to-the-minute procurement information. In the last two years, Unilever has cut about US$ 902 m in procurement costs. By the end of 2002, the company expects to have achieved more than US$ 1.6 bn in savings from procurement efficiencies. The company has a turnover of US$ 44 bn. There is perhaps no stronger argument in favour of e-commerce.

    It has been the e-business service that has been powering the growth in services for IBM, the worlds largest IT services firm that earns about US$ 33 bn from its services business. In FY00, the segment (e-business) grew by more than 70%. Even in this tough environment, the company has been able to maintain similar growth rates. The revenues from e-business integration jumped by 100% during the third quarter of the current fiscal. This is due to the fact that according to IBM, only 7% of companies in the world use the Internet for complex transactions and have business process integrated across the enterprise. Only 39% of companies globally carry out preliminary transactions over the Internet. Thus, similar growth rates can be expected in the future.

    According to a NASSCOM and BCG study, there lies an opportunity of the size of Rs US$ 9 bn for Indian IT companies from global e-solutions services market by 2005. This accounts for just 1% of the total market share. The domestic market too is all set to grow at a swift CAGR (compounded annual growth rate) of 50% from a base of US$ 65 m in 2000 to US$ 500 m in 2005.

    The worldwide market for e-solutions products and services is also expected to grow at a healthy CAGR of 29%. The market estimated to be of the size of US$ 180 bn in 2000, is expected to grow to US$ 640 bn by 2005. As per the study, the areas that would dominate the demand for services would be Customer Relationship Management (CRM) and Supply Chain Management (SCM) solutions. These are expected to account for 70% of the spending on e-solutions. The biggest market is expected to be the US with over 50% of the market share.

    E-commerce: The gamut
    Infrastructure Applications Integration
    Carrier Content Management Application Integration
    Hosting Center Personalization Sales Integration
    Router Transaction Supply Chain
    Web Server Ad Serving Financials
    Application Server Site Analysis Fullfillment
    Database Server Campaign Management  
    Storage System Customer Support  
    Load Balancing Sales  
    Managed service provider (MSPs)

    Source: Business2.com

    The markets for e-commerce solutions can further be broadly divided into infrastructure, applications and integration. While the infrastructure consists of the hardware and software that generate a website, the applications sit on top of the infrastructure and consist of software and services that look into requirement like optimization and administration, i.e. extend the site's performance and make it easier to manage. The next step in e-business is very critical and that is integration. Organisations run a number of software. If these cannot communicate with each other and exchange information then there is hardly any possibility that the benefits of e-commerce solutions will be ever realized.

    Very few Indian software services companies like Digital provide infrastructure services. The Indian companies are mostly into the implementation and integration space. Package implementation has been showing strong growth for the Indian software companies for last two quarters. The service offering and enterprise application integration (EAI) go hand in hand and therefore, many Indian software companies that take on projects to implement enterprise systems like SAP, go one step ahead and provide EAI services also. This space is expected to show strong growth in the near future. Apart from Digital, Infosys, Satyam, HCL Technologies and Silverline are some of the companies that have a significant portion of their revenues coming from e-commerce.

      9m FY01 9m FY02  
      Rs m % of revenues Rs m % of revenues Change
    Infosys 4,301 29.5% 4,463 23.2% 3.8%
    Digital 852 70.2% 1,310 55.1% 53.8%

    No doubt Internet is a very efficient delivery channel but the reasons why organisations could afford to delay adapting to the e-environment till now could be due to the fact that corporates and consumers are gradually adapting to this new way of doing business. Then there are the infrastructure (access to Internet) and security issues. Most importantly this channel would not, in many cases, replace the traditional methods but work hand in hand. Though the businesses have to adapt to this new way of doing business, they do have the luxury of time. Therefore, e-commerce will undoubtedly be a major driver for the Indian software companies in the future.



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