IT firms for upgrade, to move up value chain

Egged on by the appreciating rupee, the Indian information technology industry is evolving a new business model that seeks to rely less on low-cost skills, move up the value chain and keep up with technology advances so as not to be overtaken by tectonic shifts.

The new model will not represent a break with the past but be more in the nature of the new version of an already popular software product. Still, it will be more than just an upgrade and mark a significant step forward to a feature-rich new version, somewhat akin to the graduation from Windows 98 to Windows XP.

Phaneesh Murthy, head of iGate, says, "Critically, the new business model will achieve a break with linearity" under which you grow revenue by adding to the headcount. He is clear that for the industry to go forward, "this game change has to happen."

Nandan Nilekani, after quitting the daily routine of Infosys CEO, is "looking at bringing in new business models. How do we grow our business like Finacle, which is based on intellectual property? How do we bid for large transformational deals where you have to bring in fundamental changes for customers? How do we sell software as a service, which is a form of subscription licensing?"

He also reveals that Infosys wants "non-people based revenue, not linked to how many people you have." It is working on "some kind of platform-based solutions, providing service on a platform. Platform means you don't sell intellectual property, you sell a service, or sell per transaction, or sell some kind of content."

In order to earn increasing revenue per employee, says Murthy, software firms have to adopt a model that iGate has been pursuing for years. He describes it as "people process technology on demand." It is made up of software as a service, shared services, business service on demand, plus the process element.

Under it, you not only act as a one-stop shop offering both IT and BPO services to clients but also offer a technology platform to deliver services on a per transaction basis. These integrated services are closely aligned with the customer.

Murthy gives the example of processing home loan applications. The customer creates the business rules, the outsourced firm handles the process from the receipt of application to closing of documentation on its own platform and earns a fee for it. Earlier the service provider would have had to log on to the customer's platform to undertake the whole process.

Nilekani gives the example of sales order processing. Earlier, the service provider billed the client on the basis of the number of people who had been put on the task. Under the new model, the vendor will process orders on its own platform and charge the client for each order processed.

Avinash Vashistha, head of Tholons, the offshoring advisory firm, thinks along the same lines. "The industry has to move from FTE (full time equivalent number of people) or hourly remuneration-based pricing, to transaction or performance-based pricing "� on the number of transactions, or amount recovered, or sales achieved."

He also sees a change in the way the tradition maintenance business is priced. "IT firms have to move away from time- and material-based pricing to solution-based pricing."

For example, instead of a general rate for maintenance, you can move to severity-based pricing, with different rates for fixing bugs depending on their severity. Then, in designing enterprise solutions, instead of pricing on the basis of effort or hours, it could be linked to milestones marking progress on deliverables.

To win in this new game, software firms have to move more and more from time and material deals to fixed-price deals. In this, Infosys appears ahead of the pack. In engineering services, it is Wipro. And all have to slowly downgrade some of their traditional low margin staples like ERP implementation and system integration.