The Hindu Business Line : ‘Moving towards IP-led revenues’

The IT industry faces several challenges such as de-linking growth from headcount and demand to move to outcome-based billing by clients. Having spent over 20 years in the IT industry, Mr Subu D. Subramanian, Director and Senior Vice-President, Manufacturing, Automotive and A&D Business group at Satyam Computer Services, talks of how the industry is shaping up to new demands, as well as thechallenges and opportunities that lie ahead for Satyam and th e industry.

Excerpts from the interview:

Ten, fifteen years ago, we had these huge multi-year deals won by IBM, Accenture, etc. Then Indian players came in and there weren’t any long-tenure large deals. In recent years, there has been a resurgence in these long-term deals, which are also being won by Indian players. So what has changed in the IT deals landscape?

Earlier, the value proposition was only cost-arbitrage. Customers are now expecting us to take the responsibility for their business outcomes and for a longer period of time.

We commit to a certain level of service level agreement (SLA), commit a fixed price and we take the responsibility for a longer period of time (three-five years). This helps us to plan our pitch, estimate the resource requirement and reduce costs such as SG&A.

We don’t need to sell ourselves again and again. This creates an assured annuity deal. For the customer, they can depend on not only the cost-arbitrage but also on our ability to take responsibility for business outcomes for a given cost. The difference between the large billion-dollar deals that IBM, CSC or EDS used to be doing and the kind of deals executed now is that the services content is higher. In those days, the global players would take over the infrastructure, the people, etc. But there the value to the customer was less. There was no significant reduction in cost. But it let the customer concentrate on their core business.

We move the job offshore. So it’s not outsourcing, it is offshoring. So with defined SLAs and outcomes, we take the responsibility to deliver the services through a global delivery model. There is more value-add for the customer. There is less taking over of people, assets, and so on. If you study the pattern of such deals, most of the deals are services-intensive and offshore-intensive, whereas, in those days, it used to be asset-heavy.

Customers are clearly seeing value in engaging us now. So in most deals there is one global player and one offshore player. They make this mandatory, so that they can have the best of both worlds. Even global players are required to have a global delivery model else they are not in the race at all! That is why many global system integrators are building their global delivery model capability.

When can we see a transition to the much-talked about outcome based/value-added billing methodology?

Today, the focus is still on cost-reduction. That is the value we define. Today we go by the total cost of ownership. The customer is maintaining his infrastructure, infrastructure services and the application and application services. We say to the customer ‘this is the cost you are incurring for a given SLA. So for an improved SLA, this will be the increased cost. But by working with me you can reduce that cost’. That is a clear measure. That cost reduction is perceived as value.

But that is not the end of the game because that is not a business outcome. Their business will not feel the impact. At best it will be an improved SLA. But the company will see it because the IT budget will come down. That is how we are moving to the next level. So the transition is from a service provider, to a turnkey service provider taking risks, to a complete solutions provider.

A solutions provider transforms business. The difference in business will happen when we change those business processes as well. That is where we are bringing in business transformation solutions — process optimisation, process reengineering, etc.

We say to the client “this is the way you run your business today, this is your supply chain process, this is your CRM process, sales process, etc, and this is how they could be improved.”

How can IT services companies transform business processes and commit to outcomes?

Business expertise comes from two dimensions — strategic consulting and business process consulting. We need business process consulting that is industry-specific for example, a manufacturing supply-change or an automobile supply-chain related. Let us take automotive warranty cost. This is a very significant cost. Today you (client) are incurring so much cost by following a process. By changing and reengineering your process, we can reduce your cost. So this is a definite business outcome.

Customers are expecting this and asking us if we have such expertise to reengineer their business processes. If we had a strong consulting background, we can enhance processes and take greater responsibilities for customer outcomes.

We know our cost-structures well, so we are willing to sign on the dotted line as far as the total cost of ownership goes.

But not many Indian IT players have gone on to commit to business outcomes. Committing to this allows you to bill on a value-added or outcome basis. Players such as IBM and Accenture, with strong consulting backgrounds, have been able to successfully commit and achieve business outcomes.

There is a flat fee for services and an incremental fee based on the value that the customer derives.

Our aspiration is to get to such a value-based pricing model. But I must admit that we are not yet there. Consulting capability is one thing but doing it offshore is what is more important.

How do you view the recession in the US and its impact on IT budgets?

The predictions are that this time it will be steeper and longer compared to the past. But many of our clients are globalised and are leveraging on the expanded market — BRIC (Brazil, Russia, India and China) and other countries outside the US that are experiencing strong growth. Our clients are able to meet or exceed overall revenue and margin guidance, though their US revenues might have declined.

With our existing presence in these high-growth areas, clients prefer to work with players like us. Of course, the argument that a recession means more outsourcing is also there.

Till now we have not heard of any slowdown in client spend or any tightening of the purse string. I am cautiously optimistic. I have spoken to about 10 CIOs and none of them has asked us to do more for less! If the boom in the other markets also ceases and there is a slowdown across the globe, then there may be problems.

What was the thinking behind pursuing and winning the FIFA deal?

We lack brand visibility in Europe despite having competencies and capabilities. In Europe, most customers go by the brand. They like to go with established brands. Today when we go and meet CIOs in Europe, they are surprised to hear that we are an established $2-billion company. They are discovering Satyam. So the FIFA initiative was to establish ourselves and give brand visibility. Football is the most popular sport there. Any other associated services with the deal are extra.

What was the rationale behind the Caterpillar (market research and analytics division) acquisition?

Customers are now looking for partners in innovation as well. It is value unlocking. We will take over and enhance their (Caterpillar) assets. Together we can have a ‘go to market’. The customer becomes a business partner.

We will customise their solutions to other industries and geographies where they don’t have a reach. So we can reach new clients with their brand, their endorsement and our IT capabilities. So it’s a merging of their brand and domain knowledge with our capabilities. It also gives access to Caterpillars clients. We have the scalability and reach to take the solutions globally. We have a revenue sharing arrangement.

What is Satyam doing to de-link business growth from headcount growth?

We are trying to productise our capabilities into IPs (Intellectual Property) in terms of frameworks, components. This means that human effort is reduced substantially. For example, where there are 50 people required for an engagement, only 20 would be required because a good part of the work is already productised.

It also means that time of implementation is lower and my price realisations will go up. The model is movement from services to turnkey services to solutions to innovation, leading to IP creation. And then bring it back and leverage the IP. That will reduce the linearity in growth linked to headcount.

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