The Hindu Business Line : Don't be a mere clone!

Even as mid-tier IT companies are arriving at strategies to stay in the race, there is one that they all concur wouldn't work — a `me-too' strategy or acting as the clone of a bigger company.

THREE years after the economic downturn in the US hit the software services sector in India, quite a few medium-sized software companies have put through path-breaking changes in their business model to survive and thrive. Ask any seasoned chief executive officer (CEO) of a mid-tier software company about the attributes of a successful business model... their views would range from the realistic — emphasis on building growth with `differentiation'; to the ambivalent — equating this to the shifting target of a gun slinger; and in an extreme case, to the cynical — business model retrofitted after it has succeeded. But there is one aspect on which there is near-consensus among these CEOs: a `me-too' strategy or acting as a smaller clone of a large Indian or multinational software company would no longer work in the software services space.

As the realisation dawned that the frontline Indian software companies are poised to get bigger with every passing year, the medium-sized companies have changed with the changing times. An examination of the business model employed by select companies in the Rs 100 crore - Rs 300 crore bracket shows that there are at least three facets that have helped them emerge stronger in their service strategy and business offerings. The ones that stand out are:

Focus on a few verticals: Practically every single company in the mid-tier bracket has decided to focus only on a couple of verticals. And invariably, one of the verticals is BFSI (Banking, financial services and insurance), as it has the largest global IT spend for any vertical. Take, for instance, KPIT Cummins, which has focussed on manufacturing as the largest and BFSI as the second largest vertical. Or NIIT Technologies (demerged from NIIT and listed in end-August), in which BFSI, transportation and retail, the three chosen verticals, account for 54 per cent of its revenues.

Verticals for stability, horizontals for growth: Using a 70:30 strategy for growth, quite a few mid-tier companies have accounted for 70 per cent of their revenues from the chosen verticals and about 30 per cent from horizontals which vary from embedded space, VLSI (very large scale integration), business intelligence to enterprise solutions. In the quarter ended March 31, 2004, MphasiS BFL, in order to reduce its dependence on a single client that accounted for 19 per cent of its revenues, acquired Onida Infotech Services, the SAP practice of MIRC Electronics and Kshema Technologies with a strong presence in embedded segment. Other players have also grown some horizontals organically or through acquisitions in the past year.

Anchor customer or focus on underserved markets: Most medium-sized companies continue to rely on a key customer for growth and build on it for future growth. Take, for instance, KPIT Cummins, which has used Cummins as a strategic anchor customer and broad-based its model by focussing on four or five Fortune 500 customers as support engines for growth. Or take Hexaware Technologies, which has established a niche-operating model by focussing on underserved markets such as Peoplesoft practice (accounting for a third of its revenues), airlines and German geography.

Clearly, this has been a replicable strategy that has worked well for scalability by companies in the Rs 100 crore - Rs 350 crore bracket. But for those in the Rs 350 crore - Rs 600 crore range, the scale-up challenges to leapfrog to the next league are/may turn out to be bigger, prolonged and far more difficult.

The business models that are being put into place to achieve a unique positioning are more differentiated, but probably, much more risky than the models in the past. Going forward, the models to watch out for are:

Product-cum-services model: Polaris, which was purely a software services company till 2002, put through a historic merger with OrbiTech, a Citigroup subsidiary in June 2002. Realising that it was slipping into the slow track in the BFSI services space, it launched itself into the products space with this acquisition. Once more, the "make or break" characteristic of big mergers has been brought to the fore. After going through the pains of integration for nearly two years, Polaris has gone on an aggressive marketing campaign recently to position its "Intellect Product Suite" as a banking product of choice at the higher end. The next three-to-four quarters of earnings performance for Polaris will be crucial to see whether this business model is yielding successful results or not. Though in terms of positioning, Polaris claims it is competing with the in-house banking solutions of companies, it is likely that it would compete increasingly with the likes of i-Flex solutions and Temenos in the banking space.

Hardware-cum-software model: When the Singapore-headquartered Flextronics announced the acquisition of controlling stake in Delhi-based Hughes Software and Chennai-based Future Software recently, it ushered in a new business model at play. As this integration process is worked out, it will be crucial to see how Flextronics is able to leverage the complementary expertise of Hughes and FutureSoft in software to cross-sell its services among the former's telecom clients and ones in the electronics manufacturing space. As this integration takes shape, it will be keenly watched in the earnings scorecard of Hughes.

Software-BPO integration: MphasiS BFL is slowly using its presence in the software services and BPO (through MsourcE) space to build solutions or platforms that integrate these two practices. The rationale for this approach is that clients are increasingly looking to offshore vendors to provide a comprehensive end-to-end solution — which is a combination of software solutions (a part of services) and process capabilities (part of BPO). As this will also help build long-term relationships with clients, MphasiS is pushing this business model forward.

To some extent, iGate Global is also attempting to create a value differentiator for itself in the enterprise solutions space through what it calls, an Enterprise Data Pyramid, for companies trying to extract value from their existing ERP environments. At the same time, through Quintant, which is a business process management company, it will also be vying for clients in the software-BPO integration space. The next couple of quarters will show whether these efforts are translating into higher business volumes or not.

maverick@thehindu.co.in

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