How can Indian IT companies achieve non-linear growth?
How can Indian IT companies
achieve non-linear growth?
Ramamurthy Prakash B
Howcan Indian IT companies achieve non-linear growth? TOC
Table of Contents
1. OVERVIEW............................................................................................................................... 1
2. CUSTOMER EXPECTATIONS...........................................................................................................2
3. INDIA INC’S CAPABILITIES............................................................................................................. 3
4. NON-LINEAR GROWTH ................................................................................................................ 3
4.1. Why a radically new approach? ...................................................................................... 3
4.2. The proposed approach .................................................................................................4
4.3. The Round ABOUT way!.................................................................................................5
4.4. How this approach contributes to non-linearity?............................................................. 7
4.5. Otherimpacts caused by the suggested approach........................................................... 7
4.6. Go to market strategy....................................................................................................7
4.7. Organizational Structure ................................................................................................ 9
4.8. Measuring success of non-linearinitiatives.................................................................... 10
5. CONCLUSION.......................................................................................................................... 11
Howcan Indian IT companies achieve non-linear growth? 1
The Indian software industry has come a long way since it was started as a fledgling industry
in the nineties. From US $150 million revenue in 1991-92 the industry has grown at an
approximate CAGR of 33% to US $50 billion revenue by 2009-10. According to a recent
McKinsey report, Indian software industry accounts for close to 6% of the global IT services
and 65% of global IT off-shoring.
The business success of the Indian IT firms so far has been due to the accessibility of low
cost technical resources – India has skilled manpower whose salary levels were much lower
than those elsewhere in the world. So the Indian firms could bid for projects in US and
execute them in India, making a handsome profit from the difference in wage rates. In such
a model the revenue of an IT firm is directly proportional to the number of projects
executed, which in turn depends on the
number of resources deployed.
However, like any business model, this
model is not sustainable forever. As the
Indian IT firms aggressively ramped up
resources, the revenue per employee
started declining perhaps due to the
economic law of diminishing returns.
The increasing wage rates & foreign
exchange fluctuations made the matter
only worse. Today, for a firm to go from
$2 billion in revenue (60,000
employees) to $10 billion, it has to
recruit approximately 240,000 more
employees. On the other hand,
countries such as China, Russia,
Philippines and South Africa are quickly
catching up on the low cost model,
eroding the competitiveness of India.
This is a strategic inflection point for the
industry. To continue thriving, the Indian software industry needs to find ways to move
away from low-cost based revenue models. There is a need for a new delivery model which
is tied to output/outcome and “value added” rather than the number of personnel engaged.
At the outset, this paper suggests a new delivery model that can help Indian IT companies
achieve non-linear growth. The methodology for arriving at the model is as follows -
1. Identify customer expectations from IT outsourcing
2. Identify core strengths of Indian IT companies
3. Juxtapose the expectations against core strengths to identify Key Performance Areas
(KPAs) where significant value can be created
4. Conceive a new model that delivers on the KPAs
In capitalist reality, as distinguished
from its textbook picture, it’s not
the price-based competition which
counts but the competition from
new commodity, the new
technology, the source of supply,
the new type of organization -
competition which strikes not at the
margins of the existing firms but at
their foundations and their very
- Joseph Schumpeter
Howcan Indian IT companies achieve non-linear growth? 2
2. CUSTOMER EXPECTATIONS
1. Raise enterprise effectiveness: Today, customers are seeking various new capabilities
from IT outsourcers. They want the IT service firms to not just lower costs but also
participate in business outcomes. Instead of transferring application development to a
low cost offshore destination, customers expect suppliers to understand their area of
business and help develop customized platforms that can radically improve the overall
2. Reduce total cost of ownership: The current off-shoring model entails the following
additional costs to the customer –
Validation and verification costs
Project management overheads
Maintenance and upgrading costs
Cost of delays in delivery
Customers want these costs to be minimized to the extent possible.
3. Mitigate risks: All new projects are inherently laden with risk. With significant capital
going into development and upkeep of information systems, the customer faces risks of
not getting sufficient returns from his IT investments. These risks could be due to
changes in technology or external economic factors. The IT vendor is expected to
mitigate such risks by advising the customer on industry trends & competitiveness.
4. Improve business agility: Customers need a lot more flexibility than before. When the
business is growing they would like to scale up, deploy more resources and go to the
next operating level as fast as they can. But when there is a slump, they would like to
immediately withdraw investments and reduce operating costs significantly. In both
cases they need a trusted partner who can give them the flexibility of scaling up and
ramping down at the push of a button.
5. Legacy application management: It is not uncommon for some companies, especially in
the financial services industry, to have a bunch of legacy applications which fall in one
or more categories below:
The technology used to develop the applications is obsolete now
The people who built the applications are not in the organization anymore
No documentation is available for maintaining these applications
Companies have a very difficult time managing this kind of applications. They cannot
dispose off or redesign these applications because so much of business logic would
have been built into the applications over the years that not one person knows how to
replicate it. Companies want outsourcing firms to dissect the functionality of such
Howcan Indian IT companies achieve non-linear growth? 3
applications and rebuild them using the latest technologies and following appropriate
3. INDIA INC’S CAPABILITIES
The ‘Resource Based Model’ is used to identify the resources and capabilities that led to the
success of Indian IT companies. The six major factors identified are summarized below:
Yes Yes Yes Yes Yes Yes
Demand Doesit help
Yes Yes Yes Yes Yes Yes
Yes No Yes Yes Yes Yes
No No Yes No Yes Yes
Inimitability Durability Medium
Long term Long term
Unique No No No No Yes Yes
Low Low High Low High High
Low Low Medium Low Medium High
No Yes No No No No
4. NON-LINEAR GROWTH
4.1.Why a radically new approach?
Some obvious options for achieving non-linear growth are
1. Switching from services to product development
2. Strategic acquisition of product companies
3. “Moving up the value chain” – Consulting services
However, all these methods involve huge investments upfront. Product development
requires investment for building IPs, acquisitions need huge cash for buying out and
consulting needs money for hiring a pool of reputed consultants. The risks arising out of
these choices are also high. More importantly, there are fundamental differences between
Howcan Indian IT companies achieve non-linear growth? 4
the current Services model and these “non-linear” models – be it culture of the
organization, estimation methods, people management, pricing and performance
management. Last but not the least, the ordeal of transforming hundred thousand
employees to think differently is simply gargantuan. In this context the million dollar
question is - Is there a new way of bringing non-linearity to traditional service-oriented
thinking, gradually and without huge investment outlays and risks?
4.2. The proposed approach
We attempt to answer the question by drawing parallels between the business models of
Global IT services & Infrastructure sector in India. The conventional execution model in the
infrastructure sector has been similar to that followed in IT services sector –
1. The Government lays down the specifications of the structure to be built.
2. The Government calls for tenders and awards the project to the lowest bidder.
3. The contractor executes the project and hands it over to the Government.
4. The Government verifies the work and disburses the payment to the contractor.
This approach comes with some significant shortcomings -
1. Since project is awarded strictly based on bid price, the contractor can achieve
profitability only by controlling the costs. This can lead to poor quality of construction.
2. Poor planning and last minute changes in specification (“scope creep”) lead to schedule
overruns and & increased cost.
These issues led to the emergence of an innovative execution model known as the Build-
Operate-Transfer (BOT) model. The vital steps in this process are
1. The Government lays down the specifications of the structure to be built.
2. The Government awards the project based on the technical capabilities of the bidder.
3. The contractor executes the project but doesn’t hand over the structure immediately
4. Under a public-private partnership arrangement, the contractor operates/maintains the
facility for a certain period of time. During this time, the contractor will have access to
the project cash flows and will share a portion of the cash flows generated with the
Government in a predetermined proportion.
5. In effect, the ownership of the asset is jointly held with primary responsibilities of
operations and maintenance resting with the contractor.
6. On the lapse of the predetermined timeframe and once the primary objectives of the
contract have been met, the contract can either be transferred back to the Government
or the arrangement renewed for an extended timeframe.
In this approach the contractor’s profitability is derived from the project’s future cash flows.
Hence, the contractor takes keen interest in creating value rather than decreasing costs
Howcan Indian IT companies achieve non-linear growth? 5
1. The contractor deploys his specialists who bring in best knowledge and skill-sets
2. The contractor will be in the best position to operate/maintain the construction due to
his familiarity of the project
The BOT model is considered to be very successful. Konkan railway, Hyderabad International
Airport and Delhi Metro are some of the successful projects executed in this model. We feel
that the BOT model can be successfully applied to the IT sector as well, albeit with a few
minor modifications, to achieve non-linear growth.
4.3. The Round ABOUT way!
Every organization has a limited set of resources. It is in the best interests of an organization
to deploy its major resources in core activities that directly impact the customer experience
and leave the non-core processes to third-party vendors. Let us take the example of an
investment bank, whose primary function is to buy and sell securities on behalf of its
customers. The formulation of appropriate buy/sell strategies and providing guidance to
customers form the core of its operations. The effectiveness of these processes
differentiates an investment bank from its competitors. Other activities such as developing a
SEC compliance & reporting systems are fairly generic and non-core to the bank’s business.
The investment banks understand this pretty well, and so each of them separately engages
an IT vendor for that purpose.
There are close to 16 full-service investment banks in the world, and each of them
separately outsources the development of the reporting system to a different vendor. As a
result the same system gets developed by different IT vendors, perhaps in different
technologies and architectures. Whenever there is a change in SEC’s compliance norms,
these investment banks have to engage the IT vendors again to get the changes
incorporated into the system. Add to that expenditure the cost of validation & verification in
every iteration, project management overhead and budget creep - the total cost of
ownership for each bank skyrockets.
If an IT vendor proactively identifies the generic applications in a particular sector, develops
them by liaising with a dominant player in the industry, acquires an IP and offers the
solution to the other players in the industry then he would have created value for himself as
well as for the sector. The crux of the idea is “Same to More” -achieving non-linear revenue
growth by building the system once and selling it to multiple vendors. In the process, the
vendor company can also transform its purely transactional relationship with the clients into
a collaborative relationship and thereby extract more value for itself as well as the clients.
We identified the following critical steps involved in this model:
A strong association with the client is a prerequisite for applying this model. To start with,
vendors provide the customer low-end IT solutions such as routine data processing or legacy
Howcan Indian IT companies achieve non-linear growth? 6
system maintenance. As the engagement matures the vendor gets exposed to various
aspects of the customer’s IT systems
as well as the modalities of doing
business with him. Once the vendor
gains significant knowledge and trust
of the customer, he is ready for the
The client has sound business
knowledge. The vendor has excellent
skills in system design and
implementation. They both come
together and build a standardized
application. The client transfers the IP
to the vendor by virtue of his strong
association with the vendor as well as his willingness to get out of the non-core activities. In
return the vendor may discount or waive the cost of development or agree to pay royalties
for a certain period of time (depending on the terms of the contract).
The vendor maintains/operates the system for a fixed fee and ensures uptime based on pre-
defined SLAs. The familiarity of the project enables the vendor to operate or maintain the
system more efficiently. Operating the system enables the vendor gain deep expertise in the
functionality of the application. This opens up the opportunity of showcasing the model to
other players in the same industry. In fact, the client will be interested in promoting the
application to his competitors in the same industry – One, because the product matures as
more and more companies adopt it, and the client benefits from a matured product. Two,
the client makes a tidy royalty in the process. Three, when the rate of adaptation increases
and an industry wide norm emerges, the product essentially becomes commoditized –
making it easy for the customer to delegate the non-core activity to his partners at non-
The vendor will be in a position to provide patches and upgrades as and when there are
changes in business rules. This is particularly useful in the financial industry where the
regulatory requirements frequently change. On account of wide adaptation of the
application, the vendor will also be able to collate the best practices from various
implementations and make them part of the solution, creating more value for his clients.
Howcan Indian IT companies achieve non-linear growth? 7
If the client company chooses to maintain the application on its own, the vendor will
transfer the application. However, the vendor still retains the code base, IP and rights to
reuse. The association between the client and vendor deepens, leading to more
engagement opportunities and value sharing.
4.4. How this approach contributes to non-linearity?
As the cycle described above repeats
itself, the vendor would acquire
significant business knowledge and a
portfolio of applications relevant to a
specific industry. At that point, the
vendor can steer new customers towards
their established service foot print and
take advantage of the scale benefits,
software platform and deep domain
The profit margin becomes a factor of not the number of employees worked but the
number of implementations done, recurring licensing and maintenance fees. Thus the
linkage between revenue and number of resources involved is gone.
4.5. Other impacts caused by the suggested approach
We frequently hear software engineers quip - “Bugs are our job security!” It sounds funny
but at the same time true! Majority of revenues for the IT service companies come from
application maintenance & support. At the other end of the spectrum, the poor quality of
developed software is one of the biggest concerns for the clients. Indeed the source code
shipped is sometimes poorly reviewed and tested. Adopting the ABOUT model makes the
project team responsible for the outcome, quality and revenues of the project.
This framework also enables the organization negotiate the balance between flexibility,
reliability and efficiency to gradually transform into a hybrid product-service company – that
provides more customization than a pure play product company and more standardization
than a simple services company.
4.6. Go to market strategy
Checklistfor goodness offit
We believe answering the following questionnaire* helps identify the right candidates for
this model. If your answer is “Yes” to 8 or more questions below, it is understood that the
case is a good fit to go further with the model.
Howcan Indian IT companies achieve non-linear growth? 8
IT/Telecom Manufacturing Other
Sno Check list Answer
1. Are we associated with the client for more than 3 years?
2. Is our average CSAT rating of last two years greater than 5? ( Scale of 1-6)
3. Are the number applications we managed for this client greater than 10?
4. Is our share of the client’s total IT business greater than 30%?
5. Is the application under consideration in the non-core area for the client?
6. Is this a legacy systemthe client is a having a difficult time managing?
7. Is this system a critical bottleneck or source of significant risk for the client?
8. Is the system fairly generic across the industry? (Generic: Once built we
should be able to sell it to other vendors with customization efforts not
amounting to more than 20% of the original development effort)
9. As a vendor do we have significant competencies in this sector? (Significant
competence: Patents, availability of inhouse experts and number of
projects executed in this sector better than any other IT vendor of
10. Can the development cycle be reduced by atleast 20% by the use of
11. Is the vendor’s IT footprint in the entire sector more than 20%?
12. Does this application frequently require technology & functional upgrades
due to changing business rules? (Frequently: A modified code base of more
than 20% every year)
* Indicative list of questions
Each IT firm, based on its significant competencies & current market share, should target an
industry that is most amenable for implementing the ABOUT framework. The applications to
be targeted are those which are non-core to the business of the customer yet extremely
Low Customerrisk High
Howcan Indian IT companies achieve non-linear growth? 9
sensitive in terms of the business impact due to a break down. Customers show more
willingness to pass on maintenance & enhancements of such applications to the IT vendors.
+ Numberof releasesinanyear* Numberof testingresources*Billingperday* Numberof
+ Hours spentonprojectmanagementperyear* Projectmanagersalarycost to companyper
+ Numberof maintenance resources*Numberof billable daysperyear
- Numberof reportsgeneratedperyear* Price of each report
How is this model differentfromother emerging models?
Software as a
Nature of work High end Medium Medium High end
Who brings in
Vendor Client Vendor Client
Where is the
Client site Vendor site Client site Client site/Vendor
Business-critical All types Low-end
Core to the
Domain expertise Resource
Low cost Partnering.
up the value chain
what the client
Client decides Client defines
majority of the
Vendor Both client &
Client Both client &
Pricing model Skimming Penetration Penetration Value based
4.7. Organizational Structure
The current organizational structures of Indian IT firms resemble a matrix design – The
horizontals comprise technical experts and the verticals consist of project management
teams, engineers and business analysts. The new model calls for breaking down the
conventional organizational design and adopt a structure that is more suitable for nurturing
innovation within the company.
Howcan Indian IT companies achieve non-linear growth? 10
Having said that, we don’t want these structures to become silos. There should be a clear
focus and demarcation of tasks, yet the reconfigured systems should be fluid too. The teams
should be able to come together quickly to solve problems holistically and disengage
We propose to reorganize the structure into a layered architecture detailed as follows. In
this structure, the product team forms the core of the entire hierarchy. The product teams
are basically made of technology and business experts working in tandem. Using various
market sensing techniques this team identifies various
generic features of the product that can add value to
the customer. The onus of building in these
features and marketing them to the clients also
rests on the same team.
The service team takes care of customizing the
core products to the needs of various
customers. The service team usually consists of
software engineers and implementation
specialists. In terms of the technology and domain
expertise the product team contains the best
industry talent that can steer the product development
in the right direction. The service team is a notch below in that aspect. However the service
personnel will be relationship oriented, who front-end the clients during implementations &
The number of resources in the product & service teams shall be 1:5. The team members
should be rotated often between product and service teams so that each of them feels the
pulse of the customer and there is an opportunity for greater knowledge and experience
sharing. The program management team usually handles a single client. The team will be
headed by a “client partner” who works closely with the customer’s IT heads. He
understands the client’s world from a business perspective. He looks at the clients systems
and the vendor’s offerings (products & services) holistically and identifies more
opportunities where his firm can add value. The industry practice stays abreast of the high
level industry trends and formulates the medium & long term strategies for its line of
4.8. Measuring success of non-linear initiatives
Revenue per employee
A simple, straightforward measure of non-linear growth is the ratio of revenue to number of
employees. Tracking the ratio on a year-on-year basis gives a clear picture of where the
company is heading in terms of non-linear growth. However, this is not a lead indicator and
at best be measured on a quarterly basis.
Howcan Indian IT companies achieve non-linear growth? 11
Return on Innovation Investment (R2I)
Since innovation by its very definition is intangible and not easily measured at the front end
(especially at the outset of a new product/service development program), "the logical place
to begin is at the end - at the Return on Innovation Investment (R2I). Measuring R2I makes
the intangible ‘tangible’, thus providing managers, employees and the investment
community with valuable information that can be used in a number of ways."
Like ROI – return on investment – R2I also shows return on investment, but only from new
product innovation investments, not all investments. It looks at the firm's total profits from
new products (cumulative new profits generated from new products launched) divided by
its total expenditures for new products. This long-term ratio shows the firm's total return
from new products over a three- to five-year period. This number has two uses:
Descriptive: to demonstrate the overall effective contribution of new products.
Predictive: to forecast or set goals for the organization
Product to Implementation Ratio
This metric compares number of products/platforms developed by the organization and the
total number of implementations done. It indicates the level of reusability and so the extent
of non-linearity. A pareto analysis of product-to-implementation ratios across various
sectors gives the top management a snapshot of the domains contributing major non-
linearity to the company. This information can be further used in segmentation &
positioning of the company as a product player.
Since each of these engagements will involve upfront investments it is important to keep a
track of time period required to break even. A typical breakeven period could be three years
and each project team needs to be tracked on this metric to ensure that these initiatives are
profitable over the long run. Related to this, another important metric is “expected useful
life” of an IT system. If expected useful life of the system is less than the breakeven period
then such an engagement will not be profitable for the company.
The ABOUT model creates an opportunity for Indian IT companies to develop Industry
standard products and services offerings without the investments and risks involved in a
conventional product development model. Using this model the IT companies will be able to
not only increase revenues per employee but also deepen its current client relationships.