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Software Education: Dancing in the dark? - Views on News from Equitymaster
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  • Jun 1, 2002

    Software Education: Dancing in the dark?

    The smooth sailing for software companies ended just about a year ago. With the US economy slowing down, corporates cut IT spends. This in turn led to decline in the demand for software professionals and as a cascading effect software was no longer a coveted career option. Therefore, the business prospects of software education companies were adversely impacted.

    While at one-end business prospects weakened there was also overcapacity in the Industry. This led to a pricing war amongst competitors. Consequently, the software education majors like Aptech, NIIT and SSI witnessed a sharp decline in net profits. The magnitude of the fall in bottomline for four consecutive quarters was, dramatic. The software industry too was faced with difficult times but it managed to grow during the years. The impact of the slowdown was even more severe on smaller software education companies. As a result, many had to wind up operations.

    The great fall
    Decline in net profits (YoY) Jun 01 Sep 01 Dec 01 Mar 02
    NIIT -93.2% -86.2% -88.40% -95.8%
    Aptech -94.1% -95.7% NA NA
    SSI -82.0% -89.9% -93.10% -77.0%

    Thus, is the weakening of business prospects the only reason to blame for the sad state of the industry today? Not likely. The industry itself is to a certain extent responsible for the sorry state it is in today. Firstly the barrier to entry in this business is very low, consequently a significant number of players entered the industry creating over capacity. A very few players actually did put in sincere efforts to raise barriers to entry like creating a brand or ensuring quality of service being delivered.

    Most of the companies followed ‘make hay while sun shines’ policies. One of India’s biggest problems is unemployment and that is what they sought to exploit. Promising good employment opportunities to the students a large number of software education companies literally fleeced the students. At the end of very expensive courses the students were offered jobs in the same institutes as faculty. As a result, the service being offered, instead of creating goodwill, was a big disappointment. Thus, throwing away a once in a lifetime opportunity to create a system parallel to the formal education system in the country that is badly strained.

    But its not that the blame squarely rests on the corporates exclusively, the students too have follies to admit to. The lure of quick success drove many to over look basic facts about the courses and the quality of service being offered. Software education courses were used a springboard to success.

    Investors can draw very critical observations here. The industry to a large extent failed to create value. They failed to deliver services, which no one else would be able to deliver. Consequently, there was no brand loyalty and business eroded at first signs of trouble. Thus, being aware of what drives the revenues of company and stability of demand would certainly help. Also, investors before making an investment need to ask the question is the company or industry doing things that are difficult to replicate? Coming back to the software education industry, the question is what next? An insight into the demand could suggest a few clues.

    There are three major streams of demand for the sector. The bulk of the demand comes from those looking for a short-term course that will help them to be familiar with computers and help operate elementary software like Microsoft office. Then there are the big-ticket courses that according to education companies provide a career option to students. While joining these kinds of courses, the students are basically looking at getting job placements. The third kind of demand stems from the fact that professionals and vocational students are looking for add on skills that will help them switch careers and improve skills.

    At this point one needs to examine what the branded players (that come with such a huge price ticket) offer that the unbranded player cannot. In the introductory courses segment, there is no way the education majors can match up to the smaller players, as the customers are not willing to pay much. The unbranded players have far lower operating costs and hence offer the same courses at lower costs. Infact, consumers can learn these skills from the comfort of their home, which the branded players do not provide. Also, schools are providing the basic knowledge of computers so in future the demand for these courses is likely to decline. To counter the decline the software education majors have tied up with schools to tap these markets. The K-12 business unit of NIIT is focusing on computer education in the school segment. The company bagged an five year order worth Rs 1,480 m from the Govt. of Karnataka in December 2000 to implement computer education in the state.

      Unit Jan - Mar 01 Sep - Dec 01 Jan - Mar 02
    Revenue from education business Rs m 1,595 742 814
    Number of students Nos 68,298 159,163 106,288
    Realisation per student Rs 23,354 4,662 7,658
    Revenue from education business Rs m 567 311 209
    Number of students Nos 58,525 40,005 30,492
    Realisation per student Rs 9,688 7,774 6,854

    Therefore, the areas of strength for the branded players become the add-on and career courses. The demand for these courses arises from the need to get a job in the software industry. While the education companies are broadening their offerings with one alliance after the other, a broad portfolio of courses in no use if the company cannot provide placements. Many education majors have tied up with software companies to teach packages like Seibel and Rational. However, in the current scenario, only experienced professionals are in demand and those with qualification in packages and lesser experience are finding it difficult to get placed. Have the education companies ever discouraged freshers taking up these courses based on ground realities? Very unlikely. The situation is very similar with the career courses too. Thus, the imperative is to create a channel by which they can guarantee placements and also to be true to customers informing them of chances of acceptability in the software industry instead of selling a dream. This, however, is very difficult to achieve.

      Unit Jan - Mar 01 Sep - Dec 01 Jan - Mar 02
    Revenues (Rs m) Rs m 1,595 742 814
    No of centres (Nos) Nos 2,228 2,497 2,510
    Revenue per centre (Rs) Rs 715,889 297,157 324,303
    No of centres (Nos) Rs m 601 749 771
    Revenues (Rs m) Nos 567 311 209
    Revenue per centre (Rs) Rs 943,428 414,686 270,947

    The industry does not seem to have learned its lesson and is focusing on the old tricks of the trade to counter slowdown. It has tried to salvage whatever business is available by taking a number of steps like significantly reducing cost of courses being offered, new methods of delivery, offering a variety of different courses and once again offering placement guarantees. The only difference is that the assurance regarding placements would be far subtler previously, now it is explicit. The industry seems to be committing the same folly once again.

    The other growth opportunities that corporates are looking at are alliances with overseas partners and offering services in different countries like China, Turkey and Columbia that are just waking up to the IT revolution. The companies believe that an overseas tie up would improve the acceptability among the students. The students too would be more acceptable to prospective employers abroad.

    There is no doubt that once the demand for software professionals picks up, the demand for the courses too will show a turn around. Thus, it all boils down to surviving the tough times. This would mean that some of the companies might have to spend more than they earn for the time being. This might lead to few companies to go out of business or be taken over by larger players. The larger companies must realise from their mistakes in the past and make sincere efforts to do things no one does. Effectively, creating an education system parallel to the existing one and thereby improving the acceptability of the non-formal sector. Thus, creating a stable business model. Until then it continues to be a dance in the dark.



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