Every IT Service provider worth its salt (atleast the big 3) have hinted on bolstering their non-linear (IP based revenues) going forward. It shouldn’t come as a surprise since they are facing margin pressures as the IT budgets in the US and Europe are expected to be cut down drastically.
Infosys, one of the premier IT service providers has now stepped the accelerator on expanding its IP based product portfolio and they have chosen cloud based business platforms and applications to see them through this tough phase.
Infosys recently announced the launch of several cloud based business platforms on a subscription based model wherein enterprise customers get the best of breed enterprise solutions without making any CAPEX and only pay for what they use (Oh, well that’s what Cloud based model is)
According to the new CEO S.D.Sibhulal, Infosys has already signed 20 large enterprise clients for its cloud based business platforms. Infosys has in the last few years developed cloud based solutions for various functions including human resource, procurement, social commerce, digital marketing and a mobile app store platform (Flypp). These solutions though not marketed aggressively are seeing some sort of validation with the likes of Aircel using Flypp to develop its appstore.
The most recent addition to these Cloud based solutions is the launch of TalentEdge, a cloud platform for enterprises to streamline their Human Resources function.
The pay-as-you-use solution is expected to help organizations free up unnecessary time spent on transactional activities like payroll, accounting etc. There have been mixed opinions from industry analysts regarding Infosys’s IP strategy and some have said that with IT spending curtailed, customers are not going to spend on new technologies like Cloud, Mobile, Social etc.
I seem to think that Mobile & Social are becoming indispensible for enterprise even though the companies may not be sure of their strategy to leverage these technologies. So, a subscription based approach makes even more sense for these companies to try out these technologies wherein they do not have to make any upfront investments for the provisioning of these technologies.
There are these obvious doubts that these solutions will find tremendous competition from pure-play cloud solutions providers like Workday (Cloud HR solution) but then Cloud Technology is no magic wand. There will be competition but the likes of Infosys have years of experience working with large enterprises and they can model their solutions to solve a lot of problems posed by traditional on-premise solutions.
Cloud or No Cloud, IT service providers need IP based growth
IT/ITES sector companies like most service based companies have a simple formula for sustainable growth. Hire more people, Grow More revenue.
With the top 3 players in the sector employing over 1 lakh employees each, it is obvious that they need to constantly hire resources in order to grow. For these companies which are already employing so many people, to maintain a 20% annual growth means hiring upwards of 20,000-30,000 people every year.
Add to that, the attrition in the IT sector and the constantly increasing wages maintaining healthy margins with such an approach can be quite challenging. The ‘time and material’ approach for billing based on number of people working on number of hours is not sustainable especially when it is increasingly difficult in a highly competitive marketplace.
The solution lies in the non-linear model similar to what manufacturing companies do. Build once and get recurring revenues.
For IT service companies, a new product also means that they get additional revenues from providing services around that platform/application. The success of Infosys’s FINACLE and TCS’s BANCS banking and financial solutions is a testimony that the product driven approach makes a lot of business sense.
Cloud just provides a low-cost entry approach for companies to develop new solutions fast and companies can better position it to enterprises by highlighting the NO CAPEX value proposition.
Currently, product based revenues are minuscule for most companies in the sector and contribute anything between 3-10% to annual revenues. With the market dynamics that are developing now, companies realize the need to scale their product based revenues significantly if they have to sustain their margins.
Building these platforms and applications only gives companies in the sector to build on a scalable technology and ship their products faster.
What are your thoughts on Infosys’s product strategy which leverages Cloud technology? Will Infosys and other companies in the sector be able to partially transform them into product companies as well going forward