Non Linear Models Driving The Next Phase Of Growth For The Indian It Industry

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Our team recently released tis publication in collaboration with CII. This was widely appreciated by most IT Leaders present at the conference. Iy you are a CEO, this is a consolidated reference …

Our team recently released tis publication in collaboration with CII. This was widely appreciated by most IT Leaders present at the conference. Iy you are a CEO, this is a consolidated reference document of al talking points in te industry that provides prescriptive next steps for your company. I am sharing this document for the benefit of my Linkedin connections. Kindly feel free to reach-out if you want to discuss further.

Please drop me a note on - aljo@kpmg if you have lost my number.

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  • 1. Non-linear models Driving the next phase of growth for the Indian IT Industry kpmg.com/in
  • 2. Foreword The Indian IT industry has entered the post-adolescent stage now. Since its birth in late ‘70s and 80’s, it has seen birth of a sibling (BPO) in 90’s. It has seen two inflection points, Y2K and DotCom, which propelled its growth and then has seen atleast two economic shocks during DotCom bust and 2009 meltdown - making him a “man” out of adversity. However, now it is facing major challenges and opportunities. The tax holiday has ended, MAT on SEZs have made them irrelevant, competition from other “offshore” countries is increasing and multinationals like IBM and Accenture have cracked the Indian model. The labor arbitrage can not sustain for more than 10-12 years. The industry needs to reinvent itself. It needs to define a compelling new business model. The industry needs to dramatically change revenue per employee equation, thus bringing “non-linearity” Can it do it? In order for it to . succeed, many factors will have to fall in place. The ecosystem involving the government, trade bodies and academia is missing maturity and involvement of two critical components - (1) Consultants / Advisers (strategy, accountants, lawyers) and (2) VC/PE community. When they all work in tandem with the industry, the transformation will come. “Indian IT industry has to change its business model whereby it can create more value to its customers by facilitating business process transformation, using technology innovations. Indian companies can no longer sit back and expect to do low-end work as what they have been told to do by their customers as in the past. This paradigm shift would require IT companies to acquire in-depth understanding of their customers’ business and consulting skills to advocate and facilitate business Pradeep Udhas process changes. Vertical domain specialization Partner and Head within their hitherto technology horizontal operation IT - BPO Sector will be a key requirement going forward” KPMG in India VK Mathews Chairman - India IT Summit 2012 & Executive Chairman - The IBS Group© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 3. Our thanks to these leaders for their insights Mr. N. Chandrasekaran CEO & MD, TCS Mr. Bhaskar Pramanik Chairman, Microsoft India Mr. Vineet Nayar Vice Chairman & CEO, HCL Technologies Mr. C. P Gurnani . CEO, Mahindra Satyam Mr. Harsh Manglik Former Chairman NASSCOM, and Former Chairman and Geography Managing Director of Accenture-India Mr. N.V. ‘Tiger’ Tyagarajan President and CEO, Genpact© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 4. © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 5. Table of Contents Executive Summary 1 Section 1 - Background 3 Overview & Evolution of the Indian IT-BPO Industry 3 Changing Dynamics of the Businesses 6 Geo political – The Cocooning West 6 Market conditions – High client expectations, low spend 7 Socio-technological & cultural untethered access everywhere 7 Governance & regulatory – Killing the golden goose 8 Human resource – Ready to pay but no availability of skills 8 Need for Transformation – Non-linear Model, Driving the Next Wave of Growth 9 Section 2 - Non-linear Growth Model 11 Non-linear growth model – Redefining business dynamics 11 Intellectual Property 12 Cloud Computing 18 Platform BPOs 23 Non-linear Pricing Models 26 Delivery Accelerators 29 Branding 32 Mergers and Acquisitions 36 Section 3 - The Way Forward 41 Implications for players in the ecosystem 41 Government 41 Industry Bodies/ Associations 42 Academia 42 Clients 43 PE/VC 43 Consultants – Business, process and financial 43 About KPMG in India 45 About CII 46 Glossary 47 © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 6. 1 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Executive summary The Indian IT-BPO industry today stands at employee conundrum. With rising attrition, an inflection point in its evolution. While, the wage inflation and non-availability of skilled industry expanded from a mere USD 8 billion employable talent pool, companies are in 2000 to USD 88 billion in 20101, contributing wondering what their strategy should be in an significantly to India’s economic progress over industry which has traditionally been highly the last decade, business leaders now agree people-dependent. that the next decade will be substantially different from the previous one, in which new business models will emerge to deal with a IT-BPO Industry Challenges rapidly changing marketplace and customer • Geopolitical - Protectionist policies, new needs1. Thus, while remarkable progress has visa policies, falling discretionary spends, been exhibited by the Indian IT-BPO industry emerging markets not compensating for in the past, the future brings increasing overall decline complexity • Market Conditions - Increased competition among vendors, low-cost destinations, The industry has had its share of turbulent Client maturity, high-end services eluding times; it has grappled with adverse Indian players protectionist policies, visa regulations, falling discretionary spends and slower scale of • Socio-Technological & Cultural - Social adoption in newer markets. Market conditions media, mobility, convergence, disruptive, have become tougher due to heightened technologies competition among vendors, emergence of • Regulatory – Taxation, IP protection other low-cost destinations and increasing maturity of clients now demanding more • Human Resource – Attrition, wage inflation, accountability. Technological disruption is huge employee base, employability. shaking up the vendor landscape, where players are racing against time to respond to change. Domestic regulatory environment At this critical juncture, firms need to look comprising of issues of taxation, transfer beyond the conventional linear growth models pricing and lax IP Protection laws are further and turn to innovative non-linear forms of adding to woes of the industry. But the most growth. important challenge of all is perhaps the 1. NASSCOM Strategic Review © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 7. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 2Based on the industry trends, KPMG has • D elivery accelerators to deploy reusable robust infrastructure and aiding in domesticidentified 7 emerging models increasingly tools across multiple customers growth through e-governance measures.being adopted by companies to accelerate accelerating set up time and attaining It is the Academia’s imperative to nurturetheir non-linear growth2. They are: efficiency the next generation of talent, by fostering a thinking mindset, offering vocational • Branding to command a premium over training for ‘ready to work’ human capital and competitionNon-linear Models promoting partnership with the industry to• Intellectual property • Mergers and Acquisitions as means prepare students as they enter the workforce. to acquire new ideas, clients, service A more proactive role should be played by• Cloud computing extension, patents and enter new markets. private equity funds and venture capitalists by• Platform BPOs identifying early stage technology start ups• Non-linear pricing models Today, there is an urgent need for innovation and nurturing them through their lifecycle. on multiple fronts – across products, services, Of course, one of the most important• Delivery accelerators delivery models, pricing and branding, a need stakeholders, the client, will have to shed its• Branding further accentuated by the recent slowdown. inertia and seek transformational deals with We believe it will be a combination of all these service providers, who they should see as• Mergers and Acquisitions. factors that will equip the Indian software strategic business partners. Joint initiatives industry to stay on top of their game, at an for new technologies, an open mindset, equal footing with global giants and transform transparency and calculated risks would help• Intellectual property so that companies India to a technological behemoth from just contribute to this end. In that last endeavor, can monetize their intellectual property being the world’s back office. consultants would come into the picture portfolios keeping vendors and clients ahead of the At this watershed moment in the Indian• Cloud computing to use flexibility, curve and help conceptualize new products IT-BPO industry, all important stakeholders scalability and cost benefits made available and markets based on their experience and in the technology ecosystem comprising through the ‘as-a-service’ paradigm exposure. service providers, clients, government,• Platform BPOs to use a common business industry bodies, academia and consultants With successful adoption of the seven platform for multiple clients & services will need to work cohesively in order to models of non-linear growth and incorporating develop a long-term, holistic growth strategy. them in their strategy, Indian IT majors• Non-linear pricing models linking client The government’s role here is envisioned can emerge as this decade’s leaders in expenses to business outcomes or usage to be multifold, in creating an environment technology, pioneering the next phase of instead of headcount and effort spent conducive for innovation, rationalizing tax exponential growth. structures and transfer pricing laws, building2. India IT Services, Primer on Non-Linear Pricing Models and Their Implications, March 2010, Morgan Stanley © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 8. 3 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Section 1 Background Overview & Very few industries in modern economic history have replicated the success story of of series of measures to encourage the growth of the IT industry was framed. In Evolution of the the Indian IT-BPO industry. The industry, which was almost at nascent stage till late 1980s, 1985, all the software export revenue was exempted from income-tax3. Domestic Indian IT-BPO grew at tremendous pace after early 1990s. The IT exports have grown by 100 times over firms shifted from exporting programmers to outsourcing custom software while Industry the last 15 years1. few others started venturing into product development. The Indian IT industry has witnessed five distinct stages through its evolution. It has The 1990s: Booming of India’s IT sector faced different circumstances and challenges, The 1990s were the turning point in the story and has emerged triumphant at each stage. of India’s IT industry. The economic reforms of 1991 reduced tariffs and other taxes that were The 1970s: Birth of Indian IT Industry plaguing the industry. The 1990s also saw the The Tata group (in the late 1960’s) has been return of IBM to India, which sent a positive instrumental in the inception of the IT industry signal to other global majors that India’s IT with the establishment of Tata Consultancy industry, was open for business. Several Services2. As software development could new Indian IT firms were started during the not come to India, Indian programmers were decade, which also saw TCS, Infosys and sent to developed countries. Towards the Wipro pull ahead of the pack to emerge as later part of the decade, the government the market leaders by the end of the decade. began to realize the potential of Information These firms started scaling up increasing Technology, and gave the go ahead for setting their global reach in small but eventful steps up the National Informatics Centre (NIC) in in global outsourcing market which was 1975. dominated by global IT players. The 1980s: Setting up of new IT firms 2000-2010: Surging ahead – Indian As the 1970s gave way to the 1980s, the IT becomes IT behemoth industry experienced a radical transformation. The past decade witnessed an explosive On the domestic front, policy reforms that growth for the industry. It has surpassed all reduced costs of imported hardware and expectations, and has become a behemoth software caused the Indian software industry today. The IT-BPO industry is a significant to shift from supplying programmers to growth catalyst for the Indian economy and supplying software programs. Huge cost has grown 11 times in the last decade, up arbitrage and English language skills were from USD 8.2 billion in 2000 to USD 88.1 the other two most important competitive billion in 20114. IT services continues to be advantages which India had in its favour. the largest share of all segments followed by Government policy also changed to a the BPO, ER&D segment and the hardware supportive stance during the 1980s; and a industry4. New Computer Policy (NCP-1984) consisting 1. NASSCOM, KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis 2. An inside look at the making of a giant, Tata Review, December-2011 3. Origins and Growth if the Software Industry in India, Rafiq Dossani, Stanford University 4. NASSCOM Strategic Review 2011 © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 9. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 4India’s IT-BPO Industry JourneySource: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis5. Origins and Growth if the Software Industry in India, Rafiq Dossani, Stanford University 9. http://www-07.ibm.com/in/careers/milestones.html6. NIC Website 10. NASSCOM Strategic Review 20117. http://www.nasscom.in/vision-and-mission 11. “BPOs hunt for recruits among various professionals” Dec 2010, Daily Bhaskar ,8. “Offshoring: Why businesses launch IT operations in India” Sep 2010, Silicon.com , 12. Draft National IT Policy, 2011© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 10. 5 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry 2010 and Beyond: Continuing the saga India’s IT-BPO Industry - Snapshot13 Not being content with executing basic due to industry level initiatives countering application development and maintenance competition . Further, there exists a significant • I ndia’s market share in global sourcing (ADM) projects, Indian IT firms are offering headroom for growth through innovation industry - ~55 percent (2010) a complete integrated suite clubbing high which can propel revenues to the tune of USD • Fastest growing sector among all end services like consulting, Business 300-310 Billion by 202014. Nevertheless, the services in India Intelligence, Infrastructure Management, decade ahead seems to offer great promise Product Development etc. Firms were able for Indian IT firms, as they seek to overcome • Contribution to GDP – ~6.4 percent to withstand the tumultous period and their current challenges and tread on to new (2010) have emerged stronger than ever. As per avenues moving from their traditional linear NASSCOM India’s IT-BPO sector revenue is models to the non-linear growth models. • Contribution to India’s service sector – likely to reach USD 225 Billion by 2020 ~10 percent (2010) • Indian IT companies -- Presence in ~52 countries -- 400+ global delivery centers India’s technology and business services export market - scenarios 2020 -- 750 captives • Employment to ~10.8 Million -- Direct Employment - ~2.5 M -- Indirect Employment - ~8.3 M -- 60,000 foreign nationals • Domestic IT-BPO sector – INR 1321 Billion, growing at ~16 percent (FY2011) • I T Services – INR 501 Billion and BPO – INR 127 Billion; both growing at ~17 percent (FY2011) • I ndian Software Product segment – INR 157 Billion India IT-BPO Market Segment Breakup Figure : India’s technology and business services export market - scenarios Source: NASSCOM Perspective 2020: Transform Business, Transform India” NASSCOM, April 2009 , Summing up the Journey Industry has witnessed a complete transformation from delivering stand-alone hardware, software and services, to moving up the value chain and providing a complete suite of end-to-end integrated offerings coupled with high-end services like consulting in large transformational deals. Disruptive and Source: NASSCOM Strategic Review 2011 emerging technologies such as virtualization, cloud computing, social computing etc. have further brought revolution in the IT space. The Several top Indian IT firms have reached linkages between processes, infrastructure considerable scale and feature in the global and software are likely to get tighter and lists like Fortune 500, and Forbes 2000. pricing models such as pay-per-use and With the domestic market opening up, outcome-based pricing expected to gain more almost all major global IT-BPO firms have a prominence. All these developments are presence in the Indian market in one form compelling vendors to transform themselves or the other. Indian IT firms have also hit and adapt to the changing ecosystem. their stride, and have expanded globally across all major geographies, acquiring both clients as well as other companies. 13. NASSCOM Strategic Review 2011 14. “NASSCOM Perspective 2020 : Transform Business, Transform India” NASSCOM, April 2009 , © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 11. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 6 Changing Dynamics Maintaining the same level of rapid growth as registered in the past decade is going to of the Businesses be a challenge for Indian firms. The current market is characterized by uncertain demand, increasing competitiveness and changing technology landscape.IT-BPO Industry – Changing DynamicsSource: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis To sustain sharp growth registered by punish the US companies outsourcing their vendors, there is a constant impetus customer calls by denying them federal grants on companies to innovate and undergo or loans for a span of five years15. Operators transformational changes to stay relevant would need to disclose their location to in the market place. Like any other industry customers and offer them the option of being during its growth phase, this industry is also serviced by an alternate US call centre. In a going through its share of turbulence. separate move last year, the State of Ohio had banned outsourcing in government funded projects5. Geo Political – The Cocooning West New Visa Policies Extreme measures by western economies New visa norms are making it more to prevent jobs from flowing out of their challenging for the industry players to serve countries to destinations like India are their customers in their biggest markets. weighing heavily on Indian exports, especially Last year, US government imposed a steep the Indian IT-BPO industry. hike in the visa fees for work permits for the Protectionist Policies skilled workers to fund the security on Mexico border16. This steep hike could potentially The economic crisis resulting in rising jobless make it difficult for some of the IT resources claims has once again forced the west to to visit US for work. UK government has also raise anti-outsourcing flags and promote taken few measures making it difficult for protectionist policies. For example, the companies in UK to hire workers from outside recent US Call Center Worker and Consumer the country. Protection Act introduced by some members of US House of representatives seeks to15. http://www.thehindu.com/opinion/editorial/article2738977.ece16. http://articles.economictimes.indiatimes.com/2010-08-13/news-by-industry/27603986_1_visa-costs-hike-in-visa-fees-protectionist-move© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 12. 7 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Alternate markets growth not fast enough North America, UK and Western Europe comes to outsourcing. They have better incomplete without the social layer today. are the largest markets for outsourcing. controls in place, not just to manage More companies are now interacting with On the other hand, the rate of growth outsourcing but also measure the quality of their customers directly, through various in outsourcing has been highest among delivered goods. As a result they have turned mediums not confined to the traditional emerging economies though the base is still more demanding towards the vendors and channels. While the IT vendors create relatively small. The lower volume and low their expectations are sky high. The cost business tools or various enterprise scale of IT adoption in emerging markets is pressures on them just makes it worse, applications, now they need to think about not proportional to the contribution made by since their expectations are still high but their social interactions right from the inception western countries and has not been able to spends are not increasing considerably. during conceptualization phase and not compensate for the decline in growth from relegate it to an after-thought. Whether it is a West. Consulting to implementation: The elusive bank or a retailer or a telecom firm, customer value chain interactions are no more limited to branches Domestic market emergence Despite the top Indian players having or outlets. Consumers are connecting to the While the industry has primarily been established their brands globally and having companies from anywhere now – whether its export-centric, India’s domestic market is cutting edge solutions across certain verticals desktop, laptops, phones or tablets. They are now also gaining traction, the expected size and functions, boardroom access still eludes using the likes of Facebook and Twitter as a of Domestic market is USD 29 Billion17. The most of them. They are still looked upon medium of expression, and given the extent market size of domestic BPO is expected to as vendors instead of partners – as against to which the organizations might be exposed, reach USD 2.47 Billion by 201418. Domestic IT how the global players are positioned in the they can do anything but ignore it. spend is USD 16 Billion18. The Indian software marketplace. product segment fuelled by replacement of in- Mobility in enterprise house software applications to standardized Falling discretionary spends Workforces are getting mobile at a rate products from large organizations and The slower than expected and uncertain faster than ever before. Desktop/workspace innovative start-ups is estimated to be USD economic recovery has made companies are losing their definition as the new order 3.5 Billion18. The government (state and cautious in making any discretionary demands people to be able to work and centre) annual spend on e-governance is investment decisions for the future. This have complete access from wherever also expected to be USD 4-6 Billion over the resultant decrease in discretionary spend they are. While ‘Blackberry’ and VPN were next couple of years19. Most of the IT-BPO from clients has impacted the order pipeline synonymous with ‘work from home/ companies now have an independent vertical of IT companies and delayed contract anywhere’ in the past decade, the coming for Government17. closures. decade will have the employees’ entire office ‘move’ with them giving them the ‘access’ to everything which they had from their Market conditions- High client Socio-technological & cultural- workspace in office. The larger challenge will be to provide this not on a single medium like expectations, low spend untethered access everywhere desktop/laptop, but other digital mediums The sector where “stock performance” Social layer which has spread itself atop too like phones or tablets as the employee is directly linked with quarterly results, almost every consumer-related service, is might choose. ny web/online presence companies are in constant pressure to now spreading fast into enterprise space. or an enterprise application tool dealing perform and deliver while facing issues of Adding to this is the new “mCulture” that with customers is incomplete without the margin pressure due to rising wages, lower is defining the lives of next generation of social layer today. More companies are now billing rates and forex volatility . consumers wherein “touch” and “share” is interacting with their customers directly, ubiquitous and mobile is the new desktop. through various mediums not confine Heightened competition between vendors Limited client spending in a recessionary Mobility in consumer space environment has led to intense competition • G lobal market size for Enterprise Mobility - Past 3-4 years have seen the growing use amongst Indian IT vendors, often leading USD168.8 Billion by 201520 of ‘Smartphones’ and more recently the to undercutting of prices to win a bid. This • Over 840 Million active mobile ‘Tablets’. The underlying principal to the rapid is leading to pricing pressure as contracts subscribers21 expansion of these new product types is quite are won based on lowest price bids. This simple – mobility. IT/technology vendors and heightened competition is leading to • 15 million mobile subscribers are added clients alike will need to think ‘Mobile up’ increased cost pressures on the companies every month21 design strategy rather than create a solution as margins get hit. • Smartphone market share - 15 percent21 and then making it mobile enabled. New low-cost destinations • Laptop market growing at the rate of CAGR Communication is changing 50 percent21 Emergence of low-cost destinations like To get a perspective: The number of social Philippines, Eastern Europe and Latin America • Banking, Manufacturing and Retail are media accounts is 3 times more than the is also adding to already existing competitive leading the way in applying mobility service email accounts. Email has seen a 59 percent environment; as a result, unlike in the past to their operations21 decrease in usage amongst 12 to 17 year-olds where India was the default destination for • Over 34 million22 Facebook users and over and 12 percent decrease amongst 45 to 54 outsourcing, the customer today has options, 13 million Twitter users23 year-olds24. This implies that ‘instant/social’ and they are using them. This too is exerting is to communications today to like what pressure on the Indian players. ‘email’ was 10 years ago. Adding to this is the Social- The new ‘uncontrollable’ channel existence of multiple platforms unlike single Maturing clients- demanding high quality Any web/online presence or an enterprise platform in the past decade. The consumers Clients are now way more matured when it application tool dealing with customers is of today want to communicate from 17 NASSCOM Strategic Review 2011 . 21. The Enterprise Mobility Study-India Market Analysis, Zinnov 18. http://www.indianexpress.com/news/indias-domestic-bpo-market-to-be-worth-1.4/775190/ 22. http://fbupdates.com/2011/09/india-34-million-facebook-users-and-numbers-on-a-rise/ 19. Press Information Bureau – Government of India, July 17 2010,E-Governance Projects , 23. http://asiancorrespondent.com/71003/india percentE2 percent80 percent99s-digital-media-not-fad-not-bubble-its-just- 20. ttp://www.prweb.com/releases/enterprise/mobility/prweb4370204.htm getting-started/ 24. http://www.huffingtonpost.com/ryan-holmes/social-media-holiday-retailers_b_1158356.html © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 13. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 8anywhere through any device or any SEZ: Imposition of MAT Captives centersapplication. Hence, communication needs Minimum Alternate Tax at 18.50 percent (plus The captive centers being ‘low-risk’ andto be treated as a platform over which other applicable surcharge and cess) of book profits involved in ‘low-end’ functions are typicallyexperiences are built, and not vice versa. has been made applicable to SEZ Units and remunerated by their foreign affiliates SEZ Developers vide Finance Act 201126. between 10 to 15 percent on their cost.While earlier, the ‘market’ for all the latest in Although, a Company may claim set off of However, the IRA have adopted an aggressivetechnology used to be the west, thanks to taxes paid under MAT against taxes payable approach and expect a return of as high as 25the demographics and the rate of technology under normal provisions in future years, it is to 35 percent from the captives by comparingadoption in emerging countries like India, the possible that the set off may not be available them with full fledged entrepreneurs. Denialmarket is now shifting close to home. India in its entirety. In such a scenario, taxes paid of economic adjustments for functions &is central to the global mobile and internet under MAT would become a cost for the risk differences and single customer risk arerevolution having one of the highest rates of Company. Further, Dividend Distribution few pain areas for captive centers. Further, ingrowth of user penetration. This gives the Tax at 15 percent (plus applicable surcharge the recent transfer pricing audits the captiveIndian technology firms an opportunity to and cess) has also been made applicable centers are looked upon as creating uniqueuse the domestic market as testing grounds to SEZ Developers27. These developments intangible and a portion of the profits earnedfor path breaking technologies and solutions have adversely impacted the prospective by the foreign parent at the global level islike mobile workspace, mobile peer-to-peer investment in the SEZ scheme demanded.payments, mobile banking, mobile shoppingetc. before they take their solutions to global Intellectual Property (IP) protection Companies focusing on R&Dplatform. Software industry is currently plagued with The Indian Revenue authorities also claim weak patent protection and high piracy rates. that the Indian subsidiaries engaged In order to foster R&D, there is a need for in undertaking contract research andGovernance & regulatory- Killing the the government to put in place a strong IP development (‘R&D’) activities, creategolden goose protection law (and enforcement). As of today, intangibles for the foreign parent. ThePast couple of years have seen the the IP protection laws in India are tenuous at intangibles and the proprietary productgovernment rolling out policies that are not best. Looking at the ongoing patent disputes so created are commercially exploited byfavorable for the industry. In addition, the across the world, especially in the mobile the foreign parent to earn super normalTax authorities have been very aggressive space (Apple vs. Google, Apple vs. Samsung, profits while the Indian captive centre iswith respect to imposing tax regulations on Motorola vs. Microsoft etc.) there is a strong remunerated with a ‘low’ mark-up on itsthe Indian IT players as well as MNCs who need to evaluate whether current IP laws costs. This happens despite the fact that thehave set up captive centers in India. Adding and judicial systems are geared up to handle R&D centre in India does not assume any riskto these is the lack of clarity on agreements cases of complex dimensions, should they for the work done by them and perform onlywith various countries for avoidance of double arise in the future28. limited functions.taxation. Current taxation measures fromgovernment authorities need to consider the Transfer pricing: Affecting MNCs and These multiple regulatory issues arecurrent market situation, the challenges and Indian players alike impacting the industry growth potential andneeds of the industry. This calls for an open India is an attractive destination for MNC’s to would need attention from government so asdialogue between the government and the set up and operate their Captive units, R&D to give the required boost and support to theindustry representatives which would lead and ODC. The conducive tax environment industry.to formulation of favorable policies by mutual in the form of tax holiday benefits given toconsent. IT-BPO industry under the STPI, EOU and SEZ schemes have acted as a catalyst in its Human resource- Ready to pay butTax growth. However, this has not come without no availability of skillsUpto Financial Year (‘FY’) 2010-11, the increased scrutiny from the Indian Revenue Attrition and wage inflationIncome-tax Act, 1961 (‘the Act’) provided Authorities (IRA) especially in the area offor deduction from profits generated from Indian IT-BPO industry is facing challenges transfer pricing where there is a steep riseexports of computer software and IT-BPO in hiring, managing and retaining talent in in the transfer pricing adjustments. Keyservice25.In the last few years, the IT-BPO current environment. Availability of abundant Challenges faced by the IT-BPO companiesSector has not seen the high growth rates opportunities has led to rapid job switches have been mentioned below.experienced by it in the earlier part of the among professionals leading to high attritiondecade. Indian players levels. An effect of this is the wage inflation which is adding to margin pressure on firms. The IRA considers Indian entrepreneurFurther, while the Industry has grown big, To contain attrition, companies have to players to be the technology and branda major portion of the industry revenue is invest proactively in hiring, training, cross owner. Accordingly, the Indian players areconcentrated with the top 10 players. Small skill development, managing motivation and expected to retain higher profits in India andand Medium Businesses (‘SMBs’) are large paying higher salaries to employees. All these compensate the foreign affiliates at minimalin number, have a low revenue base and measures lead to further cost escalation cost plus margin. Another key challengethey are the ones who constitute the bulk aggravating margin pressure on the firms. for the Indian players is that the IRA areof companies registered under the STPI increasingly trying to compare prices ofscheme. The expiry of income-tax benefits Huge Employee Base leading to software products supplied to domesticunder the STPI scheme from 1 April 2011 (i.e. operational complexity parties with exports being made to overseasFY 2011-12) would impact the SMB sector in The top Indian companies in the IT-BPO affiliate company despite there beinga big way. sector have an employee base greater than significant differences in terms of geography, 100,000 and are hiring in the rage of 40,000 market dynamics, marketing expenses being employees to 60,000 employees annually29. accounted for in the pricing etc.25. Section 10A / 10B of the Act 28. “Patents dispute between Google and Apple gets ugly” Sep 2011, CS Monitor; “Samsung widens patent ,26. Section 115JB of the Act dispute with Apple” Sep 2011, The Wall Street Journal; “Judge sides with Microsoft in Moto patent dispute” , , Dec 2011, CED News27 Section 115O of the Act . 29. Company data, KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 14. 9 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Managing such a massive employee base “investments” to build best of the breed is becoming a mammoth challenge owing talent are increasingly being viewed as cost to its operational complexity which leads to amongst companies. increased HR costs. Factors such as wage inflation, skills Employability shortages, rising attrition and operational With a large pool of graduating engineers complexity in managing large pool is making it largely unemployable due to deficiencies in difficult to source talent in the industry. These the current system of education, the IT-BPO challenges are forcing IT-BPO companies to sector is grappling with the issue of not being re-calibrate their strategies and shift focus able to recruit the ‘right fit’. The wide industry- from cost competitiveness to providing academia gap is forcing companies to invest increased value in terms of domain expertise heavily in training to convert “qualified” and efficiencies to customers. As part of manpower to “billable” resources. Owing to larger strategy to de-risk, thrust is on moving current falling margins and pricing pressure, from being “people dependent” to “process dependent” . Need for Given the many challenges the Indian software faces currently, linear growth transformation - Non- i.e. proportional increase in headcount to augment revenue is neither desirable nor a linear model, driving sustainable model. The impact of linear growth could be gauged the next wave from the fact that at the current revenue per employee levels of top Indian vendors, the growth employee base could double by FY2014 at current growth levels30. From the current employee base of ~493,000, the top 4 Indian firms could add another ~430,000 employees over 3 years to reach a total of ~923,000 by FY201430. Managing such a massive base could become a herculean task and might be unsustainable over long-term. Employee headcount growth- Top 4 firms Figure : Employee Headcount growth of Top 4 India-based IT firms Source: Company Annual Reports, “Global IT Services” Morgan Stanley Research, September 2011 Includes data for TCS, Infosys, Wipro, HCL Technologies , Revenue per employee (RPE) ratio – Global Indian firms33. Also, on the RPE metric (one IT services vs Indian IT services firms of the metrics to measure non-linearity), the Over the last 5 years, the aggregate revenues RPE of global firms has been ~3-4 times of top pure play global IT services firms31 have the RPE of Indian counterparts33. Over the been in the range 2-4 times the aggregate years, while the revenues of Indian vendors revenues of top Indian IT services firms32 have been growing at a CAGR of 21 percent, while the employee base of global majors the employee headcount has also growing has been proportionately declining, reaching at a slightly lower rate (CAGR ~18 percent) at 30 percent lower level (2011) than the top making the RPE metric nearly constant over the years33. 30. Global IT Services, Morgan Stanley, September 23, 2011 32. Indian IT services Firms – TCS, Infosys, Cognizant, Wipro, HCL Tech. 31. Global Pure play IT Services Firms – Accenture, Capgemini, CSC, Atos Origin 33. Company data, KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 15. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 10 Revenue and employee growth - Global IT services vs Indian IT services Source: Company data, KPMG Research; Indian IT Services Companies – TCS, Infosys, Cognizant, Wipro, HCL; Global IT Services – Accenture, Capgemini, Atos Origin, CSC Revenue and employee growth - Global IT services vs Indian IT services Source: Company data, KPMG Research; Indian IT Services Companies – TCS, Infosys, Cognizant, Wipro, HCL; Global IT Services – Accenture, Capgemini, Atos Origin, CSC It is because of these reasons that companies are eyeing non-linear growth models which can deliver higher revenue per employee value. This would enable these players to stay lean and deliver sustainable growth and profitability. To achieve this, it would require a clear shift from “labor-based service delivery” to “asset-based service delivery” . Gradually, this is leading to a change in the rules of the game and a transition to non- linear growth model, which is expected to be the next driving force of the industry.© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 16. 11 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Section 2 Non-linear growth model Non-linear growth In the next phase of growth, the Indian software industry is attempting to move (e.g.: cloud, products, platforms, M&A) and some incremental (CoEs, Delivery model- Redefining away from delivering a cost advantage to clients to delivering value for them, by Accelerators, Pricing Models, Brand), a move to non-linearity is inevitable. business dynamics exploring different avenues of non-linearity. While, a majority is focusing on creating IP/ Based on the practices prevalent in the products and platforms, some are exploring industry, there are primarily following seven novel pricing mechanisms; few are building models through which vendors are redefining efficiencies into how they deliver service their services in their endeavor to deliver using repeatable modules. Though the effect value to their clients. of some effect of some could be disruptive Non-linear growth models In the subsequent sections, we explore each of these models in more detail, identifying trends, current scenario and imperatives for players attempting to use these levers of non- linear growth. • Intellectual Property • Delivery Accelerators • Cloud Computing • Branding • Platform BPO • Mergers and Acquisitions • Non-linear Pricing Models © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 17. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 12Intellectual propertyExecutive summaryThe Indian products growth story is a As evidence of the Indian softwarerelatively recent phenomenon, achieving product growth story, multinationalsmomentum in the last decade. Indian have opened their R&D centers in IndiaIT majors are increasingly recognizing and the country is expected to becomethat they need to invest and grow their a global R&D hub in the near future.product portfolio to match global peers But to achieve accelerated growth inand jumpstart their non- linear strategy. the future, India needs to be positionedAt another level, the software products as a preferred destination for productrevolution is being led by smaller firms development globally through jointinvesting and working in emerging efforts by the industry bodies andareas such as mobile applications, social organizations. Some imperative for firmsmedia, online gaming etc. Most of these are to set up incubation centers near theare driven by VC funding, government target market, create a separate productagencies, angel networks and MNCs. business and financial model to measure success, and potentially acquire companies with a strong IP-portfolio.The last three decades has witnessed a Leading global patent holdersgradual shift in perceptions of corporatevalue being measured from tangible assetsto intangibles , such as patents, copyrights,trademarks and industrial design rights. Thesuccess of global technology majors can beattributed to the creation, development andmonetization of their vast intellectual propertyportfolios. Notable examples are industryleaders such as IBM, Microsoft, Intel, HP ,Apple and Google with IBM topping the list ofpatent holders worldwide1.India’s software product industry• Indian Software Product Industry -- U SD 2 Billion (2011) -- USD 9.5-12 Billion (2015) Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis -- Contribution of Indian software companies – 25-30 percent Market scenario• G lobal addressable market for Indian The past few years have witnessed modest grown from just over hundred million dollar in software product companies – USD 290 – growth in the Indian software products the year 2000 to about USD 2 billion in 2011. 315 Billion landscape. Despite previously being relegated Further, it is expected to reach 9.5-12 Billion to the background by its services counterpart, USD by 20152.• Domestic Indian market opportunity – USD 3.36 Billion (2011); growing at CAGR of 14 the Indian software products industry has percent• S urge in VC investment - Investments in Revenue aggregate Indian software product business technology start-ups expected to grow from USD 2.1 bn to USD 7 bn in next 5 .5 years.Source: Nasscom’s ‘India Product Conclave’ 2011, Nasscom StrategicReview 2010, Nasscom - Zinnov study on India Software ProductBusiness, published August 20081. IBM Website, “IBM Shatters US Patent Record; Tops Patent List for 18th Consecutive Year” Jan 10, 2011 Source: NASSCOM Zinnov Study, KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis2. Nasscom -Zinnov study on India Software Product Business, August, 2008 © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 18. 13 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry The global addressable market for Indian software product companies is Break-up of software product segment expected to reach between USD 290 to 315 Billion by 20153. Among the software product categories, Enterprise Resource Management (ERM), BI, storage and security are among the largest segments and are going to be the key priorities, while emerging categories of Mobile applications, online gaming, and search marketing are the fastest growing4. In parallel, the domestic market is also rapidly evolving and is tuned to provide exciting opportunities to the software product companies. This is becoming one of the drivers for companies to innovate and provide high value-low cost solutions to the domestic customers. Source: NASSCOM Software Product Study In India, Companies are working in different Further fueling the growth of product areas of banking, financial services and realms of IP development. Few companies development, a large number of start-ups insurance segment which have been widely have developed their own IP in their have ventured in this space focusing on areas implemented on global scale. Increased chosen areas of focus while few others of business productivity applications, mobile focus on R&D is also pushing up the number are working in areas of outsourced product applications, social media, online gaming of patent applications by top Indian IT firms. development assisting their clients in product etc. Most of these are driven and supported development. There are also multinational by VC funding, government agencies, angel Despite all these encouraging developments, companies (MNCs) supporting R&D product networks and MNCs. the Indian companies have yet to crack development through their subsidiaries in the “product” code and be successful in India. Of late, large Indian software majors have establishing software product businesses been developing and acquiring IPs in the like their global software product majors. Pending patents by top 3 Indian IT companies Source: Company data, KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis , Includes data for TCS, Infosys, Wipro Financial perspective Successful companies focusing on IP/ employee ratio than the Indian IT-BPO products generally demonstrate higher companies. For instance, on an average, revenue growth with significantly lower leading global product companies operate on employee growth rate. Supporting this, we revenue per employee at least of 10-20 times find the global software product companies the revenue per employee of leading Indian IT also demonstrate higher revenue per services companies5. 3. Nasscom Strategic Review 2010 4. Nasscom Strategic Review 2011 5. Company Annual Reports, KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 19. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 14 Revenue per employee comparison of top 5 Global product companies with top 5 Indian IT companies Source: Company Data, KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis ; Indian IT Services Companies – TCS, Infosys, Cognizant, Wipro, HCL; Global Software Product Firms – Microsoft, Oracle, SAP Adobe, Symantec , On comparing the revenue and employee growth of the top global product firms with Revenue and employee growth of Global top 5 product companies with Indian IT services companies, the employee top 5 Indian IT companies base of global product majors have been relatively constant with the revenue growth. Comparing this with the Indian firms, the employee base has also grown with the growth in revenues suggesting that the revenue growth of global product companies is decoupled with the employee growth which is not the case with leading Indian IT companies. Source: Company Data, KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis ; Indian IT Services Companies – TCS, Infosys, Cognizant, Wipro, HCL; Global Software Product Firms – Microsoft, Oracle, SAP Adobe, Symantec , Case Example 1 A recent study by a British insurance MapmyIndia started out as a free portal that the company is considered a preferred company has shown that men drive an extra put out Indian mapping data for consumers. business partner for car, mobile and telecom 276 miles per year by wandering around It later moved on to partnering with car companies in India 2. aimlessly because they refuse to ask for companies, mobile phone brands and telecom operators who would be interested MapmyIndia registered a growth rate of a directions. This comes out to around USD in offering mapping data to their customers, whopping 600 percent in the past 3 years 3,000 in wasted gas over a lifetime!1 So, but found it hard to convince these original or so. The company has brought on board the next time you are lost and are too proud equipment manufacturers to invest in maps clients like Samsung, Motorola and Hyundai to ask for directions, consider investing in as a value-added service. Then, taking a leap and currently has over 500 corporate clients a GPS. And helping you in that endeavor is of faith, the company launched its own GPS across 60 cities3.MapmyIndia stands out MapmyIndia’s GPS Car Navigator, one among navigator in 2007 and saw a tremendous in the market amongst its competitors in many innovative products offered by the response to the product. In 2009, the being able to offer consumers the entire location-based solution provider. company raised an additional USD 9 million range of consumer navigation products and from Qualcomm Ventures to scale up. Today, services on real time and expects to expand Source: internationally in coming years. 1. www.aolnews.com 2. www.thesmartceo.in 3. www.Moneycontrol.com© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 20. 15 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Case Example 2 Competing head on with the major Cloud applications like email, document every three years we replenish the players is Tata Consultancy Services’s IT- management and website services1. technology we have provided them1. ” as-a-Service offering iON. It is an IP based “Our cloud-based solutions are an attractive TCS has big plans for iON and the IT major first-of-its-kind fully integrated information proposition for SMBs as they do not have hopes to turn it into a billion dollar business technology solution for Small and Medium to buy hardware or network (TCS provides by 2015. It is targeting over 1,000 SMB Business (SMB). iON addresses the entire that on a pay-as- you-use basis), explains ” customers across the country by end of spectrum of an SMBs technology needs Venguswamy Ramaswamy, global head of FY12, with plans to launch it globally in ranging from business solutions like HR, the SMB vertical at TCS. “Tech obsolescence coming years2. finance, inventory, sophisticated domain- also becomes a thing of the past because based ERP solutions as well as basic Source: 1. Company website www.tata.com 2. articles.economictimes.indiatimes.com Key imperatives for Intellectual property Take the innovation nearer to the market Spin Off Product Business as a separate Company Keep a separate financial model to gauge success Acquire Companies for Ideas & Patents; not just extension & expansion Create the innovation ecosystem - encourage smaller firms Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis Key imperatives Given the huge transformation that will be nearer to the market where it is expected Spin off product business as a separate required for Indian firms to cross the ‘Product’ to be consumed. For example, most tech company barrier in a systemic fashion, it will need breakthroughs happen in Silicon Valley and The mindset and operating model to run a involvement not only from players but also most electronic breakthroughs happen in Product Company differs significantly from the other ecosystem entities consisting of Japan/South East Asia which are also early that of a service company. While some government institutions, industry bodies and adopters and huge consumers of technology Indian Players have successfully developed academia. and electronics respectively. There are products out of their software offerings, most countries that have developed ecosystem for players wanting to set foot in this space are A few imperatives that will be decisive in fostering innovation. While India slowly tries struggling. this journey have been outlined below; but to find its niche in the innovation space, it is while we do the same, we need to take into a good idea for the current set of medium to Organizations that are serious about entering cognizance the following facts: large IT players to set up incubation centers the product business should spin off their in the geographies where they are most likely product division as a loosely held subsidiary. • Most Indian IT players have traditionally to be fed with the right set of talent and ideas. It should be able to operate independently been pure service providers An example could be an IT player selling without the pressure of quarterly results • The growth of Indian IT sector was driven software services predominantly setting up and such. Similar to the previous point, the by demand for skilled labor at lower cost, an independent subsidiary in Silicon Valley, company should be able to acquire other which is the reason for the current linear which for all practical purposes works as companies, get its own funding in whatever model in place. an independent company and focuses on way is most conducive for its R&D and growth certain areas in the market. The operating and should be able to monetize it independent With this background, Indian players have model should allow it to raise VC funding, of its parent company. Once the unit is performed exceptionally well, but the drivers partner with R&D labs of leading universities mature, which would typically take many that have helped them reach here cannot in the US, acquire startups and so on. Once years, the parent company can take a call on carry them through the next curve. the company makes headway in terms of IP , either keeping it separate or merging it back Patents, Products etc., the benefits of the with the parent unit. Take the innovation closer to the market same can be leveraged by parent company Likelihood of innovation is much higher when to strengthen its brand, product offering and the germination/incubation of ideas take place customer reach. © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 21. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 16Keep a separate financial model to gauge Qualcomm acquisition of Atheros, SAP’s companies for next-gen ideas (e.g. siliconsuccess acquisition of BusinessObjects) valley start-ups) or patents might require theProducts have a relatively longer incubation Indian players to move out of their traditional • Market-geo/customer base (Microsoftperiod compared to services. Also, post- character, it is something that needs to be Acquisition of Skype)launch, the probability of product being a done.success is uncertain. The financial metrics • Talent (HCL acquisition of Axon group) Create the innovation ecosystem –defined and tracked for product business in • Brand (Lenovo retaining the brand encourage smaller firmsorder to measure its success would differ ‘Thinkpad’ post acquisition, SBC retaining The startups have a critical role to play inwith those defined for services business. AT&T name post merger) building the innovation ecosystem owingIt is due to these reasons that a firms needto have a separate financial model to gauge to their entrepreneurial mindset. They • Service Extension (SAP’s acquisition ofsuccess of product business. would need to develop mindsets like their SuccessFactors to enhance its Cloud counterparts in Silicon Valley. The key priorities offering; KPMG’s acquisition of EquaTerra).Acquire companies for ideas & patents; not for them would be to:just extension & expansion6 Given that M&A has been one of the driving • Focus on product development and R&DMost large companies have successfully forces of IP-led growth for global majors, thisventured into nascent products and is an area which Indian Players aggressively • Keep sales & marketing and customertechnologies through the acquisition route. need to pursue. acquisition costs under checkA simple look at their string of acquisitionswill give an idea of the reasons behind the It is not that Indian companies haven’t been • Focus on emerging categories ofdecision, which typically fall into the following on an acquisition spree, but if we look at the technology such as mobile applications,brackets: reason for M&A, most of it have been for online gaming etc., which are unchartered service extension, geo expansion or talent, territory in order to ride the next wave of• Ideas (Google acquisition of Android/ while very few acquisitions have been for growth YouTube/Writely, Apple acquisition of Siri/ Ideas or Patents. Lala/Proximity, Microsoft’s acquisition of • Seek capital and guidance from VC/PE Hotmail/Visio) Given that M&A has been one of the driving funds forces of IP-led growth for global majors, this • Leverage incubation centers and industry• Patents (Google acquisition of Motorola, is one means that Indian Players will need bodies providing mentorship. MS/Apple acquisition of Nortel’s Patents, to aggressively explore; and while acquiring Mr. N. Chandrasekaran CEO & MD, TCS Views on the significance of adoption of Views on the innovative models prevalent are based on innovations in platforms and Non-Linear Models in India. in the industry (products/services/ solution sets. Emerging technologies and business models) and the imperative for high bandwidth are making new service “Our ability to sustain growth in the long- the industry to undertake innovation at delivery models possible and Indian IT must term is dependent on creating new models multiple levels given the market realities rise to the forefront in accelerating the and businesses in addition to building on our adoption of these innovative growth models strengths in services. In this context, non- “The pace of innovation being set in many among enterprises and their customers. ” linear business models are very important to countries around the world is increasing and drive additional growth for the industry. Not Indian IT needs to accelerate its participation Trends in the industry today, what is only will it help to diversify our revenue mix in the innovation journey. While our track working and what is not. Also, TCS’s but more importantly spur the creation of record in service innovation is excellent, we current initiatives for non-linear growth intellectual property across the industry value need to ratchet our ability to introduce and chain in terms of introducing new products, scale up new business models which “Companies are investing in all facets of this platforms and hybrid models to the market. ” new paradigm. It is too early to call the 6. Company Websites © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 22. 17 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry the winners as adoption and scale will take of industries. One notable success in turn facilitating non-linear growth in the time yet and not all industries are proceeding this regard has been TCS life and pension industry at the same pace. At TCS, we have three platform, Diligenta, TCS has scaled in the “The government is taking multiple initiatives clear defined strategies to focus on non-linear UK with more than 5 million life insurance to spur innovation like funding a National growth These are as follows: policies under administration. This clearly Knowledge broadband network among 450 shows the potential of these platforms to universities to increase collaboration. The • Products: TCS is already a global leader deliver quality to end customers. initiative to connect all Gram Panchayats in the arena of software products for will also provide the last mile connectivity to the financial services covering the • iON: iON is TCS’ unique cloud-based offer virtual citizen service windows across entire industry spectrum from market comprehensive IT offering for the Indian all villages. Many of the pilot programs in intermediaries to retail banking and Small and Medium enterprise market. areas from financial inclusion to healthcare insurance. We will continue to explore new Using latest technologies, iON provides and education have shown the potential opportunities in multiple industries. SMEs with a total IT solution for all their of platforms to deliver effective solutions relevant business needs on a fee basis. It at the base of the pyramid. Now we need • Platforms: TCS has been investing in has gained traction in the 9 months since a coordinated approach to scale up these building horizontal and vertical process its launch and has garnered over 200 initiatives and build sustainable business platforms for some time. These multi- customers. “ models. ” tenant, pay-per-use platforms provide an efficient and effective way to deliver Initiatives that the government needs to services to customers across a wide range take in order to support innovation, in © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 23. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 18Cloud computingExecutive summaryThe Cloud is perhaps the most talked The ability to cater to multiple customersabout technological phenomenon in through a single delivery platformrecent times, in its promise of flexibility, makes Cloud an attractive investmentscalability and cost benefits made for service providers in the long term.available through the ‘as-a-service’ Cloud, being an IP-driven business,paradigm. Industry research firms companies would need to evaluate theirestimate double digit growths of Cloud appetite for risk and investments. Indianspend over next several years. But firms need to examine fitment anddespite the few success stories, at focus on building expertise in one cloudpresent, most Indian IT companies are delivery model which can be extended toengaged in third-party implementations other service models. Also, companiesand cloud migration services; which need to focus on building the rightwould still come under the traditional partnerships evaluating their strengthsoutsourcing models. Such third-party and market potential.cloud-based process implementationscould be numerous though paltry inrevenues and would provide only lineargrowth.Cloud Computing is a phenomenon thathas stirred up interest and investments inmany parts of the world. The promise of theCloud lies in its flexibility, scalability and costbenefits made available through the ‘as-a-service’ paradigm. For any offering to betermed as a Cloud it should have the followingcharacteristics:Characteristics of CloudSource: KPMG’s The Cloud: Changing the Business Ecosystem, 2011Further, the Cloud is defined in terms of threeService models and four deployment modelsas depicted below:Cloud Service Models and Deployment ModelsSource: KPMG’s The Cloud: Changing the Business Ecosystem, 2011© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 24. 19 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Among the major global players in SaaS are Salesforce.com, Intuit, Cisco Webex, Leading Cloud Players NetSuite, SuccessFactors, and RightNow. SaaS PaaS IaaS PaaS model consists of three categories - Raw Compute Platforms like Amazon Web Salesforce.com Google Dell services; Web Application PaaS like Google App Engine; Business Application PaaS like SAP Amazon HP Force.com7. Gmail Facebook BT IBM Amazon Windows Microsoft Dropbox Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis Market Scenario Public Cloud Market Industry research firms including Gartner, IDC and Forrester estimate the Cloud to grow at a double digit CAGR for the next several years. According to the forecasts, 13 percent of the incremental IT budgets would be utilized for Cloud computing. Within cloud computing, SaaS will continue to dominate spending on cloud computing8. Cloud Computing • C loud Computing contribution to reach 3.8 percent of Global IT Spending (2014) from 1.4 percent (2008) • Public cloud services are expected to grow at an annualized rate of 27 percent from USD 15 billion in 2010 to nearly USD 160 billion by 2020 Source: Forrester Research • In the private cloud space, market is expecting to reach USD 16 billion by 2020 from current USD 8 billion with a a CAGR SaaS is also the most mature and largest investing in SaaS solutions to be able to of 8 percent. among all three service models. With its cater to new market segments. For example, value proposition of low risk, no capex and TCS has invested in building iON platform • SaaS would comprisemajority of these usage-based pricing model, it has managed providing business applications over cloud growing from USD 13 billion in 2010 to to rapidly penetrate the market. PaaS is still to small and medium business enterprises USD 133 in 2020 with a CAGR of 26 nascent, evolving and highly competitive. in India12. Small and mid-sized players have percent. IaaS has the highest growth of 67 percent also plunged in SaaS and players like Zoho. • Global addressable market for Indian among all the three models9. com, HRMantra, Impel, iWeb, Kallos, have software product companies – USD 290 – launched their applications in CRM, Payroll, 315 Billion. The recent USD3.4 billion agreement for SAP Enterprise resource management, SRM and Source: Gartner, Forrester Research to buy SuccessFactors10 and Oracle’s USD 1.4 host of other areas13. billion acquisition of RightNow11, indicate that large firms are recognizing growth potential The PaaS revolution is being led by in this space. These recent acquisitions may small enterprises with customized PaaS be the start of urgent consolidation in the applications in India. An example is cloud computing marketplace as big players Bangalore based Wolf Frameworks, which attempt to create scale and meet customer has built a cloud-based Census Information needs with diverse applications. Management System (CIMS) for SEDS, a NGO based in Anantapur District in Andhra While small start-up firms dominate the Pradesh, which is also India’s second most SaaS landscape in India providing attractive drought-prone area. The NGO has used cost propositions, large firms are also 7. Force.com Cloud Platform Drives Huge Time to Market and Cost Savings: by IDC, published September 2009 11. http://www.oracle.com/us/corporate/press/519740 8. Report on India IT Services by JP Morgan Chase, published on 9th January, 2011 12. TCS company website 9. Cloud Computing Takes Off: Bluepaper by Morgan Stanley, published on 23rd May, 2011 13. Company website 10. http://www.sap.com/corporate-en/press.epx?PressID=17902 © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 25. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 20 the PaaS platform to transform the lives of more than 40,000 members living below the Cost, revenue and profit per transaction poverty line. The National Stock Exchange has used AppPoint’s software BizApp Studio, to develop a compliancy management solution. Among the large players, Wipro has leveraged OrangeScape’s PaaS platform to build a complete custom ERP system for a large government organization14. Indian Success Stories • W ipro – Leveraged OrangeScape’s PaaS platform to build a complete custom ERP system for a large government organization • NSE – Used AppPoint’s software BizApp Studio, to develop a comliant management solution Source: JP Morgan, India IT Services, 15 December 2010 • Wolf Frameworks – Built a cloud based Census Information Management System (CIMS) Financial Perspective The ability to cater to multiple customers On profitability, though the long terms • TCS –iON platform for SMBs through a single delivery platform makes revenue opportunity look promising for • Other small and mid-sized players - Zoho. Cloud an attractive investment for the service providers, margins are depressed, com, HRMantra, Impel, iWeb, Kallos. service providers in the long term. With an in the initial phases. The prime reasons are increase in customer base, the fixed cost relatively high sales and marketing cost, high Source: Cloud Computing: Indian PaaS players accelerate on cloud incurred in creating and delivering services customer acquisition costs, slow customer highway, published in www.informationweek.in on July 21, 2010 gets recovered and results in higher margins acquisition and customer churn. However, over long term. Being a volume driven after the initial years of investment lasting business, cost benefits are realized with between 1 to 3 years, margins are likely to Despite few success stories, at present, surge in volume of customers and customers be phenomenal once revenue crosses a majority of Indian IT companies are engaged achieving scale once the fixed upfront threshold. An example is Salesforce.com in third-party implementation of process investments are recovered. The economies of which has current gross margins of over 80 solutions for clients on their cloud (e.g. scale are derived from amortization benefits percent16. Given the customer stickiness enabling a business process solution on of administrative and run time costs across and the annuity of predictable subscription the client’s cloud) or are helping implement multiple customers. On infrastructure front, services, long terms benefits are enormous. cloud migration services. Such third-party costs benefits of investments made are cloud-based process implementations could realized with scale. For example, a 100,000 be numerous though modest in revenues. server data center would have 80 percent These are still traditional outsourcing models lower TCO/server vs. a 1000 server data that would provide linear growth. center15. Case Example has been spectacular in the past few years; tools called ZOHO.com competes with at logger heads with industry giants Google Microsoft’s and Google’s offerings, including “Over the next three years, you will see cloud and Microsoft for a share of the Web-based word processor, spreadsheet, presentation, offerings really mature in terms of features software pie, the company has managed to and CRM tools, where it competes with and functions, and become feature rich, carve out a loyal customer base, by plugging Salesforce.com. The suite has over 3 million overtaking desktop offerings in many areas. the gaps in the offerings of industry leaders. users around the world. ZOHO also has a tool As feature parity is reached, market adoption for IT administrators to manage networks, will explode. Just as mobile phones overtook Zoho is a leading provider of on-line business called ManageEngine which has over 40,000 wired phones in terms of features, functions applications and a pioneer of cloud-based customers, and is the company’s biggest and of course usage over the past 10 years, offerings in India. The company has built a revenue earner3. cloud software will overtake installed customer relationship and business process software over the next 10. The reason in app on the cloud using open source platforms Source: 1. Interview with Sridhar Vembu by Jeremy Caplan on Wall Street both cases is the sheer speed of technology such as Apache and offered it free of cost Journal’s Digits blog, published 26th July, 2010 evolution. “1 says Sridhar Vembu, CEO of initially; the product soon went viral. Its office 2. The Cloud of Opportunities, Businessworld, published 12th November, 2011 Zoho Corp, the company behind the Zoho suites now cost USD 300 a year, against 3. Zoho brothers on cloud 9, published on Times of India online version, suite of online applications. Zoho’s growth USD 600 that a large vendor charges2. Its 12th January, 2011 online suite of productivity and collaboration 14. Cloud Computing: Indian PaaS players accelerate on cloud highway, published in www.informationweek.in on July 21, 2010 15. The Economics Of The Cloud For The US Public Sector, whitepaper published by Microsoft, November, 2010 16. Salesforce.com Annual report 2011© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 26. 21 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Key imperatives for cloud computing Get the market right, Cloud is not a commodity Venturing into the right service model SaaS - Develop domain and functional expertise PaaS - ‘Influence’ necessary to take off IaaS - Capital intensive; high volume, low margin business Get into right partnerships Address data and security issues beforehand Key imperatives The Indian IT industry has been playing However, this does not mean that every Some Indian players have software products a catch-up role in terms of leading the single player that enters the cloud business that have a fairly large client base, and some technological breakthrough. Cloud has for needs to spread its scope across all Cloud of these products form a core component the first time in history of IT-BPO industry, components. Owing to their past track record of their client’s business (Banks, Retailers, offered an opportunity for the Indian players to of being successful at software development, Hospitals etc.). These firms are best placed take a giant leap in the global playing field and standardization and domain expertise, Indian to venture in PaaS, since their captive base emerge as leaders. Cloud is going to disrupt players can explore and invest in areas of will attract other vendors to develop on their the current landscape impacting both - players SaaS. This expertise, once gained, could be platform and once the offerings are rich in as well as customers. Firms either have the extended to PaaS and IaaS service models. A features, will in turn attract more clients. option of following “wait and watch” or “lead brief point of view on each Cloud component and define” approach in shaping up the future and their fit with Indian players is provided IaaS – Capital intensive; high volume, low landscape. below: margin business IaaS is capital intensive due to investments Get the market right; Cloud is not a SaaS – Develop domain and functional made in setting up underlying infrastructure. commodity expertise Since, it is a high volume, low margin Developing cloud based IP assets would need We believe most companies would venture business, gaining scale is critical. We believe substantial investments owing to its large in SaaS model of Cloud leveraging their owing to large investments required, IaaS gestation period. Because of these attributes previously gained expertise in domain and would be dominated by few large players of Cloud, the following questions, however business functions. For firms aiming to globally and in due course will be relegated basic, assume significant importance, and venture into SaaS model, gaining niche to the background as a non-value adding should be answered by every Indian Player expertise in a specific domain or business component of cloud - similar to what cables today: function is most important; and given the are to telecom – dark fibres are an example. history and experience Indian players could The real Cloud play will happen in the space of • Should we do Cloud? become potential leaders in this space. SaaS and PaaS. • Which part of the Cloud can be our While we have mentioned that IaaS is a low PaaS – ‘Influence’ necessary to take off strongest play? Which other parts should margin business, it is important to put it in To succeed in PaaS, firms need to have an we invest on developing – if any? perspective. Today, reliable IaaS providers are ‘influence’ that can drive businesses to adopt scarce, with Amazon Web Services clearly the • What will be our target market? their platforms and vendors to build for it. leader in this space. This has ensured huge Basis of this influence could be various • What will be our unique offerings? margins in this business for Amazon. But in • Captive clients (Google Apps) the next few years, as more reliable providers Once the organizations are clear on what they emerge, we expect IaaS to cease to be at the want to pursue, they need to ensure that all • Unique value proposition (Amazon – core of Cloud business and it will become a the success factors for cloud are taken into reliable and affordable IaaS combined with low-margin commoditized offering. Hence for consideration. A few imperatives for moving a flexible PaaS) a company looking to invest for 10 years down into any component of cloud are mentioned • Unique offering (Salesforce). the line, this might not be the best bet. below. On drawing parallels with global firms, most In the Indian context, we have seen some Venturing into the right service model niche firms (Tulip, Netmagic) and a few firms including the ones mentioned above Amazon, Salesforce and Google are the world ventured into this space after attaining telecom firms venture into IaaS and this is a leaders and Gold Standards in Cloud today17 leadership and a position of influence in good trend18; this is a specialty commodity – in terms of coverage of Cloud components another Cloud component. A recent example business and should remain that way. as well as impact on businesses worldwide. is SAP’s acquisition of SuccessFactors. Combining it with high margin businesses will They have been game changers in the truest Combination of the captive client base of SAP erode focus and get complex in the long run. sense; disrupting industries, businesses and the robust platform of success factors and consumer demands alike – which is an will inevitably lead SAP to succeed in the imperative for any company to stay ahead of enterprise PaaS space. the game. 17. www.pcworld.com,www.cloudcomputing.sys-con.com 18. Company website © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 27. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 22 Get into right partnerships For PaaS players, key considerations for and the entire cloud strategy of a player can Indian players will need to form their strategy partnering with SaaS players are get derailed. Hence it is very important for IT for the Cloud components they want to vendors to have a comprehensive, fool proof • Application or Services that enhance the venture into and the kind of services they solution at hand while they approach clients value of the Platform want to provide. This also implies that with their Cloud based offerings. whichever component the firms decides • Standardized and Configurable Offerings Indian players, as they slowly move into Cloud not to pursue will need to be fulfilled with that can be customized to suit a large services will need to make investments partnerships. It is important to choose the number of clients Key consideration for to ensure that any client will be absolutely right partners, since for a Cloud offering, partnering with IaaS players is reliability comfortable with the solution being offered. every single component of the service is and uptime. Investments to ensure data security in the key to success, and while the firms will For SaaS and PaaS players, key consideration cloud could be huge at least in the initial have a control over what they are providing for partnering with IaaS players is reliability stages, but this is something that’s not an themselves, they will need to ensure that and uptime. option – it is necessity of the new business their partners are reliable and do not turn into model. a point of failure. For the providers of SaaS Address Data and Security Issues and PaaS, the right partnerships are crucial. beforehand For SaaS players, key considerations for This is a core imperative that the Indian partnering with PaaS players are players, or for that matter any player will need to address once they move into Cloud • Large client base business. Clients are worried about data • flexible development environment security, and not wrongly so. One misstep Mr. Bhaskar Pramanik Chairman, Microsoft India Thoughts around building a non linear development and maintenance , outsourcing the cloud and then decide whether you will model in the IT-BPO industry… model. Building application and technology deploy on the cloud or on premise. No need The success of the Indian IT sector, pegged products and taking them to market globally to rewrite the code. on the global delivery model, is well known is now a lot easier than before especially using cloud based technologies and a pay for Lowered costs by using cloud technologies and documented. The time has come to use business model. at development and in deployment saving look at how the IT-BPO industry can adopt on capital costs, creating multi tenanted nonlinear models to enable it to grow and Even in the App Development area using the applications and serving many customers remain profitable and competitive especially latest generation of software tools can bring globally. Cloud also allows for a different with other nations. about considerable developer productivity, business model where you can charge by allow reuse of code and create frameworks user or any other metrics (outcomes). Possible Areas for Non-Linear Model which can considerably reduce time to deploy A stronger focus on Product development as and associated costs. You can now create distinct from the traditional application applications once, using the latest tools on© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 28. 23 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Platform BPOs Executive summary Extending their current BPO service no upfront capital investment for clients portfolio, Indian outsourcers are makes it ideal especially for clients not gradually moving to Platform BPO willing to make CAPEX investments and solutions - which involves bundling appeals largely to mid and small-sized of technology, consulting and BPO. businesses. But despite costs savings This is a shift from the erstwhile for the client, vendors need to consider labour dependent delivery model to a that the break-even period for platforms largely transaction and process-centric is significantly longer because of the delivery model. Software providers initial set up costs and upfront expenses are offering an entire suite of services before their clients adopt the platform. over a common business platform that Some of the key priorities for companies gives them the ability to easily scale offering platform BPO would be the need up, optimizing costs and improving to facilitate easy process of migration, process performance for clients. Indian offer attractive pricing mechanisms, IT vendors are working at different levels transfer platform benefits across offering services under different models. multiple clients and leverage cloud for Inherent benefits of this model like cost platform delivery. savings with short deployment time and With traditional modes of service offering in Buyer preferences with respect to standardization of outsourced Business Process Outsourcing (BPO) slowly business processes turning into commoditized services, Indian outsourcers are taking another look at how they deliver BPO services to clients. Moving away from a predominantly voice based, low margin offerings, more and more clients are asking for standardized business processes with a fully “integrated platform” that also includes a standard software offering, not just the people and process expertise. Platform BPO is defined as an integrated BPO solution that involves bundling of technology, consulting and BPO – a shift from people - centric to process-centric delivery model. A Platform BPO vendor provides the whole breadth of services the client needs ranging from software Source: HfS Research September 2011 licensing, hosting, implementation and support. The buyer is required to only pay a monthly fee based on usage which is also known as the pay-as-you-use model. Market Scenario Traditionally, Indian outsourcers have Operators are using several ways of including Platform BPO – Major Segments built their BPO value proposition on labor platform BPO startegy in their business • Finance and Accounting – AP AR, Cash , arbitrage but that is rapidly changing. plan. In the most basic format, vendors Management, Billing, Invoicing Rather than working in silos, software are building their own add-ons to optimize providers are offering an entire suite of existing platform BPO solutions. In the • HR Outsourcing – Recruitment, Payroll, services with a common software platform high-volume offerings like HR and procure-to- Talent Management, Compensation, that gives them a more scalable solution pay, vendors have gone to package leaders Workforce Management with ability to optimize costs and improve Oracle and SAP to negotiate favorable terms • Analytics – Sales, Customer records, process performance for clients. Major around supplier offerings. Firms are also cross-sell, Customer churn segments that exist in the platform BPO creating their own industry-specific software space today are Finance & Accounting, • Procurement Outsourcing – Vendor packages from ground up. Finally, software Business Intelligence and Analytics, Human Management, Inventory Management, firms are adopting the inorganic route to Resources Outsourcing and Procurement Contract Management, Payment acquire vendors with proprietary platforms Outsourcing. Processing, MDM and captive clientele. © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 29. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 24 Indian IT vendors are working at different Platform BPO – Vendor Strategy levels in these four models. TCS for example, signed a ten-year USD 1.2 billion deal with Vendor Strategy the Nielsen Company in 2007 to deliver outsourced finance, accounting and HR Build their own add-ons on Create their own industry-specific Adopt inorganic route to acquire services on proprietary platforms built existing platform BPO solutions software packages on third-party vendors with proprietary platforms by the company. Infosys has developed platforms and captive clientele platforms in HR, procurement and media & entertainment. Some of its products are Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis Newspaper-in- a-box (NiaB), HR outsourcing (Hire-to-retire) and Shopping Trip 360 (retail analytic solution) respectively. One of Incorporating platform BPO into their IT these standardized platform solutions. Hence, the biggest BPO platform play for Infosys strategy will cut costs for clients by an a minimum threshold is required to register was its acquisition of McCamish Systems additional 20 percent to 30 percent on top profits. It is estimated that the break-even (a platform-based insurance processing of the 15 percent to 20 percent savings of period for platforms is significantly larger solution provider) in FY1019. Accenture has a traditional BPO solution21. A significant (atleast 18 months) due to high initial set up its internally developed “pharma-in-a-box” immediate and sustained cost savings that costs22. offering20. can be deployed in a short period with no upfront capital investment for clients makes it However, once the initial investments have ideal for clients not willing to invest in CAPEX, been made and services launched, the cost Indian Success Stories especially for small and medium business of maintaining platform keeps reducing • T CS signed a 10-year USD 1.2 Billion segments. For a vendor to be able to offer as more and more customers are added deal with Nielson company in 2007 to platform BPO, significant upfront investments to the platform. Large customer base also delover outsourced F&A, HR services on need to be made in setting up data centers, drives further standardization of processes proprietary platforms license costs for third-party software, hiring across multiple clients, reengineering of talent etc. processes for efficiencies and technology • Infosys has developed platforms in HR, improvements; further reducing the cost of procurement, media and entertainment Owing to greater proportion of fixed costs, supporting the platform. like Newspaper-in-a-box (NiaB), Shopping the degree of operating leverage is higher in Trip 360 (retail analytics solution). Source: Forrester report: Platform BPO: Process Outsourcers Take a New Approach to Traditional BPO, published 29th January, 2010 Case Example With the advent of Cloud, the next wave When it comes to platform BPO, pure Ghosh, how this will play out. Says Shantanu ” of BPO is being considered to be Business play BPO companies are competing Ghosh, Genpact Senior Vice President – Process-as-a-Service (BPaaS) which in as equals with IT services firms. In Practices, Solutions, and Transitions3. other words is delivering platform BPO over fact, a few of them like Genpact and cloud and is expected to be a gamechanger WNS are ahead of a BPO subsidiaries Genpact is also pursuing the inorganic route in coming years. BPO delivered as BPaaS of IT majors1. “More and more to strengthen its BPO offerings. The BPO includes the benefits of Infrastructure as a major acquired 100 per cent stake in High customers are going in for platform Service (IaaS), Platform as a Service (PaaS), BPO though they do need some push Performance Partners (HPP), a US-based SaaS as well as the traditional benefits of initially. Most of them start with some company developing software platforms for outsourcing such as process expertise process initially and then transfer the mortgage industry in 2011. Genpact will and labor arbitrage. This is better than the other processes as well, says CTO of ” leverage HPP’s Quantum software platform platform BPO proposition considering the Genpact, SV Ramana2. The company to support its Mortgage Business Process fact that companies are increasingly finding is also investing in BPaaS, where it as a Service (BPaaS) offering. The Quantum it difficult to secure the capital required for believes there would be significant platform helps originators and lenders to major platform implementations and other IT traction in the medium term. “BPaaS automate and streamline major elements of initiatives. Thus cost reduction and flexibility will force people to standardize their the loan origination process, resulting in a would be key drivers to move into BPaaS to processes. Infrastructure and software shorter loan life-cycle and a more transparent deliver BPO services. become more of a choice that allows mortgage asset4. buyers to leverage the right ecosystem. Source: Financial perspective I think that is a huge shift that changes 1. Company websites The platform BPO form of service delivery the landscape and is fundamental to 2. Platform BPO: Platform for Growth, published on 4th December, 2008 moves away from being people-centric to how this will play out. Says Shantanu ” 3. www.outsourcing-center.com, Published 1st February, 2011 4. Times of India online version, published on 10th October, 2011 being platform-centric, thus breaking the linear link between revenue growth and headcount. It allows service providers to de-linearize growth through standardization and large-scale productivity payoffs. In addition, having the Platform BPO model in its service portfolio, it offers more credibility to the capability of the BPO service provider, in terms of domain and process expertise, essential in today’s competitive marketplace. 19. Forrester report: Platform BPO: Process Outsourcers Take a New Approach To Traditional BPO, published 29th January, 2010 20 Accenture company website 21. Forrester report: Platform BPO: Process Outsourcers Take a New Approach To Traditional BPO, published 29th January, 2010 22. Report on India IT Services by JP Morgan Chase, published on 15th December, 2010© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 30. 25 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Key Imperatives for Platform BPOs Ensure ease of migration for Customers Ensure long-term contracts Develop industry specific process platform Leverage Cloud to offer BPaaS Key imperatives In a bid for BPO firms to deliver more value to ensure seamless integration across Develop industry specific process platform to client, some of them have extended their geographies, a strong alliance/vendor With more and more software vendors portfolio to include platform BPO. Process management is needed for standardized going the platform BPO way, it is essential standardization, stable technology platform, delivery. that service providers invest in building transaction pricing model coupled with right industry specific process platforms or IP led talent mix are the critical success factors for Ensure long-term contracts expertise that showcase significant process vendors venturing into this space. In addition, The one-time cost in platform BPOs is improvements. They should also make an some key imperatives for vendors are as usually high as it bundles the initial setup effort to communicate the same through follows: cost, data migration cost and in many cases a concerted branding exercise. Firms can infrastructure. To offset this, the supplier either play on their historically strong vertical Ensure ease of migration for Customers and vendor can enter into a long term offerings or choose to move into uncluttered Platform BPOs should require minimum effort contract so that the supplier can amortize it space. In addition, this should translate into to migrate from client’s platform to vendor’s over the deal period and the client realizes higher capability to scale and ability to use the platform. This should be achieved through productivity gains over the lifetime of the same platform for multiple clients. best in class scalable and highly standardized contract. Outcome/output based pricing can technology to support majority of client’s be explored mutually as beneficial to clients Leverage Cloud to offer BPaaS requirements without customization. Vendors and vendors. The BPaaS model allows vendors to spread should ensure enhanced level of data their investments across multiple customers security and business-continuity planning. While some clients might want to enter into and customers share financial benefits by Standardization and uniformity in processes short term contracts in order to ‘proof test’ reducing operating costs, thereby cutting across business verticals and locations for the model, it is not advisable for the Indian capital expenditures. BPaaS can be offered the customer will be essential. Building players to succumb to the immediate revenue as a fully integrated suite of services as well solution accelerators may help in this process. pressures and go ahead with it. It might be as stand-alone offerings, depending on a Secondly, a phased approach to migration is better to be patient till the client is more client’s needs. A flexible pay-per-use pricing advisable. The service provider can start with comfortable with the solution and is ready to is inherent in this model as is standardization BPO support to develop an understanding enter into a long term contract. available from externally sourced of client’s processes and then move on to infrastructure, platform, and software across migration. Finally, as the vendor needs many clients. Views on future of Indian services On talent pool.. companies … Skill pool and ecosystem in India is very much Indian services companies will continue lagging the west e.g. Silicon valley and it may on the services model moving up the value not be realistic to expect Indian companies chain – higher value services and with more to step up and compete on the product complex (non linear) commercial / pricing innovation front… models i.e. transaction based pricing, revenue sharing, outcome based pricing etc. On HCL current initiatives … ’s The challenge in front of Indian companies is HCL is developing 14 products with Cisco to find the adjacencies that they can enter… and will not charge any fees – they will get a Mr. Vineet Nayar percentage of the revenues Services demand for India will stay since Vice Chairman & CEO, Indian companies will continue to move up HCL Technologies Prognosis for the industry… the value chain preserving the overall “value There will be restructuring which will result proposition”This coupled with nonlinear . in margin dilution. Some VCs may be farmed pricing will sustain the model… out by large companies... © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 31. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 26 Non-linear pricing models Executive summary The current economic climate has Analysts estimates a margin gain compelled customers to reevaluate of ~1 percent for every ~5 percent their existing and new contracts with move to non-linear revenues owing service providers, who, are moving to to their better margins compared to high-value, complex service offerings traditional services20. But in order to like consulting, system integration, better leverage the different pricing which demands a different pricing models available, companies need paradigm. Indian IT companies have to increase its level of adoption in been pricing based on Time and Material application outsourcing services – (T&M) and Fixed Price (FP) models, which form a majority of their current which are linked to headcount and effort revenues. Success in non-linear pricing spent. Non-linear pricing models on management depends on the ability to the other hand, link clients’ expenses isolate and measure business drivers to their business outcomes or usage. or KPIs Also, non-linear pricing models Billing is no longer based on effort and can be perfected only with sufficient revenues are linked with productivity data points and experience which can ensuring vendors share productivity act as a guiding factor to decide on key gains with clients. This is fast emerging KPIs and outcomes. This will mandate as a win-win proposition for both the building of comprehensive baseline client and the service provider as both repositories. Lastly, a “Consultative” parties share the risk. front end will need to be created engaging with key stakeholders at Non-linear pricing models result various levels to gather business in higher revenue productivity per insights, obtain buy in and drive change employee and improved margins for that will ultimately deliver business companies. results. Traditionally, Indian IT companies have been Linear and non-linear pricing models pricing based on Time and Material (T&M) and Fixed Price (FP) models, a model linked Linear Pricing Model Non-Linear Pricing Model to employee strength. Non-linear revenue models on the other hand, link clients’ expenses to their business outcomes or Contract Type Time & Material Fixed Price Business Outcome Linked Pricing usage. Billing Effort based Productivity Market scenario Benefits of Non-Linear Pricing Higher revenue productivity per employee Improved vendor margins It is estimated that most Indian firms currently garner less than 10 percent of their Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis revenues via the new pricing models23, but intend to multiply that in the next couple of years, given its immense non-linear potential. Non-linear pricing models Outcome based models cover service offerings like products, consulting, Outcome-based Charging based on business results achieved infrastructure management and customization. IBM has used outcome- Usage-based “Pay-per-use”, “pay-as-you-go” or transaction based pricing based model in various deals, including the end-to-end IT operations management IP/ product based charging on license metric License fee-based deal with Vodafone wherein IBM’s revenue was linked to the commercial performance of Vodafone24. TCS used similar pricing Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis contracts in its BPO deal with Pearl Insurance in UK and again in the USD 250 million IT infrastructure management deal with Tata Teleservices in 200525. 23. Report on India IT Services by Morgan Stanley, published on 23rd March, 2010 24. Livemint.com and Wall Street Journal 25. TCS changes rules of outsourcing game: Published in Economic Times, 28th September, 2006© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 32. 27 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Platform-based services that employ the Key imperatives for non-linear pricing models usage-based pricing model have arguably seen the highest level of adoption across Isolate Key Performance Indicators the industry. All major Indian companies are either focusing on acquisitions that Build a Baseline Repository offer scalable reusable platforms or convert their traditional offerings into a platform. Create a “Consultative” Front End Wipro and HCL Tech appear to have a higher number of acquired platforms while TCS and Infosys have so far focused on developing a majority of their offerings in house26. Wipro Key imperatives also offers testing services under both Pricing management is a significant Build a baseline repository usage-based and outcome-based pricing profitability and positioning lever that Indian Since non linear pricing is a relatively models23. companies have not focused on enough recent phenomenon; Indian IT firms are in the past but would need to focus on, at a back foot with respect to historical In license fee based models, the universal going forward. Companies need to treat points of reference when embarking on a banking products developed by Infosys pricing management as a discipline itself new deal. Non-linear pricing models can be (Finacle), TCS (BaNCS) and Oracle financial that requires senior management attention perfected only with sufficient data points services and software (Flexcube) qualify26. on an ongoing basis. It may be worthwhile and experience which can act as a guiding for companies to enhance price setting and factor to decide on key KPIs and outcomes. governance mechanisms before embarking Dedicated investment in building a baseline Financial perspective on the non-linear based pricing models. KPI database and senior management teams Non-linear pricing models result in higher Estimation models and assumptions used which can steer the initiative can drive strong revenue productivity per employee and thus, therein also need to be made robust to execution in outcome based pricing deals. improved margins for companies. As billing ensure that it is truly a win-win proposition. This would also be a step towards creating is no longer based on effort and revenues frequent repeatable model elements. are linked with productivity ensuring vendors Isolate key performance indicators (KPIs) share productivity gains with clients, it is a Success in non-linear pricing management Creating a “consultative” front end win-win situation for both the parties. will depend on the ability to isolate and Consulting skills will be required in engaging measure business drivers or KPIs, which is with client stakeholders at various levels Assuming that non-linear initiatives generate by far the greatest challenge of non-linear to gather business insights, obtain buy a higher EBIT margin of ~50 percent pricing model, especially in outcome based in and drive change that will ultimately compared to traditional services, large Indian pricing. Since this step requires a serious deliver business results. In addition, these IT players can potentially achieve a margin commitment from the client, this needs to skills would be leveraged at all stages gain of ~1 percent for every ~5 percent of be a collaborative process, with a joint task of engagement, right from the project top line earned from non-linear pricing27. force to formulate tasks which can come conceptualization stage through execution under the umbrella of non-linear pricing and involving creating of metrics scorecard, set up a measurement process accordingly. It governance, tracking and monitoring. is essential though that the firm moves away Hence it is imperative that companies from their erstwhile selling proposition of explaining outcome-based pricing , invest in total cost of ownership (TCO) optimization to a “consultative” front end to manage these a more tangible gain sharing understanding engagements. This will ensure that both the with client to achieve any significant gains in parties are able to leverage the benefits of terms of non-linearity. this model, leading to a more mature and strategic relationship between the customer and service provider. 26. Company websites, media reports 27 Report on India IT Services by Morgan Stanley, published on 23rd March, 2010 . © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 33. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 28 Mr. C. P Gurnani . CEO, Mahindra Satyam Views on the innovative models prevalent introducing new capabilities. Sometimes This fragmentation will spawn vendor-led in the industry… we confuse productivity improvements with innovation, increased choice to the buyer Interestingly, Indian IT companies are innovation and that is something we need to and differentiated value in prebuilt solutions already on the unbeaten path and embracing be careful about. ” leading to a win–win situation for customers. ” innovation. Some models that have worked Initiatives that the government needs to wonders in the IT-BPO sector are: On Non-linear growth: trends in the take … industry today… • Automotive initiatives where leading While the Government is going to the grass Software-as-a-service (SaaS) is the trend service providers are leveraging their root level to provide basic education, the time that has the potential to alter IT industry technological competency to automate is now to provide the youth with knowledge landscape along with Cloud which is provided back office operations which will that will enhance their skill sets ‘as a service’ to external customers using and enable to apply for specialized jobs. The • Evolution of new business models - Internet technologies. Deep specialization need of the hour is also to foster a culture “Platform based service” and “Business into sub vertical processes will be an of innovation in colleges and encourage and Process as a Service” - to cater to imperative for commercial success in the assist in all possible ways, path breaking dynamic needs of buyers will play a new arena of alternative services delivery. thoughts and ideas, especially in the areas significant role in imminent future. of energy, science , utilities and finance. On company’s current initiatives for non- This can be done in various ways like Grants, Views on Innovation in the IT-BPO Sector linear growth… Fund Generation, Awareness Drives and in India… The formula for future success which Curriculum Based programs In short, innovation is “a dramatic game “Mahindra Satyam is closely following - changer exemplified by improved margins, microverticalized solutions, which will indeed reduced risk, delighting customers, and lead to market fragmentation.© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 34. 29 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Delivery accelerators Executive summary Of late, companies have started implementations too. These tools leveraging CoEs to develop reusable bring in reusability and hence, reduce tools which could be used across the total cost and effort required for multiple customers accelerating implementation, adding non-linear deployment time and attaining efficiency. effect. In order to achieve non-linearity, One of the outcomes of these CoEs companies would need to invest in are the solution accelerators which are building CoEs, assembling knowledge essentially pre-built software that help in management practices and hiring the lowering TCO and offer greater flexibility requisite talent mix to support these. in customization. Almost all Indian IT The productivity benefits could go a majors have invested in building these long way in differentiating players from tools and have had some successful competition. Companies are adopting means to Categories of solution accelerators accelerate their deployment process in projects and attain cost efficiencies. Of Select Categories of Solution Accelerators late, companies are investing in Centers of Excellence to develop reusable assets Readily deployable Pre-built templates Software tools Partial code Business like solution accelerators, software tools, process frameworks modules application templates, business process, etc. Solution components accelerators are one of the incremental ways which global and Indian companies have been using to attain higher efficiency and Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis easy replication. These are essentially pre-developed software products that help accelerate Solution accelerators the TCS Automotive Center of Excellence implementation of business solutions • I ndustry focused – Automates business (CoE) serves clients by leveraging the firm’s for clients. A typical solution accelerator processes specific to an industry/domain automotive domain knowledge and pre-built could contain readily deployable process business models and solution accelerators29. frameworks, templates, tools and partial • Technology focused - Automates business Wipro’s high-tech ‘Lab on Hire’ services can code modules. These could be industry processes specific to a particular help organizations optimize IT investments focused, technology focused or could span technology implementation or a service and reduce costs involved in testing services across both. line management like tools purchase and • Industry and technology focused managing licenses29. These pre-built software help in bringing -Automates implementation of processes down the total cost of ownership through in solution implementation Of late, several Indian IT companies have reduced time to market and lower built solution accelerators and benefited deployment efforts ensuring reusability. As from them. Amongst the larger ones, TCS per definition by Forrester, 30 to 70 percent has a solution accelerator portfolio spanning of code could be reused while using solution Market scenario industry verticals such as the ‘Due Diligence accelerators across engagements28. Solution IT majors are investing significant resources Cube’ for its manufacturing clients and accelerators also offer greater flexibility to develop technology labs or Center of the ‘Retail Accelerator Solution’ for the when it comes to customization as they Excellence (CoE) whose sole directive is automotive segment. Similarly, peer Infosys can be reconfigured based on the nature to build software/solution frameworks, offers the ‘Manufacturing Collaboration of a client’s business processes. When accelerators and create IP Some of the . Accelerators’ for the manufacturing segment, compared to products, they are more agile CoEs also work on a ‘Lab on hire’ concept and ‘Test Automation Accelerator (ITAA)’ as they are only partially finished unlike for clients which designs solutions, offer as well as ‘Cloud Strategy and Consulting products. Apart from bringing productivity consultation on make/buy decisions for Accelerators’ for the various sectors it gains, they also de-risk the implementations platforms and also, serve as a Simulation serves29. by making outcomes predictable. & Testing Lab for projects. As an example, 28. “Solution Accelerators Will Disrupt The IT Services Landscape” Forrester Research, Oct 29, 2007 , 29. Company Website © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 35. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 30 Software major, IBM, has committed Key benefits of solution accelerators significant investment towards building such software at its Global Business Solutions Centre in Bangalore30. Small and mid cap IT companies are focusing more on domain specific solution accelerators. For example, Persistent Systems has developed a solution accelerator for rapid integration of Skype video calling on embedded devices such as connected TVs, IP set top boxes, mobile internet devices, media phones and more31. NIIT Technologies has worked on an airport portal solution accelerator that addresses the needs of the airport portals32. Smaller firms are sticking to their domain expertise; for example Sonata Software recently established a dedicated CoE for mobility, with a dual focus on supporting ISVs and enterprises. Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis Financial Perspective As per Forrester more than a dozen solution accelerators save an average of 25 to 30 percent of time in a project implementation cycle for a client as they are meant for multi- client implementations33. developed over 750 solution accelerators/ TCS Code Generator Framework (TCS Case Example • productivity components across the three MasterCraft) provides an integrated Among the top Indian software firms, TCS is areas: (a) technology services; (b) business environment along a product or at the forefront of creating technology and processes; and (c) vertical domain. This has application development life-cycle. By engineering solution accelerators for leading enabled TCS to be aggressive while pitching significant re-use of code, it speeds up global IT product and platform companies1. for large projects, by highlighting its cost new application development, legacy According to the company management, competitiveness2. system integration, and/or making “Astute investments in quality assurance and enhancements. Some of the key solution accelerators which software testing space, including solution TCS has developed are3: Source: accelerators and frameworks created by the 1. JP Morgan report on India IT Services, published 15th December, Company’s in-house R&D team, are paying • TCS SOLAR Framework is a service 2010 2. TCS Annual Report 2010-2011 handsome dividends. TCS claims that well- ” oriented framework to strategize 3. Company Website proven components can typically generate and deliver Business Intelligence & cost savings of 30-40 percent through reuse. Performance Management solutions for The business excellence program at TCS has clients Key Imperatives for delivery accelerators Key Imperatives Though the Indian software industry has reusability. A key driver for this is the Invest in CoEs to bolster asset and IP reached some degree of maturity, yet, it has extensive investment made in creating development not reached the levels of standardization as reusable tools, templates, business achieved in other traditional industries such processes to be used for all customers Focus on internal awareness bringing highest level of automation. A as manufacturing and automotive. Most of these industries have achieved higher Center of Excellence (CoE) is one of the Set Knowledge Management tools in place channels which can help create these tools efficiency and reaped productivity gains Hiring the right talent through extensive standardization, replication & technologies of standardization for IT and companies. 30. http://articles.economictimes.indiatimes.com/keyword/forrester-research/recent/3 31. http://www.indiainfoline.com/Markets/News/Persistent-Systems-develops-a-solution-accelerator-for-rapid-Skype-Video-integration/3905710501 32. http://www.google.co.in/url?sa=t&rct=j&q=niit percent20solution percent20accelerator percent20aerospace&source=web&cd=1&ved=0CCYQFjAA&url=http percent3A percent2F percent2Fwww.niit-tech.com percent2Fimages percent2Ffiles percent2FAPSA.pdf&ei=wCf4Tu_BOo2rrAfcvpTqDw&usg=AFQjCNGfUZMFq8DShd4GmlUbkgX5nGkkHg 33. http://www.expresscomputeronline.com/20071210/market01.shtml© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 36. 31 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Vertical and horizontal solution accelerators Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis Invest in CoEs for creating assets Focus on internal awareness plays a crucial role in this. Companies need Indian firms need to make significant Often, it is found that companies have created to invest in KM so as to allow the business investments in creating CoEs which can help tools but are not able to monetize it since the leverage the benefits of these accelerators. them create assets bringing standardization. delivery teams and client management teams Hiring the right talent These could be software tools, templates, are not aware of its existence and benefits. business process maps, etc. which are Companies would need to ensure that once Apart from investments, companies need relevant for a particular type of customer the tools are developed, the beneficiaries to hire the right talent sets with a right mix under specific business conditions. To within the organizations are aware and are of domain/industry experts and process achieve the real benefits of standardization, able to leverage them. Also, support and experts. These teams would differ from the companies need to invest in creating feedback mechanism needs to be in place so regular pool of technical resources involved in comprehensive reusable assets for all types that these tools can be improved/modified as delivery and would have significant technical of customers and for all conditions. Initially, per the changes in business environment. and domain expertise with some R&D these could be created only for major focus mindset. areas but could be expanded to all areas. Set the knowledge management tools in IT services vendors who are focused on Once these reusable assets are in place, place leveraging the benefits of standardization can there would be incremental efforts spent in To make it more effective and leverage the differentiate their service quality and this will modifying and improving it. true benefits, it is critical that there is constant go a long way in offering better services to flow of information and knowledge between customers thus improving their bottom lines. CoE and business. Knowledge management © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 37. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 32 Branding Executive summary increase their brand perception, A higher brand perception can enable augment profitability and ultimately service providers to charge a premium contribute in their non linear growth for a similar category of services strategy. Some of the components offered by its competition. While global to build a strong brand would include technology firms have been largely highlighting technology/domain agile in the branding game, their Indian strengths, offering a symbiotic counterparts have been lagging behind. partnership proposition, articulating key A strong brand identity in terms of differentiators vs. peers and delivering showcasing critical elements that on the brand promise. clients look for may enable providers to All else being equal, what makes one Various brand categories company command a pricing premium over another? Why are clients willing to pay a hefty price for precisely the same set of services that a vendor provides merely because they perceive a different and better value proposition? The answer is simple. A strong brand can make all the difference to a company’s growth trajectory. Brands add value to a basic product or service by enabling the product or service to command a higher price, or higher market share than an unbranded equivalent. The term Brand equity is used to describe both the value of the brand and the brand’s component values. Its value may be monetary, an increase in a rate of return or any number of softer market research measures such as awareness or consideration34. Branding in the global technology outsourcing market works at different levels Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis of projected competence. To understand this better, we have categorized the brand projections of service providers in six levels: • All-in-Alls, who are the one stop continue to under-invest in their brands, shop for all needs, providing sound both financially and in terms of management • Outsourcers, who have mastered the advice on all areas of the projects, and attention. ability to replicate commoditized tasks accountable for the business outcome • System Integrators, experts in bringing and ultimate success of the project. They “They have been caught napping. It may together component subsystems and are considered partners rather than just require a rethink of their positioning and making them work seamlessly service vendors. This level of perception customer value propositions to avoid usually ensures that a technology provider potential risk, says a BrandFinance report on ” • Technology Advisors, experts who India’s Most Valuable Brands. reaps maximum benefits with minimum understand the finer nuances and effort. limitations of the technology being It ranked TCS fourth among the top 50 implemented brands. Wipro and Infosys slumped one position each to ninth and 15th place • Business Advisors with a complete Market scenario respectively35. understanding of the business objectives Cost benefits associated with outsourcing to and industry practices that are essential India have ceased to be the exclusive domain As the world of IT services undergoes a for a planned technology initiative of home grown India technology providers. radical transformation, brand perception will Leading global technology brands have now play a huge role in deciding the pecking order • Business Technology Advisors, who established their offshore development of those who survive the race for dominance combine the best of both of the above by centers in Indian cities and offer services in the industry. Forrester estimates how the being experts in pertinent aspects related that customers perceive as superior at world of IT service providers would change to both business and technology comparable costs. Their Indian competitors by then end of this decade. are now realizing that they can no longer 34. www.dobney.com 35. Failure to build brand may cost TCS, Wipro, Infy dear by The Economic Times, published on 29th October, 2010© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 38. 33 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Top 10 service providers, 2010 Estimated Top 10 service providers, 2020 Rank Name 2010 revenue (USD billions) Rank Name 2020 revenue (USD billions) 1 IBM USD 55.0 1 IBM USD 75 2 Accenture USD 23.2 2 Accenture USD 32 3 HP/EDS USD 21.5 3 Infrastructure consolidation USD 28 4 CSC USD 16.7 4 European consolidation USD 26 5 Fujitsu USD 14.0 5 Consolidation of Japanese players USD 25 6 T-Systems USD 11.4 6 Product vendor wildcard USD 23 7 NTT Data USD 10.5 7 Telecom wildcard/consolidation USD 18 8 Xerox/ACS USD 9.7 8 salesforce.com USD 16 9 Capgemini USD 8.7 9 TCS/Infosys USD 15 10 Atos Origin USD 7.0 10 Product development roll-up USD 14 Source: Forrester Research, Inc. Financial Perspective An example of how a global technology of CEO of Andersen Consulting, explained firm used a strong branding initiative to gain in a press release: We are a very different competitive advantage over its peers will help organization today than we were when we signify how branding should be inherent to a formed Andersen Consulting back in 1989, so company’s non linear growth strategy. adopting a new name and brand identity is a logical next step in our growth strategy. Accenture: Rebranding and Repositioning36 The year 1989 was a watershed year for To carry out the global rebranding and Andersen Consulting when the consulting repositioning initiative, Andersen Consulting practice of the accounting firm Arthur supplemented its annual USD 75 million Andersen separated to form an independent marketing & communications budget with an business unit. For close to ten years after additional USD 100 million. To create interest the split, an estimated USD 7 billion was around the effort, it tapped the advertising spent in building the Andersen Consulting agency Young & Rubicam to develop a teaser brand. But therein came another blow. In advertising campaign in support of the arbitration against Andersen Worldwide and rebranding and repositioning effort. Following Arthur Andersen, Andersen Consulting was the specified launch schedule, Andersen granted its independence in August of 2000, Consulting announced its new name on but as part of the ruling, the license to use October 26, 2000. Managing Partner and the Andersen Consulting name was to expire CEO, Joe Forehand commented on the new December 31, 2000. name at the time of the announcement: Accenture expresses what we have become To deal with the new development, Andersen as an organization as well as what we hope to Consulting started to develop a new be – a network of businesses that transcends positioning that would formalize its position the boundaries of traditional consulting and as a leader in the new economy. To distinguish brings innovations that dramatically improve Andersen Consulting from its competition, the way the world works and lives. the firm developed a positioning platform that captured the company’s vision and strategy Today, Accenture commands a market cap of -- positioning Accenture as a bridge builder USD 35 Billion37 and is a respected consulting helping companies close the gap from the firm across the world. It is the second most old economy to the new. It also positioned admired company in the world after IBM38 the company as one who helped companies and constantly tops the perception charts. transform trends into business opportunities Despite having a similar operating model for using its deep global knowledge, its unique service delivery as its Indian counterparts, vantage point and its breadth and depth of the consulting and technology giant charges resources and relationships. This change a significant pricing premium over its Indian in business strategy was realized through peers which, according to some industry extensive market research with senior experts, are almost 20 percent39 higher than executives coupled with input from a team of the existing rates. It would seem that the 36. Accenture: Rebranding And Repositioning A Global Power Brand, brand experts. As Joe Forehand, Managing company’s extensive branding effort over the published in people.exeter.ac.uk 37. www.nasdaq.com Partner years has borne rich dividends. 38. http://money.cnn.com/magazines/fortune/mostadmired/2011/ industries/30.html 39. Accenture sets up outfit for low-cost deals by The Economic Times, published on 13th May, 2009 © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 39. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 34Perception Value Top 10 Winners Values in Thousands Company New Media Social Media Twitter Total USD Change ^ PV/IV Blackberry USD 3,692 USD 19,392 USD 962 USD 24,046 USD 48,002 70.3 percent Accenture USD 2,338 USD 2,971 USD 83 USD 5,393 USD 3,241 35.7 percent Hermes USD 1,130 USD 4,588 USD 120 USD 5,838 USD 4,299 33.0 percent Philips USD 1,173 USD 6,665 USD 217 USD 8,055 USD 4,490 32.3 percent Colgate-Pamolive USD 3,059 USD 930 USD 37 USD 4,025 USD 2,500 30.9 percent 3M USD 1,535 USD 4,750 USD 158 USD 6,443 USD 3,956 26.4 percent Danone USD 1,734 USD 396 USD 14 USD 2,144 USD 1,118 25.8 percent Goldman Sachs USD 13,549 USD 2,967 USD 52 USD 16,568 USD 14,199 24.9 percent Audi USD 4,254 USD 8,606 USD 471 USD 13,331 USD 7,477 24.1 percent Ikea USD 3,871 USD 884 USD 236 USD 4,991 USD 2,764 21.5 percentSource: General Sentiment, Inc. 2010Case example This global sporting event was an unlikely Mahindra Satyam bag several large clients benefactor to Mahindra Satyam going through from the sporting segment, a key win beingThe most watched soccer game in American a hard time in terms of client perception the multi-million dollar deal with Aspire Zonetelevision history, the FIFA World Cup 2010 because of the recent accounting scandal Foundation in Qatar, one of the leading sportsfinals between Spain and Netherlands and economic downturn. Mahindra Satyam institutes in the world in March 20113.attracted over 700 million viewers worldwide, tied up with FIFA, for which it managed the Source:beating the 600 million that caught the IT services and application development 1. Reuters article, July 13, 2010opening ceremony at the 2008 Beijing program in return of getting prominent 2. Huffington Post, July 12, 2010Olympics. 16.8 million Spaniards and 8.5 visibility during the sporting event. The 3. Financialexpress.com, March 16, 2011million Dutch - 91 percent of the TV audience company’s logo appeared across the sidein their respective countries1, watched the boards alongside some of the best brands ingame as did some 24.3 million Viewers in the the world at the ongoing FIFA World Cup 2010US2. in South Africa. This brand recognition helped Key imperative for branding Key imperatives A comprehensive, integrated brand strategy Right positioning- Don’t confuse the Develop a comprehensive, integrated brand market is vital to ensure success in the marketplace. strategy Developing a brand strategy requires Customers have long considered labour Right positioning- Don’t confuse the market following few key steps: arbitrage as the key selling point for Indian IT majors. Only in recent years have Indian • Identify and understand the target market Showcase the right strengths vendors tried to change this perception segment by attempting to move up the value chain Deliver on the brand promise • Articulate key components of the brand and establishing themselves as premium in-house players. Notwithstanding their best attempts to position themselves differently, Indian • Test and enhance brand values with the software providers still undercut on price if target market the client so demands. This dilutes the very intent of the high value brand they are trying • Communicate clearly and consistently to create. across the right media formats • Delivering on the brand promise Showcase the right strengths It was only in the late 90’s that IBM ventured While designing a potent branding exercise, into the software and solutions space. In the following factors need to be kept in mind: 2004, the global technology major © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 40. 35 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry major transformed from being a software solutions to a premium solution delivery provider via acquisitions (Trigo, Alphablox, Cyanea, Venetica, Maersk Data, Systemcorp) that strengthened their portfolio in high end services40. When recession hit economies around the world, IBM chose to go ahead with its ‘Smarter Planet’ campaign and in 2010 its brand value surged 30 percent over the previous year to USD 86 billion41. IBM has built its brand equity by putting a disciplined brand system in place over the Mr. Harsh Manglik years and showcasing its strengths and Former Chairman NASSCOM, and key differentiators at various stages of its Former Chairman and Geography existence. Thus, it is crucial in the branding Managing Director of Accenture-India process that companies continue to actively identify pockets of expertise that they “The future offers neither guarantees nor emerging opportunities but also threats. can showcase to clients and command a entitlements ... only possibilities. Individuals Non linear, or dramatic, growth cannot be premium from them. In addition, building organizations are a key a part of the system attained by maintaining the status quo. The an all round competence and projecting the to realize the potential, but not the only idea of a race provides a good metaphor promise of a one-stop-shop to meet all client ones. Governments too have a critical role where one is either getting ahead or getting requirements, right from conceptualization through sound and consistent policies that behind. Innovation, across all dimensions of to procuring and deploying the services at contribute toward creating an attractive the environment .. by both businesses and competitive prices is key to commanding and stable environment for investment and governments ... provides the potential means a strong brand. An added benefit is commitments of resources, where global for developing competitive differentiation, demonstrating an organization culture of alternatives exist . ” and through it the basis for pulling ahead and innovation. dynamically maintaining the lead. Innovation in the IT-BPO/ITeS Sector in Delivering on the brand promise The emergence of “Cloud Computing” , India: Views on the innovative models Instead of focusing on building the business propositions where analytics are prevalent in the industry (products/ perfect brand, companies should focus embedded, and innovative structuring of services/business models) and the on developing a solid business model career propositions to attract and retain the imperative for the industry to undertake that delivers on the brand promises and best talent, are examples of innovations innovation at multiple levels given the brand values. The idea should not be that different organizations are following to market realities how much to spend but how well you sharpen and strengthen their competitive A spirit of constant innovation is fundamental define and deliver the service and how positions with the idea that these would help for sustained growth and business effectively you communicate the value create non-linear growth for them. competitiveness not just in IT-BPO/ITeS proposition. Branding is effective only when but in all areas of enterprise. But it is even it is perceived to offer a real benefit for Government: Initiatives that the more important in IT-BPO/ITeS because the its audience and a demonstrable point of government needs to take in order to industry got its start based on leveraging difference42. support innovation, in turn facilitating the favorable cost differential that India non-linear growth in the industry provided. The recognition and capture of that At its heart, successful Innovation is about potential was innovative but that is no longer people who are curious, imaginative, enough. All the dimensions of business lend confident and have well developed faculties themselves to innovation, including the basic for critical thinking and working together with value proposition, delivery system, approach open minds. These capabilities evolve over to talent, and business model. time through developmental experiences, Since customers take a global view and have starting from childhood and go well into global alternatives, the role of governments adulthood. Therefore educational philosophy is important as well since it is critically plays a critical role, in addition to the culture important to have policies that are sound of organizations where people work. and stable, advanced infrastructure and The role of government becomes critical nurturing of human capital. The nations and because for much of India it is essentially the regions where these are done well become shaper and driver of educational policy, at attractive for investments and as long term all levels. Governments can give a powerful “bets” by customers. “Surprises” and boost to a national culture of Innovation lack of consistency undermine the overall through a thoughtful development of the attractiveness. educational approach and by ensuring that the educational policies and implementation Non-linear growth: Trends in the industry develop rather than stifle the potential for today, what is working and what is not. innovation. Innovation does not work well in Also, your company’s current initiatives authoritarian and hierarchical environments. for non-linear growth Nor is it nurtured when uniformity and The operating environment globally is ever conformity dominate. Diversity of exposure evolving and is always associated with 40. IBM sticks to premium branding strategy through downturn by The and understanding are very important. Economic Times, published on 30th June, 2009 41. Local IT firms lag on branding quotient published by DNA Money on 24th March, 2011 42. www.gantrygroup.com © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 41. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 36Mergers and AcquisitionsExecutive summaryM&A has been a strategic growth engine majors. Indian companies need to takefor firms since last couple of years. risks and make bolder acquisitionsThe current economic conditions are in unexplored but promising areas.conducive for consolidation as small Focusing on integration post acquisitionand mid-sized players are struggling is another critical lever for success.for sustenance. Indian companies Also, companies need to keep a longhave started to look at inorganic term view and evaluate the benefitsroute for non-linear growth. Global of acquisition. If need be, companiescompanies have always been ahead and may also need to take the bold step ofspearheaded M&A route for innovation hiving off the acquired business unit ifand strengthening product/IP business. synergies have not been realized after aIndian companies have been reactive in sufficient amount of time.this area unlike the global softwareThe last decade has seen a steady growth in significant decline in global M&A activity43M&A activities of IT-BPO companies driven as world economies slowed due to theby huge growth opportunities present in recession and shrinking investment funds.both domestic & global market. M&A has M&A deal values declined and investors &been one of the key strategies adopted by sellers adopted a wait-and-watch approach.companies globally for acquiring both scale However, the last 2 years have seen a globaland depth in business. revival leading to an uptick in M&A activity43. The cash flow pressure for the companiesGlobally, M&A and PE investments are has lead to consolidation of the small anddirectly linked to the state of the economy. mid-sized firms for sustenance in theAs a result, 2008 and 2009 witnessed a extremely competitive industry.Factors fueling growth of M&A in IndiaSource: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis Market Scenario The story of the evolution of M&A deals in Services (FNS), an Australian core banking India solutions company, led to the evolution Traditionally the Indian IT-BPO companies of what is today known as ‘TCS BaNCS’ have acquired companies for scale, product45 geography, headcount addition, domain expertise and to leverage or set up Global • WNS’s – BizAps acquisition: WNS Delivery Model. However they have seldom acquisition of Business Applications looked beyond their core business model. It Associates (BizAps), a provider of SAP is only in the last 2 years that companies have solutions to optimize ERP functionality started taking the inorganic route to target for finance and accounting processes, non-linear growth44. A number of Indian IT strengthened its position in platform- firms in spite of the significant cash balances based services46 on their balance sheets were conservative • Aditi Technologies – Cumulux acquisition: and risk averse which has put them way Aditi Tech., a software product and behind the global counterparts. In India the application development services numbers of deals for non-linear growth were provider, acquired Seattle-based cloud- relatively few. Below are some of the deals computing start-up, Cumulux to gain43. Nasscom Report on M&A – Engine for Growth with non-linear growth intent: capabilities around Cloud and move to44. KPMG Analysis45. TCS acquires Australia’s Financial Network Services” October , • TCS – FNS acquisition: TCS’s acquisition non-linear model47 2005, Finextra of Sydney-based Financial Network46. BPO firm WNS buys BizAps” June 2008, Business Standard ,47 Aditi Tech buys cloud computing start-up Cumulux” Novermber . , 2011, The Hindu Business Line© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 42. 37 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Evolution roadmap for M&A’s in India Source: KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis Global scenario Global companies have always been ahead Global M&A Scenario (FY11) in envisaging the future trends in technology • Converging trend including security, social on the basis of which they strengthen media, mobility and cloud computing their product/service offerings, accelerate driving M&A innovation, obtain critical mass, meet customer demand more rapidly, and leverage • Mix of big and small strategic deals as partnership opportunities. The approach is companies make small acquisitions and also reflected in the M&A strategy for global weave them together to address strategic companies. Based on the trends in the goals. M&A space we can segment past/current • Multiple deals by to enhance acquisitions into three categories: Market competitiveness and build capabilities, acceleration, Market expansion, and New for example Google in the last 2 years did market entry. 50+ acquisitions around social networking, mobile video, mobile advertising & In the Global M&A scenario, companies are payment technologies. now focusing on: • For rapid technology innovation many large • IP and technology assets companies acquired small companies and • Enterprise Mobility R&D units. Source: Gartner Symposium , KPMG in India - CII Summit 2012, Non- • ERP Platforms linear models 2012 Analysis • Niche Capabilities • Capturing the complete Value Chain. © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 43. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 38Evolution of Global M&A dealsSource: KPMG in India - CII Summit 2012, Non-linear models 2012 AnalysisBelow are the indicative M&As in Indian & totally unexplored. The Indian companiesglobal markets over the last decade48. The are reactive unlike their global counternature of M&As indicate that while there parts which define the trends, bear the risk,is a lag in the some of the scenarios in the transform the business model and transitionway M&A has evolved and matured in the the customer mindset:Indian and global markets, some areas areGlobal and Indian M&A TrendsSource: Companies’ Data, KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis48. KPMG in India - CII Summit 2012, Non-linear models 2012 Analysis © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 44. 39 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Financial Perspective Google – Android Case Example Google acquired a small software start-up – Android – in August 2005 for an estimated From modest beginnings as a small brought in enterprise wide GIS integration USD 50 Million49. The acquisition helped services firm in the late 80’s, Rolta technology, TUSC has been an industry-leader Google gain talent including co-founder India has built upon a steady stream of in providing assessment and implementation Andy Rubin, who had previously also started acquisitions to become a world leader for mission-critical IT and business systems. mobile-device maker company - Danger in the GIS, CAD/CAM space in a little Piocon brought in high-level BI solutions for Inc. In no time, Google Android started over two decades. In response to the engineering and OneGIS brought consulting, witnessing a significant surge in demand market’s changing needs and to fuel development and systems integration with activation rate growing at a staggering growth, Rolta has acquired companies capabilities. rate. The company is now activating 700,000 with world-class IPRs, in addition to devices per day, translating into 255.5 million pure technologies, which have enabled With each of these acquisitions, Rolta added Android devices annually. At this rate, it is Rolta to move up the value-chain another piece of the GIS/CAD/CAM pie of its expected to outrun Apple by 2013 which is and offer cutting-edge solutions to product portfolio. These acquisitions have not selling nearly 260 million iOS devices50. customers world-wide. Forbes Global only brought in critical technology, in the form has ranked Rolta amongst the “Best of source code, design & software, but also As a result company’s revenues from 200 under a Billion” four times in six added rich domain knowledge, consultants, Android have been increasing at a years while the company was included project expertise, credentials, references and considerable pace. A small start-up which by Standard & Poor on their 2008 customers. Leveraging this expanding pool of remained dormant for some time even after Global Challengers List. its IPR, Rolta has also successfully launched its acquisition by Google in 2005, contributed various innovative solutions for its markets, nearly USD 1 billion to company’s revenues Through its intelligent extension of by offering differentiated solutions at the in 201051. It now contributes USD 2.5 billion expertise and knowledge acquired in high-end of the value chain, encompassing a year though mobile advertizing & services, one business, Rolta has successfully enterprise-level decision support systems growing 2.5 times in the last 12 months52. launched new businesses. Rolta’s for selected vertical segments. Rolta has acquisition strategy is clear and developed flagship solutions frameworks HCL – Axon focused. It acquires companies, that provide deep application integration and business divisions or technologies – insightful business intelligence across an HCL acquired Axon in December 2008 that are at the cutting-edge, synergistic enterprise. These include, Rolta Geospatial for USD 658 million53. The acquisition was with its lines of businesses, have Fusion in the geospatial domain; Rolta aimed at blending the SAP practice of target an established track record, give it OneView for process and power industries; with existing capabilities of acquirer and access to new markets, are culturally and Rolta iPerspective as a platform for IT come up with productised solutions for large compatible and enable it to move up integration and management. transformational engagements. Company’s the value chain. In line with this, Rolta revenues from Enterprise Applications Source: has acquired many companies like stream before the acquisition of Axon stood • Rolta Annual Report 2010-11 Orion in Canada, TUSC, Piocon and • Articles on Livemint, Pryroda and Directionsmag at USD 180.6 million in FY 2007 and USD OneGIS in the US. While Orion • Rolta Press release 206.5 million in FY 2008, accounting for • Rolta Chairman statement in Economic Times 13 percent and 11 percent of company’s revenues respectively. The acquisition was able to help the company expand its revenues from this stream to reach USD 718.0 million in 2011 accounting for 21.3 percent of company’s revenues54. Key Imperatives for Mergers and Acquisitions TCS BaNCS Make bolder acquisitions; not necessarily bigger TCS acquired Financial Network Services (FNS), an Australian core banking solutions Post Merger; Integrated or Federated? vendor in 2005 for approximately USD 26 million53. Post acquisition, TCS integrated Balance Acquisitions across the type of end-goals in mind it with its Financial Solutions portfolio, a company’s arm dedicated to provide Acquire with a long term view, not for short term revenue application solutions to financial institutions Eveluate and track success - Hive off if synergies are not realized globally. TCS BaNCS, its portfolio of banking solutions, has been deployed across 240 companies in over 80 countries55. Key Imperatives M&A is a necessary evil, which companies The company’s revenues from Banking, M&A is a route, which if executed need to embark after few years of existence Financial Services and Insurance (BFSI) successfully, can lead to targeted results for venturing into new direction and business vertical has grown from INR 2,796.8 crores which could take years to achieve if done models. in 2005 to INR 16,527 crores in 2011. As .3 in an organic fashion. Having said that, We explore some of the key imperatives a percentage of total revenues, the sector there have been numerous instances of which can be considered while venturing into currently contributes 44.28 percent of the spectacular M&A failures. The upshot is that M&A. company’s total revenues as against 34.48 percent in 200556. 49. Company Press Release 53. Company Press Release 50. “Google Is Activating 700,000 Android Devices Daily” December 2011, Business Insider , 54. Company Annual Reports 51. “How will Google make money from Android” September 2011, Microviews , 55. Company Data 52. “Mobile generating equivalent of $2.5bn a year, says Google chief “ October 2011, The Guardian , 56. Company Financial Reports © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 45. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 40 Make bolder acquisitions; not necessarily (that the parent company is not currently For example, in recent times a few Indian bigger exposed to). For acquisitions such as these, IT Players acquired companies to reach the Indian players will need to make bold bets the challenge will be to billion dollar threshold to be able to qualify – like acquiring a few startups which may for the larger transformational deals in the • Keep the acquired company independent seem completely irrelevant to what the marketplace along with the leaders. In other from the parent by having in place a company does; this will help them venture cases, companies resort to M&A primarily federated structure into disruptive technologies that will define to give a boost to their revenue owing to the markets of the future. The previous • Put in place a mechanism that allows pressure from investors. economic downturn had given the Indian the parent firm to leverage the benefits In summary, companies need to be cognizant industry a good opportunity to acquire derived from the acquired company of the value a particular deal brings in – both companies in western world owing to their despite a decentralized structure in place to the parent, to the acquired company and attractive valuations. Indian firms, however, to the industry as a whole; latter being an were conservative in their approach and did Balance acquisitions across the type of important factor especially in the coming not leverage this opportunity. end-goals in mind decade. Indian players will need to balance their Post Merger: Integrated Or Federated? Evaluate and track success - Hive off if acquisitions to ensure that while they synergies are not realized One of the key questions post M&A is ‘how make bold moves in trying to transform fast and effective’ has been the post merger their business model, they also need Conventional tenet of acquisition is to acquire integration. This is the right question to ask to continue to make acquisitions which a company and merge it with the parent so in scenarios where the acquisitions were of help their conventional businesses grow that it gets subsumed and becomes a part companies that are similar to the parent in through service line extensions, geographic of the parent company for life. However, terms of business, culture, ecosystem and expansions and the like. the list of M&A disasters is fairly large and focus. not all M&As turns out to be a success. In Acquire with a long term view; not for cases where companies are acquiring out To take a leap now, companies will need short term revenue spurt of their comfort zone, the probability of to acquire companies that are going to failures increases as there could be cases Though not necessarily limited to the IT be drastically different to them – culture, when synergies aren’t realized even with a industry, M&A has been used as a tool to business model, ecosystem, probably long wait. In such situations, the companies achieve sudden revenue spurts, though the geography, type of talent etc., will all be should be in a position to hive off the acquired end goal might be different for each company. different. These could be startups or a business unit (Eg.: eBay sold Skype in 2009 company dealing in business lines of future which was acquired in 2005). • Strategic M&A – acquire high margin, process disruption, smart decision support niche expertise businesses e.g. cloud including advanced analytics and bundling based receivables management , service + technology into new productized analytics in social media solutions. • New Product Innovation - leverage Government: Initiatives that the solution and services which can be government needs to take in order to created, packaged and sold as ‘products’ support innovation, in turn facilitating e.g. social media or supply chain analytics, non-linear growth in the industry anti-money laundering etc. The Government needs to enable an • Transaction based pricing – through environment that helps improve ‘innovation Mr. N.V. ‘Tiger’ Tyagarajan BPaaS & standardized offerings – e.g. in intensity’ of the service industry working HRO, OTC , insurance claims etc. with industry bodies, institutes, investors and President and CEO, service providers. Few specific areas that Genpact • Use SEP (Smart Enterprise Processes ) to should be worked upon are: drive Outcome based pricing Non-linear growth: Trends in the industry • Improve transparency and regulations • Drive Smart Decision Services to get to today, what is working and what is not. around private-public partnerships in the high value added predictive analytics Also, your company’s current initiatives field of higher / vocational education and for non-linear growth research Innovation in the IT-BPO/ITeS Sector in Most players including large BPO and ITO India: Views on the innovative models • Facilitate building technology and service players have placed strategic focus on non prevalent in the industry (products/ focused ‘incubators’ and forums bringing linear growth, but it hasn’t grown as fast as services/business models) and the together entrepreneurs, investors, one would have assumed. We continue to imperative for the industry to undertake companies, and institutes focused around see significant risk aversion to truly going innovation at multiple levels given the IP creation outcome based especially in developed market realities markets vs. emerging economies. The latter • Simplify regulations and procedures The potential for process innovation is much more open to these in particular required to establish businesses, conduct remains huge; there is significant client given lower legacy challenges, higher growth research and file for IPR especially for appetite, however, execution has been absorbing a lot more risk and being very good entrepreneurs and SMBs in technology slow, hampered by disagreement on scope at defining what is core vs. non-core. and services and lack of effective governance including At Genpact, we’re looking specifically at 5 shared investments and risks. At Genpact, levers for non-linear growth our innovation efforts are focused around© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 46. 41 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Section 3 The way forward Implications for Software service providers can accelerate their growth and reposition themselves in the models and investing in IP/patents/ products, software patent disputes are other players in the market place by adopting certain non linear initiatives. However, apart from software bound to rise. Hence, there is a strong need to evaluate and update current patent ecosystem companies, we believe that a transformation of this magnitude can happen with support protection laws to avoid future litigation and provide global clients the confidence of other players in the ecosystem – which in to work with Indian companies. our case constitutes government, industry bodies, academia, clients, PE/VC Funds and • Cybercrime: With the phenomenal consultants. growth of the industry, the last few years witnessed a sharp spurt in cybercrime. The Government needs to proactively frame policies to facilitate investigation Government and prosecution in cases of cybercrimes The Government’s role in the future of this by corporate and individuals. The redressal sector is multi-fold: mechanisms in particular needs to fast, • Help create an environment that is simple and convenient. conducive to innovation and growth • Funding: Government should encourage • Rationalize taxation structures and transfer public-private investment vehicles to Pricing Laws channel large sources of funds towards start-ups, small and mid-sized firms • Provide adequate future-ready for promoting entrepreneurship in the infrastructure to nurture the industry country. The government could also review • Help develop the domestic market restrictions on non-corporate organization structures for venture investing. Favorable policy actions by the government around these four aspects will encourage the • Global outreach: The government could Indian players to strengthen their services for explore partnerships with countries of the global marketplace and foster innovation strategic importance to establish bi- that can be taken global. In addition, MNCs national/multi-national funds for investing will be encouraged to invest more in R&D in product ideas in designated areas of specific work in India, helping build the mutual importance. ecosystem and talent pool required for idea incubation and development. Rationalize taxation structures and transfer pricing laws Create conducive environment for • Transfer pricing: While on one hand the innovation and growth Indian revenue authorities have been • IP protection: With companies aggressive on the IT-BPO Sector, on increasingly focusing on new business the other hand several new measures introduced by the government in the © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 47. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 42recent years which hint at the underlying salaries, R&D, admissions etc. providing investors and associated organizations (e.g.positive mindset that the Government them greater autonomy. Further, increased incubators) would go a long way in promotionis aiming at relieving the taxpayers from role of private partnerships in setting up the Indian ‘IP’ brand.the operational burden of transfer pricing institutions of higher education can becompliance as well as faster solutions to the explored. Idea incubation through mentorship anddisputes. We believe once APA is introduced fundingin the DTC, it will definitely help bring more • Incentivize institutions of higher Industry bodies can catalyze the setting upcertainty to the players. learning: In order to encourage R&D and of incubation cells and development of broad innovation, government can incentivize ecosystem into which entrepreneurs, SMBs• Tax: While the original tax exemption the government-funded institutions based and innovators can plug into and develop (Section 10A/10B) for the industry has now on patents filed, R&D effort, research innovative solutions, products and platforms. expired, given the state of global economy papers published, research work done for Apart from this, they could also potentially and the Indian IT Industry, the government corporate and similar initiatives. collaborate on setting industry standards should frame policies around selectively and integration frameworks for technology providing tax relief to companies within Help develop the domestic market development. Industry bodies can play a the sector. Government investment will be vital to pivotal role in providing greater access to encourage increased technology usage alternate sources of public and private funds -- Tax rebates on new growth models: through e-governance initiatives. The which would provide immense opportunities Favorable tax rebates could be provided government needs to expand the scale and for startups to get funding in seed, early and to both the suppliers as well as users of scope of its existing efforts to provide citizen growth stages propelling their growth. software (e.g.: cloud, mobility, etc.) by services online. This may either be facilitated rationalizing the tax and duty structures through public-private partnerships or Establish and strengthen linkages viz. state levies such as VAT, CST, entry between academia incentivizing the private sector to undertake tax. these projects. The government should also To ensure that the talent pool required for the -- Tax rebates on R&D investments encourage greater industry participation in industry is ‘relevant’ and of highest quality, by IT-BPO Companies: Under the sectors such as healthcare, education, public it is imperative that industry bodies act as provisions of the Act1, tax rebate is services, financial services, defense, space, facilitators in establishing close linkages available on carrying out in-house R&D nuclear energy, etc. between academic institutions, government to eligible companies. A clarification bodies and corporate. Providing a platform to by the government regarding the interact and exchange ideas would help bridge availability of this tax rebate to IT-BPO Industry bodies / Associations the demand-supply gap of talent pool. companies would be a welcome move. Industry bodies and associations can IP/Product R&D is a nascent and capital play a significant role in encouraging intensive area. A huge tax burden will entrepreneurship, bringing innovation and Academia only dissuade the organizations from facilitating policy decisions. They would need Academia plays an active role in the software making large investments in IP and to make concerted marketing and branding ecosystem by providing the talent pool which other intangible assets. efforts to showcase the non-linear expertise forms the backbone of software industry. Skill of Indian companies; erstwhile known only for shortage is the single most disabling factor inDevelop infrastructure providing cost arbitrage. This will significantly the industry today, impeding the innovation• Infrastructure development: The enhance the value proposition and brand cycle and causing a slower adoption to non- Government can give a boost to the perception of Indian software providers. In linear growth among providers. industry by making IT hubs in tier-2/3 addition, they would need to highlight the cities and developing satellite townships emerging opportunities in domestic market The academia needs to complement industry around these hubs, thus, creating a self- and help establish connects between efforts by introducing new relevant modules, sustaining ecosystem. Several academic customers, academia and Indian companies. as well as building entrepreneurial and soft institutions could be established around skills. these townships ensuring sufficient Governance of IPR availability of skilled talent pool, critical Industry bodies can play a critical role in Teaching to think for the sustenance and growth of the IP governance and create awareness on Most Indian institutions have been industry. This will help the industry tap into Intellectual property rights and patents encouraged on ’Teaching’ methodology and entrepreneurial talent in the hinterlands. issues. They can help establish links with IP/ emphasized on ‘memorization’ rather than patent experts in the industry. encouraging a ‘Thinking’ mindset. Students• Broadband connectivity and computing are not usually encouraged to think creatively infrastructure: The Government needs to Branding and promotion or exercise critical thinking skills. This could be invest in increasing broadband penetration Industry bodies need to make focused efforts because Indian industries in the 60s and 70s and provide computing infrastructure at to promote Indian IP brand value. This could required certain basic skill sets and a majority subsidized rates to schools, universities, be done through focused branding events of the students inculcated only those before large corporate, SMBs etc. This would and trade development initiatives. Also, they moved into the labor pool. But while the ensure the accelerated development of a collaboration with international or overseas earlier forms of teaching helped serve the large market for emerging technologies associations and investor-groups in key basic needs of the nation and industry, the like cloud, social computing, analytics, etc. targeted overseas markets can help facilitate education system now needs to transform establish appropriate linkages between itself to address the reality of a rapidly• Framing policies for establishing world- Indian players and overseas investors. changing marketplace by developing ‘thinking class institutions: Government needs to Further, establishing a process to recognize, minds’ with an emphasis on research and evaluate the effectiveness of regulating acknowledge and highlight the success innovation. top institutions and could explore easing stories of Indian companies, entrepreneurs, regulatory controls over issues like faculty1. Section 35(2AB) of the Act © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 48. 43 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Partnership between Industry and be undertaken by clients in the near future investments. To foster and bolster the growth – especially with the new technologies and of technology start-ups in the country, PE/VC academia – eesearch and curriculum service delivery frameworks. firms would proactively need to be involved Joint efforts by industry and academia in identifying the early-stage technology will ensure that there is sufficiently skilled Open mindset startups and nurture them for better returns. manpower to drive the software story into its Clients would need to have an open mindset Apart from developing the ecosystem to next phase of growth. Industry participation with respect to the changing realities in create and grow start-ups, creating an exit on a continual basis is vital for relevant the marketplace. They would need to be ecosystem is critical for sustainability of early- curriculum design and focus areas for more receptive in the adoption of new stage investments in India. research. Accordingly, academia should reach technologies like cloud, mobility, platforms, out to industry for guidance on curriculum etc. Investments in adoption of these formation – including increased ‘internship’ technologies at early stage can help draw the Consultants – Business, process time for students within the industry. long-term benefits in their growth story. Further, academia-industry interactions and financial through forums would help in reducing the Joint Initiatives for new technologies Consultants, whether they cater to the demand-supply gap and address the issue issues at strategic, financial or process The changes we will witness during this of ‘quality’ of talent. Industry players should levels, have always been at the forefront of transformation will not be evolutionary. It will also come forth and provide support and bringing thought leadership in the industry. have impact on every aspect of the service funding for research initiatives, especially Their role is getting increasingly relevant in model – right from the solution to the mode in areas that are relevant to their business. an era where India wishes to lead from the of delivery and pricing. This will require Further, encouraging industry players to own front. Consultants will play a critical role in the clients and their technology partners or sponsor institutes can lead to setting up of engaging with IT players and clients and to work very closely, as it is impossible increased industry-academia interactions. guide them through this major change over for the technology provider or the client to next few years. They will need to play the role single handedly bring about a change of this Use of technology to enhance value and magnitude. of partners and help their customers frame spread of education and execute their next stage of business and Transparency financial growth plans. Academic institutions could become part of the new digital revolution and leverage Transparency has traditionally been Keep ahead of the curve technology innovations in cloud, mobility, demanded from service providers; but we The consultants will need to proactively keep web-based delivery for expanding the breadth believe that for the kind of changes the track of the developments in these new and depth of its reach. industry is bracing itself up for, the clients emerging models and engage with customers – especially large ones and the service to help them stay ahead of the curve. They Vocational training for ‘Ready to Work’ providers will have to work together as a will need to be aware of the increasing human capital team, be open about their mutual objectives complexities arising in the marketplace and and discuss limitations and business goals. While R&D and Product Development takes enable their customers to address these center stage in this phase of growth, the challenges through proper planning and industry will still need to be supplied with Take calculated risks – Engage with execution on business as well as financial resources skilled in the basic IT skills to consultants front. carry on business as usual work. As new As some of the non-linear models are technologies start becoming more common disruptive in nature, customers will need help Help conceptualize products and new in the service delivery process, the academia and guidance before they invest heavily in markets based on experience and in partnership with the industry will need to these areas. Challenges in areas of change, set up the infrastructure to train people in the process, and technology can only be dealt exposure new technologies. Given the rapid expansion with holistic approach and not by dealing with Consulting organizations will need to assist and growing needs of this industry, the issues in isolation as these changes would companies in conceptualizing non-linear infrastructure will need to be rapidly scalable be impacting an organization and would not models relevant to the market and devise and will need to have its reach across India’s be limited to a specific business unit. To avoid strategies for new market development geographical expanse. This is particularly taking an imprudent risk, both, the service and penetration. They should bring to table important since all the major centers (Tier provider and the clients will need to know thought leadership in the various components 1 cities) have almost completely exhausted the ramifications that the change will bring of the changing technology landscape - new their local talent pool. about. Consultants, with their exposure and solutions and offerings, product ideas, their ability to closely track the changes in platforms, pricing and branding strategies the market can be of immense value in such so as to enable Indian players leverage situations. opportunities for non linear growth effectively. Clients The clients, while they sit on the other side of the table, constitute a stakeholder of paramount importance in the ecosystem. PE/VC In the current scenario, VCs and PEs are Vendors as ‘Partners’ primarily involved in late stage or growth Clients would need to look at their erstwhile stage which constitutes ~49 percent of the vendors as strategic “partners” and advisors total deals (72 percent in value) while funds who can play an integral part in their growth invested in early stage deals constitute ~25 story. Close collaboration between the percent of total deals (4 percent in value)2. two will be key to ensuring success in the Also, PE/VC firms in India are sector agnostic large transformational initiatives that will and prefer to be opportunistic with respect to 2. Venture Intelligence accessed January 3, 2012, Data does not include real estate deals © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 49. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 44 Zhongguancun Technology Park was a tiny recently proposed the area for designationCase Example village. Entrepreneurs survived by taking in as a “special zone for talent development” ,Zhongguancun used to be a small farming government contracts, and hiring students the first in China to make a formal proposalvillage tucked away in the northwestern part to do the work. Gradually, it expanded to for talent development. This is expected toof Beijing city in the 1950s, largely off the include a number of other high-tech zones position Zhongguancun as a “one-stop shop”administrative and public radar. It all changed and parks throughout Beijing, integrating for attracting skilled professionals, helpingfifty years later, in June of 1999, under the a number of sectors including education, them set up businesses, and promotingguidance of the government’s strategy of R&D and manufacturing. The next milestone research. The Beijing municipal governmentDeveloping the Nation through Science came with approval by the State Council as has established a special fund of up to 10and Education, when the Zhongguancun a national innovation demonstration zone. billion yuan a year to subsidize high-tech R&DScientific and Technological Garden was Today, the Zhongguancun Scientific and professionals and promote industrialization ofestablished. It was the first state-level hi-tech Technological Garden has more than 8,000 their research. In addition to the government,industrial development zone to be founded in hi-tech enterprises, with 23 world-famous Bank of China, Bank of Beijing and ShenzhenChina. Thus began the story of a remarkable transnational corporations, 4 of the top 10 Development Bank, as well as a number oftransformation of a farming village into what international software companies, and 43 of venture capital companies, are also offeringis now known as “China’s Silicon Valley” , the world’s 500 most powerful enterprises. financial backing for new startups in thehome to locally spawned globally known firms In addition, the city has 40 universities and area. Through such preferential policies,like the Stone Group, Founder, and Lenovo colleges, 200-odd research institutions, Zhongguancun is expected to attract 30,000and as research and development base of 67 State-level laboratories, 24 university- new high-profile professionals from 2011 tomajors such as Google, Intel, AMD, Oracle sponsored science parks and 29 innovation 2012 and another 50,000 from 2013 to 20153.Corporation, Motorola, Sony, and Ericsson1. parks2. Source: 1. A Geek’s Guide to China’s Silicon Valley, www.techcrunch.com,This remarkable transformation came through To aid in sustainable growth, the published 27th December, 2011concentrative efforts of the government, administration committee at Zhongguancun 2. www.china.org.cnacademia and industry. When it began, National Innovation Demonstration Zone 3. Zhongguancun: Talent for transformation published in www.chinadaily. com.cn, 21st December, 2011 © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 50. 45 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry About KPMG KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 150 countries and have 138,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such. Our Audit practice endeavors to provide robust and risk based audit services that address our firms’ clients’ strategic priorities and business processes. KPMG’s Tax services are designed to reflect the unique needs and objectives of each client, whether we are dealing with the tax aspects of a cross-border acquisition or developing and helping to implement a global transfer pricing strategy. In practical terms, that means KPMG firms work with their clients to assist them in achieving effective tax compliance and managing tax risks, while helping to control costs. KPMG Advisory professionals provide advice and assistance to enable companies, intermediaries and public sector bodies to mitigate risk, improve performance, and create value. KPMG firms provide a wide range of Risk Consulting and Management Consulting that can help clients respond to immediate needs as well as put in place the strategies for the longer term. KPMG in India, a professional services firm, is the Indian member firm of KPMG International and was established in September 1993. Our professionals leverage the global network of firms, providing detailed knowledge of local laws, regulations, markets and competition. We provide services to over 5,000 international and national clients, in India. KPMG has offices across India in Delhi, Chandigarh, Ahemdabad, Mumbai, Pune, Bangalore, Chennai, Kochi, Hyderabad and Kolkata. The firms in India have access to more than 5,000 Indian and expatriate professionals, many of whom are internationally trained. We strive to provide rapid, performance-based, industry-focused and technology-enabled services, which reflect a shared knowledge of global and local industries and our experience of the Indian business environment. kpmg.com/in © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 51. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 46 About CII The Confederation of Indian Industry (CII) is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India’s development process. Founded over 116 years ago, it is India’s premier business association, with a direct membership of over 8100 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country, CII carries forward its initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few. With 64 offices and 10 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 223 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community.© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 52. 47 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Glossary ADM Application Development and Maintenance ISV Internet APA Advanced Pricing Agreement IT Information Technology APAC Asia-Pacific ITeS Information Technology Enabled Services ARPU Average Revenue Per User JV Joint Venture BFSI Banking, Financial Services and Insurance KM Knowledge Management BI Business Intelligence KPI Key Performance Indicator BPaaS Business Process-as-a-Service M&A Mergers and Acquisitions BPO Business Process Outsourcing MAT Minimum Alternate Tax CAGR Compounded Annual Growth Rate MDM Master Data Management CAD Computer Aided Design MNC Multinational Companies CAM Computer Aided Mapping NASSCOM National Association of Software and Services Companies Capex Capital Expenditure NCP New Computer Policy CIMS Census Information Management System NGO Non-Governmental Organization CIO Chief Information Officer NIC National Informatics Centre CMM Capability Maturity Model NIIT India based IT training institute CoE Centre of Excellence NLD National Long Distance CRM Customer Relationship Management NSE National Stock Exchange CST Central Sales Tax Opex Operating Expenditure DTC Direct Tax Code PaaS Platform-as-a-Service EBIT Earnings Before Interest and Taxes PE Private Equity EOU Export Oriented Unit R&D Research and Development ER & D Engineering Research and Development RPE Revenue per employee ERM Enterprise Resource Management SaaS Software-as-a-Service ERP Enterprise Resource Planning SEZ Special Economic Zone FDI Foreign Direct Investment SI System Integration Forex Foreign Exchange SLA Service-Level Agreement FP Fixed Price SMB Small and Medium Business GDP Gross Domestic Product SRM Supplier Relationship Management GIS Geographic Information System STP Software Technology Park GPS Global Positioning System T&M Time and Material HR Human Resource TCO Total Cost of Ownership IaaS Infrastructure-as-a-Service US United States ICT Information and Communications Technology USD United States Dollars ILD International Long Distance VAS Value Added Services IMS Infrastructure Management Services VAT Value Added Tax IP Intellectual Property VC Venture Capital IPR Intellectual Property Rights VPN Virtual Private Network IRA India Revenue Authorities © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 53. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 48DefinitionsAccelerators Frameworks designed to automate repeatable tasksAmortization Spreading payments over multiple periodsArbitrage The simultaneous purchase and sale of an asset in order to profit from a difference in the priceAttrition Also called employee turnover - it is the rate at which an employer gains and loses employeesAutomation The use of control systems and information technologies to reduce the need for human work in the production of goods and servicesBottomline Net IncomeBusiness-continuity Identifies organizations exposure to internal and external threats and synthesizes hard and soft assets to provide effective prevention andplanning recovery for the organization, whilst maintaining competitive advantage and value system integrityCaptive Wholly owned subsidiary The delivery of computing as a service rather than a product, whereby shared resources, software, and information are provided to computersCloud computing and other devices as a utility (like the electricity grid) over a network (typically the Internet)Commoditized Process, good or service easy to obtain by making it as uniform, plentiful and affordable as possible Software deployment includes all activities that make a software system available for use. These activities can occur at the producer site orDeployment at the consumer site or both Spending that must be done for the long term profitability of a company, but may be postponed from the current period(s). This includesDiscretionary spend equipment replacement, equipment upkeep (often referred to as repairs and maintenance), marketing, research and development and training Knowledge, experience and competence that have been acquired through a consistent track record of successful projects accomplished inDomain expertise various domain arease-Commerce Buying and selling of products or services over electronic systemse-governance Technology driven governanceEnablers Suite of software that facilitates the development of applications and adapt changesEnterprise Mobility The ability of an enterprise to connect to people and control assets from any locationFixed Price A contract where the payment does not depend on the amount of resources or time expendedHub and spoke model System of connections (spokes) arranged around a central node (hub)Incubator Programs designed to support the development of entrepreneurial companiesInflation A rise in the general level of prices of goods and services in an economy over a period of time Refers to the ownership of intangible and non-physical goods. This includes ideas, names, designs, symbols, artwork, writings, and otherIntellectual Property creations A range of strategies and practices used in an organization to identify, create, represent, distribute, and enable adoption of insights andKnowledge management experiences. Such insights and experiences comprise knowledge, either embodied in individuals or embedded in organizations as processes or practices The linear model of growth implies the outcome is exactly proportional to the input. With respect to the software industry it assumes thatLinear Growth company revenues will grow in direct proportion to employee addition Process of moving from the use of one operating environment to another operating environment that is, in most cases, is thought to be aMigration better oneMultimedia Media and content that uses a combination of different content formsNon-linear Growth Implies a disproportionate increase in revenues relative to the increase in operating costs, thus having a salutary effect on profitability Offshore outsourcing is the practice of hiring an external organization to perform some business functions in a country other than the oneOffshore where the products or services are actually developed or manufacturedOutcome-based pricing Pricing model where clients are charged based on business results achieved A form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for aPatent limited period of time in exchange for the public disclosure of an invention© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 54. 49 | Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry Pay-per-use Pricing model where the client is charged based on its usage of services Piracy Unauthorized duplication of an original for commercial gain A computing platform includes some sort of hardware architecture and a software framework (including application frameworks), where the Platform combination allows software, particularly application software, to run. Typical platforms include a computers architecture, operating system, programming languages and related user interface (run-time system libraries or graphical user interface) Private cloud Proprietary computing architecture that provides hosted services to a limited number of people behind a firewall The economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety Protectionism of government regulations designed to allow (according to proponents) "fair competition" between imports and goods and services produced domestically Based on the standard cloud computing model, in which a service provider makes resources, such as applications and storage, available to Public cloud the general public over the Internet Refers to the southern part of the San Francisco Bay Area in Northern California in the United States. The region is home to many of the Silicon Valley worlds largest technology corporations A high-end mobile phone built on a mobile computing platform, with more advanced computing ability and connectivity than a contemporary Smartphone feature phone Social Media Includes web-based and mobile technologies used to turn communication into interactive dialogue A framework of agreements to which all relevant parties in an industry or organization must adhere to ensure that all processes associated Standardization with the creation of a good or performance of a service are performed within set guidelines Bringing together of the component subsystems into one system and ensuring that the subsystems function together as a system. In System Integration information technology, systems integration is the process of linking together different computing systems and software applications physically or functionally, to act as a coordinated whole Third-party A situation where an IT services vendor utilizes a third-party’s product offering to offer a customized solution to its client implementation A project billing type whereby the customer is charged for all of the hours of work performed, any direct expenses incurred, and material Time and Material purchased during project delivery Topline Net Sales These are major contracts involving business process improvements and re-engineering to overhaul an organization operations to drive Transformational deals productivity Utilization rates Also known as chargeability ratio, it is the percentage of total labor dollars or hours spent or charged to project production A technique for hiding the physical characteristics of computing resources to simplify the way in which other systems, applications, or end users interact with those resources. Virtualization lets a single physical resource (such as a server, an operating system, an application, or Virtualization storage device) appear as multiple logical resources; or making multiple physical resources (such as storage devices or servers) appear as a single logical resource The Year 2000 problem (also known as the Y2K problem, the millennium bug, the Y2K bug, or simply Y2K) was a problem for both digital and Y2K non-digital documentation and data storage situations which resulted from the practice of abbreviating a four-digit year to two digits. © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 55. Non-linear Growth Model – Driving Profitability, Bolstering the Indian IT Industry | 50AcknowledgementThis document has been released in “India IT Summit 2012” organized by Confederation of Indian Industry.The KPMG team, who has contributed towards the content presented in this document, comprises ofArun Chillara, Saurabh Jha, Sanjay Seth, Akash AroraNikhil Kumar, Smita Bhattacharya, Aljo Joseph, Aditya ShanglooShireen Khan, Ajay Nainy, Eric SamuelA special note of thanks to Jiten Ganatra, Remedios Dsilva and Priyanka Agarwal© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 56. KPMG in India Contacts CII ContactsRajesh Jain NMP JeyeshPartner and Head Deputy Director andMarkets Head - Kerala State OfficeT: +91 22 3090 2370 T: +91 484 401 2300E: rcjain@kpmg.com E: jayesh@cii.inPradeep UdhasPartner and HeadIT - BPOT: +91 22 3090 2040E: pudhas@kpmg.comArun ChillaraAssociate DirectorIT - BPOT: +91 22 3090 2392E: arunc@kpmg.comSaurabh JhaManagerIT - BPOT: +91 22 3090 1897E: saurabhjha@kpmg.comkpmg.com/inThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.Printed in India.