Is Oracle's cloud growth a worry for Indian IT?

There has been a sharp rise in Oracle's software-as-a-service business

Enterprise software major Oracle’s big push towards cloud-based services may further hit Indian IT firms. 

Companies such as Infosys, TCS, Wipro, Cognizant implement business software applications for clients of the California-headquartered firm and have seen this business earning them significant revenue. 

For example, consulting and package implementation together account for nearly 30 per cent of Infosys’ revenues. Tata Consultancy Services, India’s largest IT services firm, gets about 18 per cent of its total revenue from enterprise solutions and consulting business. 

With a sharp rise in Oracle’s software-as-a-service business and decline in license revenue, analysts say, revenue of Indian IT services firms will shrink. These companies will have to innovate continuously to develop digital technology strengths since they look at a tough competition from digital-first companies.

“Our pivot to the cloud is now clearly in full strength. The increase in revenue from our cloud business has overtaken new software license business decline on an annual basis. Total cloud revenue in the quarter was approximately 1.3 billion, with growth modestly accelerating to 72 per cent in constant currency from last year,” said Safra Catz, co-chief executive officer, in an analysts call. 

With the transition to Cloud, customers of Oracle such as P&G, BT, Airbus, National Instruments or Apple will be more independent in use of technology and the software implementation will become “more consulting and less maintenance-based”. 

While Infosys declined to comment, mails sent to two other IT services firms went unanswered. 

“Services providers benefit from the implementation of these new services models in the short run.  However, their manage service revenues shrink as the digital or Cloud operating environments are far more efficient and there is dramatically smaller opportunity for the services providers once their clients have made the transition,” said Peter Bendor-Samuel, chief executive officer of Everest Group, a global technology researcher.   

The implementation cost is lesser when services are offered through Cloud than on-premise software, said Pareekh Jain of HfS Research India. “In a nutshell, the business pie for Indian IT services will reduce with Oracle’s migration to cloud.”

Bendor-Samuel believes with the focus on cloud-based software or applications firms like Oracle will look at digital-first companies. “A further complication for the incumbent services providers is that they are often not viewed as the right partners to help on the implementation work ….and the clients are increasingly looking to digital first companies to assist them in these efforts.”

At the same time Indian IT services companies need to look at developing new skills and IP to offset the business decline in traditional software maintenance business. 

“IT services firms must move to deliver their own IP and build out their AppDev practices in order to counter the cloud onslaught. While integration, orchestration, management, and implementation are still strong areas for revenue today, in the long run, Cloud takes account control away from the IT services firms and moves it to the vendor,” said Ray Wang, principal analyst and founder of Constellation Research. 

As software majors such as Oracle, SAP focus on Cloud-based delivery, IT services firms who implement these projects need to acquire skills and talents through acquisitions of small companies with the right expertise. The incumbent services players may also get certified professionals for cloud-based services through acquisitions. “We see strong growth in the space as the business models shift from IT to marketing and with acquisitions. Wirpo’s acquisition of Appirio, IBM’s acquisition of Blue Wolf, Accenture’s Acquisition of Day 9 all show this,” added Wang.