Indian IT Outsourcing - Changing Gears

(Published earlier at my other blog. )
A recent BusinessWeek article "Indian IT Companies Eye New Strategies" talks about the non-linear growth models that the Indian IT services companies are working on. It comes at a right time and I echoed similar thoughts in my earlier comment as well.

Necessity of the mother of innovation
Potential US Recession or not, organic growth models of the Indian IT service companies are providing diminishing returns as the revenue base grows. Companies are always trying to figure out where their next $1B is coming from. While we have been hearing about the companies moving up the value chain for a long time, it seems that the urgency has increased in recent times.

Looking for new or more efficient revenue streams
Companies have evolved from traditional revenue streams to innovative models.

Fixed revenue - Basic services supported fixed revenue stream. Revenue was directly tied to manpower.

Incremental revenue - Incremental revenues were addressed with the process improvements (CMMI) and basic productivity enhancements.

Exponential revenue - It is possible with the de-coupling of growth and manpower. With the creation of automation processes & tools, frameworks, solution accelerators etc is the key. Selling products such as Infosys' Finacle, TCS' BaNCS are some examples. Creation of Solution Accelerators that dramatically reduce the amount of work. While it isn't a new idea what with re-usability having been a key focus for these firms all these times. It just happens that it is now moving from operational level (productivity enhancements) to strategic level (key differentiator).

Another example is the trend of platform-based BPO - moving away from the traditional BPO of managing customer's processes and systems.

Self-perpetuating revenue stream
This is an interesting prospect going forward. How can the IT service firms create something once (one-time SG&A) and generate value/revenue repeatedly with minimum effort and overhead? This goes beyond the platform-based BPO where the expertise is productized and sold to multiple customers with required customizations. Another idea could be royalty-based revenue - create a product/service for the client and get into a royalty agreement to get a recurring revenue. This already happens with OEM software but it will be interesting to see how IT firms can take it apply it to services.

New Growth Markets - OPD
Another market that is getting a lot of attention is Outsourced Product Development (OPD). This space is currently dominated by smaller and niche players. While tier-1 IT companies have product engineering groups that support bigger ISVs (Independent Software Vendors), the relatively smaller deal sizes compared to generic IT services are the reason for lack of serious attention so far from these big players. However that may be changing because of the potential for this market coupled with the slowdown elsewhere.

Outsourcing has matured!
The first phase of outsourcing where cost/location arbitrage ruled the roost is almost over. Now come the exciting, perhaps tumultuous even, times for the Indian IT industry. Some will survive while others fall wayside or get acquired. The stage is set for the next IBM from India. Who will grab the chance?