The Hindu Business Line : Evolving business models

After a consistent revenue growth of over 50 per cent during the bullish phase in the late 1990s, the slowdown literally caught most medium-sized software players napping.

And succumbing to negative/single-digit revenue growth in 2001-02, the past fiscal demanded a serious re-evaluation of the business models by the entire contingent of medium-sized companies. (See main story for the `reasons'.)

The introspection by these companies has led to the conception /refinement of key business models which are likely to dominate this sector for the next three-five years (of course, with mid-course corrections where necessary).

Focus on select verticals, technologies

Before the technology meltdown, medium-sized companies were attempting to replicate the business model of the frontline firms. But it became apparent that it was not a sustainable strategy when the slowdown hit the sector in late 2000/early 2001.

Going back to the strategy drawing board, most medium-sized companies refined their business models to focus on select verticals, technologies, geographies and limited set of customers or a combination of these.

Consider the latest business model of KPIT Cummins Infosystems. It has decided to focus on only two verticals: Manufacturing and BFSI. These verticals are to be complemented with key technologies required by them.

In the manufacturing vertical, it aims to deepen and widen its relationships with customers by providing end-to-end services ranging from consulting, embedded applications to managed services.

Its strategic customer for this vertical is Cummins. In addition, it has identified four-five Fortune 500 customers as its stars for whom it would like to become the vendor of first choice by deepening its relationship over the coming years.

From among the remaining five of its top 10 customers it aims to build a pipeline for replacing the top five if they do not ramp-up adequately.

At present, its revenues have been dominated by manufacturing, but it can fall back on the BFSI-vertical, as it is less immune to slowdown in technology spending, or a variation of this business model employed by Hexaware Technologies.

It has aimed at bringing more predictability into its business model by following a three-pronged approach.

First, it has a slightly more broad-based focus on verticals such as airline/transporation, BFSI and manufacturing. In this, it has a couple of multimillion dollar, multiyear contracts from a couple of customers such as Exult and Deustche Leasing.

Second, it has focussed on technologies, by emphasising on its PeopleSoft practice. Finally, to broadbase its focus on geographies, it has targeted Germany as one of its client growth regions.

Predominantly, most companies in the medium-sized segment, be it Zensar Technologies, iGate Solutions or Mastek, are employing one of these hybrid models to remain a competitive force in the software services game.

Products niche

Among the listed companies, i-flex solutions was the only products player, with products accounting for nearly 64 per cent of its revenues in 2002-03. Its flagship product, FLEXCUBE, offers a range of package solutions for corporate, retail, universal and investment banks and other specialised financial institutions.

It is the only company which has made products business as a viable business model, logging operating margins of 53 per cent in 2002-03.

However, it has complemented its products strategy with software services, focussing on the banking vertical in the traditional onsite-offshore model. Subex Systems is the other company which is seeking to establish itself in the products space, concentrating on its telecom range of products.

Its RevMax suite of products comprise its flagship product, Ranger, a fraud management system, and INcharge, a revenue assurance solution. In 2002-03, software products accounted for 36 per cent of its revenues, up from 33 per cent in the previous year.

Kale Consultants is yet another player which sells software products in the airline and banking vertical. Products accounted for 48 per cent of its revenues in 2002-03, down from 54 per cent in the previous year. Companies such as Kale Consultants and Nucleus Software are also operating in the products space

In contrast, companies such as Geometric Software (which focussed on products and technologies) and VisualSoft Technologies initially migrated from products to a predominantly services play.

Since its initial public offering in 2000, Geometric Software, in the past two years, has transformed itself twice in the specialised Product Life Cycle management space.

In 2001-02, it converted itself from a quasi projects-products/technologies play to a dominant project play. And in 2002-03, it has said that it will become a systems integrator, in addition to being a solution provider for software OEMs and other service providers.

Software-BPO integration

IN THE medium-sized software segment, the trend of software-BPO integration is likely to be ushered in by MphasiS BFL (through MSource — its BPO arm) in the near term. Among frontline companies, Wipro is working on this strategy through its BPO arm — Wipro Spectramind. This trend is still at a nascent phase and an integration strategy has not been articulated yet by any player. But the rationale for this integration is compelling for two reasons.

MphasiS, for instance, is best positioned to work on this strategy. While its software arm employs 1,420 people, the BPO arm employs more than twice that number at 3,120. Going forward, it appears that software-BPO integration will help derive productivity payoffs which, in turn, will help protect the gross margins of companies such as MphasiS.

Second, BPO accounts for a bigger chunk of the capital employed in a company such as MphasiS.

Unless software-BPO integration happens in a meaningful way, an improvement in the consolidated return on capital employed will never happen.

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