Tech trends and business ideas

All things that motivate entrepreneurs

Thursday, April 19, 2007

The changing IT services landscape

I had great fun watching the live telecast of announcement of financial results by Infosys and TCS. Being a shareholder in both these companies and in a few other promising companies in the Indian IT sector that give 25% plus y-o-y, I have little to complain on their efficient use of my capital.

As a long term investor, I am not bothered by cyclical factors like the weakening $$ or interest rate hardening. Anyway these companies have hedged their $$ exposures in the short term and the impact cost on their margins can only be negligible. Well, in case if the trajectory persists, they may have to re-price their offerings and I am not much worried about their loss of competitive edge since still it would leave their clients with significant cost and efficiency arbitrage. Even the competition has large presence in India, hence the problem is not just theirs. Interest rates matter much less since these are mostly zero debt companies with sufficient cash hoard (apparently to finance acquisitions) at least in the short term.

But something else worries me more.

I often get to hear CIOs often mouthing the word ROI than CFOs. They are looking for solutions more than technology (which is the way it should be). They say they simply can’t afford large scale, highly customized and costly IT implementations and services. Enterprise solutions are becoming all the more modular, pre-integrated, pre-tested pre-assembled and validated at the Vendor’s side before implementation. Not much different from custom orders given to a carpenter. Customers engage multiple vendors to bid on smaller projects that can be easily deployed, managed and measured. The IT partners are also expected to provide best practices, 24x7 service and at times even to give a better insight into the customers’ business model itself – not as a consulting assignment, for free. These ancillaries have become the differentiators in the otherwise commoditized IT services market place.

Add to it the long term threat posed by SaaS to the traditional revenue streams of these IT services companies. If clients are no longer rolling out large CRM or ERP applications on-premise and are instead accessing them from a remote center via a web interface, won't that bypass the role of third party systems integration and applications management vendors altogether?

Under SaaS, clients use the internet to access remotely-hosted applications, which are delivered on a one-to-many basis. SaaS specialists such as Salesforce.com, NetSuite, and RightNow, which all develop and host web-based CRM and ERP systems are enjoying strong growth, driven by the continued acceleration in speed of WAN bandwidth, and diminishing user concerns over security and reliability.

SaaS will sound familiar to anyone who lived through the Application Service Provider hype of the late 90s. However, the big difference is that ASPs were basically pushing hosted versions of traditional client-server applications on a one-to-one basis, whereas SaaS applications tend to be multi-tenant, are designed for internet delivery from the outset, and many utilize genuine usage-based pricing models.

Some say that the prospect of bandwidth carriers requiring SAAS companies to pay a premium for faster networks could slow the general adoption of SAAS. This is because it will require SAAS companies to rethink how much they are willing to pay to deliver their services, as well as how much to charge customers. But the flip side is that if someone went to a customer and said ”we're going to reduce your access to applications over the Internet because you're not paying us enough”, they would switch providers so fast it would make their head spin. I find it extremely hard to believe there won't be some [carrier] who says, “I’m the one you don’t have to pay for.”

How the small SaaS providers differ from the big consulting organizations is that they are focused on doing lots of short integration projects, whereas an Infosys or a TCS or Accenture wants to send in a truckload of consultants into its clients for 18 or 24 months at a time. If the employees are not on a project, it inflates their bench strength that hits their bottomlines hard.
.

I don’t want to put out a `sell’, but many soon will if a quick rethinking of IT service delivery models do not emerge out of the woodwork to meet the ever evolving set of challenges.

A comprehensive perspective can be found here and here.

.

Labels: , , ,

0 Comments:

Post a Comment

Subscribe to Post Comments [Atom]

<< Home