Introduction
One of the biggest threats faced by the Indian IT industry is the linearity in the employee count and revenues. As of 2011 the top five Indian IT outsourcing companies have around 100,000 employees on board (some less and some more). One can see a direct proportion between the revenues and the employees and typically over the years the ratio has been 35,000 US$ to 45,000 US$ per employee per year [source: annual reports of the companies]. Gowing byt he current gowth trends of the top five IT services companies from India, for growth rate to continue each of the companies would need a workforce of more than two million (same as the current strength of Peoples Liberation Army, China the largest Army in the world) by the year 2031 - which is an unlikely solution.
Nonlinear Revenue models (Service Providers Perspective)
There has been a strong drive among the IT service providers especially from India to unlink revenues and the head count. The top companies have been trying several ideas with varying degrees of success. In this section I describe five of the broad changes needed from a Service Providers perspective.
- New Approaches
While the two approaches discussed here are not entirely new but not many companies make significant revenues in these models compared to their time tested Time and Material and Fixed Price models.
First, Creation of IP Blocks - There is a possibility of companies to create IP blocks which could be sold to / integrated with the products of several clients. In the telecom sector the IP block can be a simple codec implementation to a complete protocol stack for some of the emerging technologies. Another example could be in the Cloud space - companies can invest in IP blocks for rapidly rolling out the internal clouds. One strategy for the choice of the IP block could be something that the customer sees as good alternate option. For time to market and or for matching the competitor offering reasons clients may be willing to pick the IP block.
Consider the case of Samsung - it was a part of both Open Handset Alliance (Android) and Symbian Foundation as well while having its own BaDa Operating System. There are several hardware platforms in the market each of which takes several months of effort to integrate with a particular mobile OS. The platform vendors also can not integrate their solution with each of the operating sytems. While Samsung as a part of its strategy may invest in several competing Operating systems- keep the one that does well and dump everything else that doesn't, not every company has the business strategy or deep pockets of Samsung. Services companies can partner with some of the phone platform vendors and integrate the platform with some of the Operating systems. If the investment pays off the handset OEM will be willing to agree for a royalty based payment structure, if not the services company can always showcase it as a part of their capability demonstration in bidding for the usual T&M / Fixed Price projects.
Second, Creation of Platforms - A platform is by itself is unsaleable and needs associated customization to meet the needs of clients. Large software companies are in a better position to create platforms. One of the possible approaches could be to work with a client to develop a solution on top of a platform and negotiate the pricing such that the Services firm keeps the rights of the platform and the first client keeps the rights of the solution built on top. Client may be preferentially billed for the support provided in IP creation. It is however very important to invest in the right technology / project to be chosen for something like this. Typical examples could mean features not really creating competitive advantage but are mandatory for running the business such as billing, policy compliance etc (in case of telecom companies). The clearly fragmented OSS / BSS market makes it a potential case for this. The availability of a platform for rapid application development will reduce the switching costs for network operators - thus keeps them in a better bargaining position with the OSS/BSS vendors. As a matter of fact there are already several Cloud offerings in this space. For the app stores, the Infosys Flypp story is another example for good platform idea.
- New Markets:
Services companies still have their structures, business models and policies aligned to doing business with North American and European corporations and governments. There are several other markets especially the emerging one which may need a completely different set of business model for them to succeed. Services companies choosing to invest in the new markets have a native advantage as the market grows. One example again in Telecom could be the switches of less than 100,000 lines capacities C-Dot (a government company) exports to several emerging economies. And the reselling old GSM network equipment to emerging economies when countries adopted 3G is another example. While most of these cases may look like potentially less profitable avenues - they can be easily converted into royalty based revenue streams by enabling smaller local businesses to work on these in their cost-structures while providing only the technical / managerial capability. FabIndia's business model may have takers for instance.
- Pricing Models:
Apart from the pricing aspects of Fixed Price and Time & Material models companies may consider the following models as well.
Business Outcome based model - For projects in which the services companies have strong experience and cases where the companies have caused clear business benefits in the past make a case for this. A portion of the benefit provided can be claimed as the fees. Companies should be careful while choosing such projects. Projects causing head count reduction / highly transformational projects with significant people interaction of employees of the client companies may be avoided. Projects that simply convert capital and fixed costs into variable costs such as implementation of Cloud etc could be potential example candidates. Such projects when coupled with the IP blocks and Platforms described in the earlier sections make a cohesive strategy. Highly specialised services in the domain of business intelligence helping companies plan their production, supply chain and pricing could also be another class of example. While there are consulting companies to advice - there are n't many to take a share of both Profits and Losses and at the same time follow the execution.
Taking complete / partial ownership of Client Product / Service lines: Companies exiting businesses have an obligation of support for the agreed product lines. There have also been examples where larger companies lend their brand to the right offering. While white lable manufacturing is not considered very lucrative, picking up the right project inline with the competencies and existing IP may give rise to a non-linear revenue possibility. In fact, companies can specialise in taking up complete / partial ownerships for products in mature or decline stages of the lifecycle. Companies can use their market reach if they are present in markets other than the client's strong / choice markets. Again caution should be exercised in the choice of the product and the market so that the company can leverage its strengths for those incremental revenues. One example in the media space could be partnering with clients operating in the internet space unwilling to cater to specific markets, if the market segment could be profitably served by the company.
- Incentives and Measurements:
Stock Market expectations and Senior management incentive structures linked to them are considered one of the strongest reasons for risk averse nature of companies. I was told that there are sales teams that prefer selling a client's product over in-house product due to incentive structures.
Measurement based on quarterly or even annual revenues and profits may not work well if investments have to happen in the non-linear revenue generating businesses. It is certainly not an easy task to device proper incentive structures but is a very important aspect. Certain exponential returns may be considered on business success which ensure that there is appropriate reward for the risk taken. It has been experienced by companies that it is difficult to attract talent across the experience levels for risky ventures. OB researchers may attribute it to the lack of social security in the Indian context. Creating subsidiaries with P&L responsibilities may be considered after the incubation period. The companies may need to start operations outside India if the availability of talent with the required risk appetite is available. Here the intention is not to typecast Indian work force as risk averse but to see in which geography can results be achieved in the most cost-effective fashion with the least business risk.
- Organisation Structure:
The Organisation Structures should be aligned to properly take up the non-linear initiatives. There have been debates if the Finacle model is better or the OnMobile model. Irrespective of the model the structure of organisation should try to get the best of both worlds - Firstly, the creation of subsidiaries which are smaller and nimbler allow quick response to the opportunities and convert them into profitable business without the bureaucratic delays unavoidable in the larger parent organisations of today. Two, it would be unfortunate and injustice to the vast amount of knowledge of customers and markets built by the wider organization is not utilized. This brings a challenge that while the smaller subsidiaries have the necessary autonomy, it should also be ensured that they are not operating in silos.
Acknowledgements
Some of the ideas in this blog are result of the discussions I had with faculty, peer group and industry veterans during the CSITM Participatory Research Workshop conducted at IIM Bangalore in May 2011. While there have been several interesting ideas and concepts discussed - this post is dedicated to the Service Provider's perspective (the sub-group in the work shop in which I have contributed my thoughts). Errors, omissions and interpretations of examples from the Telecom Sector may be entirely attributed to the author.