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Non-linear growth for IT service providers

‘‘Non linear growth” is the latest buzzword in Indian software

Srikant Suddekunte

The past decade and a half has been boom time for IT Service Providers (ITSP) based in India, with a few low phases thrown in. There have been multiple benefits to the nation as well as the employees of these companies. Industry forces foresee stagnation in growth in coming years, an attempt to tackle this “non linear growth” is the latest buzzword. This article looks into existing attempts which are being made in this regard and discusses a possible solution.

The biggest challenge for any business is not just attaining growth but to sustain the same. Ask any sportsperson and he will say “It is tougher to remain number one than to become number one”. When you are not on top, you have only one target—the existing champ. But once you become number one, all the people below you are fighting hard to dethrone you. The cease-fire case study (Cease fire was a fire extinguisher launched for home safety in late 1980s) is a celebrated example. The first year was spectacular, sales were high and order book was full. But no one thought of how to sustain the business, what happens in the second year? How does the company grow after its initial peak? ITSP have grown rapidly, their growth will taper off and organization size will be a big issue to handle if they don’t change their business model.

The as-is business model of the ITSP is ADM (Application Development and Maintenance) their revenue is effort based, i.e. the more the number of people working, the more the revenue. This is called “Linear growth”. Though the upper levels have not been tested, one is sure that beyond a particular number, adding more people will cause the overheads to increase. Presently TCS is leading this linear growth and has around 1,00,000 employees on its payroll.

Let us look at some of the attempts made by different industry players to achieve non linear growth:

IT Products

Infosys has a Banking product Finacle which is a source of Non linear growth, but nothing beyond that. In any case they are facing tough competition from FLEXCUBE by I-Flex.

In the products business revenue is from licenses/usage and not the people who worked for the product. Thus the linkage between people and revenue is removed.

Profit sharing

IBM India has got into profit sharing arrangements with Indian mobile operators –Bharti and Idea. IBM’s revenue is based on the profit that Bharti and Idea make.

IBM has gone into this venture based on the strong domain expertise it has gained from handling AT&T’s business in USA. The basic way of working is different, while Indian IT service providers are only considered about completing the task related to the application that they handle IBM has taken the risk of agreeing to be a part of the client’s profit/loss. In any case IBM has its product and hardware business to fall back on.

Fixed Bid

This can be a source of non linear growth in the short run. You bill the customer based on a certain amount of effort and involve lesser people because of higher efficiencies (Reuse, Onsite-offshore).

In the long run competition eats into your profit and the client has to get some of the benefits of your efficiency. This then becomes an endless cycle of squeezing the vendor by pitting one against the other.

Reusing IT solutions across industries

Some IT solutions can be leveraged across multiple verticals, billing/invoicing being an example. While this is a step in right direction, reuse has its pains like Intellectual Property Rights issues, decustomising (removing the domain specific components) the original solution and customising the new solution etc.

How do other industries achieve growth? They go for either organic or inorganic growth. When a manufacturing company goes for organic growth they accrue the benefits of economies of scale, however in the case of ITSP organic growth means linear growth.

The way to achieve non- linear growth is growing inorganically, by acquiring small IT product companies. ITSP typically have a strategic alliance with many product vendors. Product vendors are companies who hold the licenses (and have developed the product) for installing and using their custom products. These range from biggies like Oracle, IBM and SAP to niche players in the Business Process Management (BPM) space like Pegasystems and Global 360.

The following is the proposed road map for achieving non linear growth:

IT firms that are sitting on huge cash surpluses (most of them are) should go in for strategic acquisitions of smaller product companies.

These products should be the ones they have worked on and should be in a space which has good growth prospects and also reasonable product maturity.

Select the best of the talent in their existing services divisions and involve them in product development.

Bring in an atmosphere of continuous product development amongst the employees, this is a paradigm shift from service delivery, be on a look out for other product acquisitions and internal product development.

The road ahead in a hybrid Product-Service company will not be easy. Here are a few things to look out for:

Products have a long gestation period. Each acquisition involves a one time hit to the balance sheet. A few acquisitions may even go wrong and not generate revenues as expected.

The first few acquisitions may set the cat amongst the pigeons and some of the other product vendors may shy away from IT service providers.

There might be occasions when a competing IT services firm may do the implementation project for a product owned by you. Accept this as a way of business but be smart enough to gradually push the competitor out by showcasing your overall strengths. At the end of the day you own the product.

Some times ITSP pass over application bugs and issues as “Product limitation”. Once you own the product you need to provide a complete solution to the client.

Expect some issues related to salary in the two divisions. Use the product division as a means to retain the best of the talent, keep rotating members between the product and services division for greater knowledge and experience sharing.

As an industry which has been evolving its business model - body shopping, offshoring, near shoring, global delivery, now is the time to take the bigger leap and grow by doing vertical integration of business. Undoubtedly there will be a few failures but one has to take such risk to sustain growth, given the track record and entrepreneurial nature, I am sure they will succeed and come up with a better approach also.

About the Author
Srikant has worked in the IT industry for over three years primarily in BPM. He can be contacted at articlesfromsrikant@gmail.com