For the IT services industry, it’s the time to wake up to new realities. Strategic outsourcing is increasingly considered to be dead, IT models are being realigned to new technology needs, and long-term deals are shrinking with every passing year. Of all the major technology disruptors that have shaken up and stirred the industry, cloud has been one of great significance. The advent of cloud has not just transformed the way IT is consumed by enterprises, it has also in many ways questioned the tried and tested ways of functioning of IT services companies and left them scrambling for answers.
With the advent of disruptive technologies, the vendors have switched to as-aservice model (PaaS, SaaS & IaaS) and will continue to evolve their products and services
—————–—Sanchit Vir Gogia Chief Analyst & Group CEO, Greyhound Research
As the industry continues to unfold new challenges, IT service providers are relooking at their traditional strategies and outsourcing models to integrate it with their clients’ fast changing needs. In fact, the revenue and profitability models are gradually getting transformed as clients move away from traditional FTE-based models to cloud-based, pay-as-per use IT models. “Indian heritage service providers are adapting to the shift in business models rapidly due to the changing dynamics of how IT services have evolved. In the past 3-5 years, these traditional service providers have cautiously monitored the market dynamics, some made the decision early while others followed,” observe Dr Pradeep K Mukherji, President & Partner APAC & MEA, Avasant and Saugata Sengupta, Consultant, Avasant. SMAC technologies, with cloud as a key ingredient, is a big opportunity for IT companies to open up new revenue streams in a slowing down economy. According to a survey of global IT decision makers by research firmOffshore Insights released last year, Global 2000 firms will spend 15-16% of their IT services and outsourcing budgets on SMAC and India will export $15 bn worth of SMAC software and services in fiscal 2017. With cloud services gaining interest among enterprise clients, it’s certainly a different ball game for the service providers. The ones that quickly evolve and remodel their businesses will be better prepared to grab the opportunities.
GETTING CLOUD READY
Sensing a ‘gold’ lining in cloud computing, Indian service providers are looking to grab their share of cloud revenue and are getting geared up for a fresh battlefield, both by way of acquisitions and by pumping in new investments. “Over the past few years and now with disruptive technologies stepping in, IT vendors have started to acquire smaller companies and start-ups or making seed investments into the smaller companies that add focused offerings to their portfolios,” says Sanchit Vir Gogia, Chief Analyst & Group CEO, Greyhound Research. Infosys’ acquisition of Panaya, a US-based Software-asa- Service (SaaS) company that specializes in automating application management service was a key step in this direction. Its close rival, Wipro’s decision to take a minority stake in Drivestream, a Virginia-based firm that integrates Oracle’s cloud applications is yet another example.
Going ahead, profitability and growth in market share will depend a lot on how companies identify and grab opportunities in the new technology areas. In fact, industry experts suggest that cloud and associated markets need to be treated as a whole new segment and addressed in a different way.
As cloud service providers like Amazon, Microsoft, Dell, Terremark, Rackspace, among others, provide the infrastructure and services backbone, the traditional service providers are developing capabilities to provide the application and customization layer to the cloud
—Dr Pradeep K Mukherji President & Partner APAC & MEA, Avasant —Saugata Sengupta Consultant, Avasant
Indian IT companies do face tough competition from their global rivals and risk losing out on deals in the new technology areas, if they fail to quickly build up their expertise in this space. The 10-year multi–million dollar cloud deal that ABN Amro signed with IBM last year raised an alarm for Indian services majors like Infosys and Wipro which were also said to be vying for the deal. Although these companies still need to evolve on the cloud services front to keep pace with their global IT services competitors, there are things going for them. “The advantage
these service providers have is an available clientele which trusts them to deliver on technology services at extremely competitive rates and this advantage is carried forward in providing IaaS, PaaS, SaaS, cloud management, and cloud platform services,” assert Mukherji and Sengupta.
Avasant Research has observed that security and mobility are the two major concerns for the buyers of cloud services and this is where the likes of TCS, Wipro, Infosys, and HCL can play a major role.
THE REVENUE IMPACT
Although companies are optimistic that new technologies will contribute a significant chunk of the business,currently, it accounts for only a fraction of their revenues. Application services and maintenance still hold the lion’s share in revenues.
Research studies indicate that there is a lot to expect in the future. According to IDC’s estimates, Indian IT vendors will generate at least $225 bn in SMAC-related revenue in 2020. “Most of the revenues will be realigned fromstrategic outsourcing to managed services and cloud,” Gogia points out.
Revenue drop due to cloud apps is being felt primarily in enterprise apps or corporate systems. The impact is deepest in the implementation phase—with both time and number of people required shrinking dramatically
—Uday Tembulkar Co-founder, Empacus
The advent of cloud services and associated models have increased service providers’ risk of losing out on traditional revenue streams. Uday Tembulkar, Co-founder, Empacus, an outsourcing management and advisory services company, clarifies the point with an example. “A Fortune 100 company recently decided to migrate from on-premise PeopleSoft HR to Workday. The service provider supporting PeopleSoft will eventually lose this revenue stream,” he says. Some industry experts are also of the opinion that traditional service lines have not seen a major impact as of now, and it is the growing demand for new services that needs to be addressed. “The impact on revenues
has not been observed since the demand for traditional services hasn’t declined significantly yet. New demand is generated due to the digital transformation and requirement of the new age market,” update Mukherji and Sengupta.
While the IT services industry takes a transformational shift, it will not just lead to operational and structural realignments for services organizations, but will extend beyond to drive larger mindset changes, which will differentiate them in the long run.