A long and fierce storm tends to change the landscape for ever. Likewise, an economic crisis brings about some permanent changes in the business landscape. While some behemoths collapse, some emerge stronger. And most importantly, it changes the rules of the game. It changes the way business is done. Something similar is evolving in the Indian IT space.
Indian IT which grew at super-normal rates of over 25% for a decade, found a big speed-breaker in form of global recession. As the credit crisis became fierce, IT-budgets of organizations around the world saw a deep cut. Discretionary IT spending became abysmal. Pricing took a big beating. Negotiation process became stretched. Renegotiations become rampant. In short, Indian IT companies were rubbed the wrong way by the recession.
But again, every crisis results in new evolution. Indian IT industry is also witnessing such an evolution. There is a change in demand. So the IT vendors are changing the way they cater to their customers. There is a change in the way deals are done, the way software is made and delivered, the way customer is charged.
The most important of these metamorphosis, is the trend for on-demand services. As the recovery is starting to take shape, customers have started to loosen the strings of their wallets. This is evident from the number of deals that are coming on table these days for the Indian IT majors. However, the customers are still shunning away from big capital expenditure for IT. They are asking for on-demand delivery of IT-services. In technical terms, Software-as-a-Service (SaaS) is what most clients demand. Instead of buying an entire software application for themselves, clients want the IT vendors to manage, host and deliver the software application as an on-demand service. The customer can log-in, use the software and pay only for that transaction. In layman's terms, it is like going to a restaurant. One does not need to own a one. Instead one can go there, order one's favorite dinner and pay for just that. And also one can go to the same restaurant as many times as one wants.
In the changed business environment, the existing way of selling IT services would not work. As per traditional method customers were charged for the time and resources used to build their customized software. These software applications were then deployed on client's machines and needed constant maintenance and enhancements. But now rules have changed.
Clients no longer want to own the software. Why? Because, this on-demand service model brings the total cost of service for the clients down by as much as 40% in some cases. They can also avoid large, complex outsourcing contracts and instead pay-as-they-use. According to recent news, top customers like Nokia, Siemens, Royal Philips Electronics etc. are demanding such services from Indian IT vendors like TCS, Infosys and Wipro. Many business applications like customer relationship management (CRM) and enterprise resource planning (ERP) are being delivered on the SAAS model. According to Gartner, market for SaaS-based CRM was worth US $ 1.8 bn (about 18% of the total CRM software market) in 2008-09.
But the question one might ask is that, is this equally beneficial for the software vendors? The answer is yes. This brings a sea of opportunity for the Indian IT vendors. The new business model ensures more proximity with the customers, aiding better understanding of their day to day requirements. This can help them mine more business from existing customers. Further, Indian IT vendors have dedicated offshore development centers for each of their marquee clients. This type of delivery mechanism allows them to do away with these client-specific centers of excellence (COE). It brings their cost of development down by as much as 30%. Most importantly, it allows them to reuse their software applications in serving different clients. As same software can be tweaked a little to cater to different clients. Or at least some basic logic can be reused and there is no need to start from scratch for every new client. So this method is quick and saves cost.
Indian IT is gearing up with solutions based on the new model. Wipro is using its 'FlexDelivery' model to offer on-demand ERP software solutions to its customers. It generates nearly 15% of its ERP revenues from this and aims to take it to 50% of total ERP revenues. Infosys offers Oracle's PeopleSoft HR management software on same lines. TCS is also catering to a plethora of small and medium businesses particularly in India on its IT-as-a-service platform. A number of deals on flexible on-demand model are being discussed. The sooner our home-grown mega-vendors master this art the better!
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Use of the information herein is at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Before acting on any recommendation, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: 91-22-6143 4055. Fax: 91-22-2202 8550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407