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Software: Beyond execution - Views on News from Equitymaster
 
 
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  • Sep 19, 2005

    Software: Beyond execution

    In FY06, India's IT and BPO exports grew by over 33% YoY to reach a size of US$ 23.6 bn. Of this, IT software and services exports grew by 32% YoY to clock revenues of US$ 17.3 bn, while the ITES segment grew by around 37% YoY to reach revenues of US$ 6.3 bn. As per NASSCOM, software exports are expected to clock a 27% to 30% YoY growth to hit US$ 21 bn to US$ 22 bn in FY07, while ITES-BPO exports are expected to grow at a rate between 27% and 35% to hit US$ 8 bn to US$ 8.5 bn. Clearly, it seems that offshoring is becoming more and more mainstream. Recent trends of Indian software companies winning larger and larger deals are ample proofs of this.

    Europe, traditionally conservative and a late adopter of outsourcing, is expected to witness increased outsourcing. As per our interactions with the managements of top software companies like TCS, in FY04, around 300 of the Fortune 500 firms resorted to outsourcing in some form or the other and this number increased to around 400 in FY05. These corporations are global in their reach and have IT budgets in the range of US$ 200 m to US$ 500 m. Given that the Indian companies’ share of these budgets is relatively miniscule, there is tremendous scope for growth.

    It should be noted that some of the key reasons for the offshoring story taking off and changing the entire dynamics of the global IT industry so dramatically is the fact that Indian companies have virtually perfected the art of ‘global delivery’. Their execution skills and scalability have resulted in more and more corporations willing to resort to offshoring in some form or the other and re-thinking their IT vendors. The concept of ‘strategic global sourcing’ is taking off. However, the global business environment is becoming more and more complex and competitive. Post the dot-com bust, companies started to focus more on the ‘Return on Investment’ factor while making their technology decisions. This is expected to hold true more now than ever before. We give a perspective of how the software industry could shape up in future.

    Partners over vendors…
    As offshoring becomes more and more mainstream, corporations will increasingly expect their vendors to become partners in their growth. Simple technology solutions will not suffice. Companies will expect their software vendors to provide them will full-fledged business solutions that will help them become more competitive.

    Thus, the vendor/partner’s role will not end merely after execution of the project. Partners will have to help clients shape their business future, not just technology future. As mentioned above, the ‘Return on Investment’ factor is becoming all the more crucial. Fortune 500 and Fortune 1000 firms make huge investments in IT and would like to see more ‘bang for their buck’. As a result, apart from just advocating a solution to the firms’ problems, IT companies will also be expected to partner with them in facing future business challenges. They will have to simulate different ‘scenarios’, design and develop different business solutions and then take a decision on which is the most attractive proposition.

    Global IT spending has been estimated at over US$ 600 bn by analyst firms like Gartner and International Data Corporation (IDC). This would form a significant part of total capital expenditure. While estimates are not available, expenditure relating to automation of operations in factories, e-procurement, IT in supply chain management, hardware, IT infrastructure and other such functions would definitely form a significant part of capex. Therefore, it is only logical for firms to expect tangible business outcomes and returns on these ‘sunk costs’.

    Business solutions Vs Technology solutions
    Partners will have to develop business solutions for their clients rather than just technology solutions. Let us take a simple example. A firm wants to develop a solution for automating its supply chain. This will help it to track inventory better, reduce costs, improve quality and enable it to bring its product faster to the market than its competitors. However, after the vendor develops an automated supply chain solution, the firm finds that this is not linked to its broader business plan and in fact, is not integrated with most of its other systems, like accounting, payroll, engineering, manufacturing, marketing and collection.

    This is a simple technology solution that may not enable the firm to make more intelligent decisions, since it is not linked to the business plan. It is merely the completion of a set of deliverables, based on time and within a certain set of specifications. However, a business solution should enable the firm to improve its business performance parameters, such as profitability, cost savings, market share and higher sales growth. Therefore, the measure of success for such a solution would be tangible results and thus, the vendor will have to partner with the firm for its success.

    It could very well happen that in future, the time and material or fixed price contracts of today will get replaced by totally different ones that are ‘outcome-based’. That is, the vendor/partner will have to bear a part of the risk involved and the client should have received tangible business benefits. Companies like HCL Technologies have specifically mentioned that they are trying to win such type of deals and in these deals, billing rates would also be higher due to higher degree of risk taken by the vendor. In order to win such contracts, building up of competencies in the consulting field will be the crucial differentiator. Deep domain knowledge of the client’s business is needed in order to build such skills. Thus, a constant move up the software value chain is needed if Indian software companies are to move comprehensively from being just ‘low-cost service providers’ to ‘higher-end business solution providers’. A paradigm shift in thinking is what is needed in order to succeed in this competitive space.

    Conclusion
    The software industry is certainly expected to see some exciting times ahead. The days of Indian companies being perceived as mere ‘low-cost code coolies’ is over and, while this is a big positive, it also puts a lot more responsibility on them. ‘Return on Investment’ is a crucial factor for clients and they will outsource/offshore to those firms that they feel will deliver the maximum value for them. Thus, execution of increasingly complex and demanding projects will remain a key factor, going forward. However, as we have mentioned, software companies will now have to go further than just execution and become long-term partners with their clients, enabling them to achieve long-term business success and better performance.

     

     

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