Year 2009 is seeing firms move from commoditised hardware products to services.
Global and Indian technology firms appear to be back in business this year, as the pall of gloom surrounding the economy appears to be lifting gradually.
While many Indian IT firms announced multi-year, multi-million dollar outsourcing deals over the last couple of months, both local and global technology majors have been revisiting their business models and, in some cases, acquiring companies to reposition their brands in 2009.
Xerox, for instance, yesterday offered Affiliated Computer Services (ACS) Inc — whose technology is used to run systems such as the E-ZPass electronic tolls in the US — $6 billion to move into a services market and not just sell office-equipment like copiers and printers, a business where the competition is tough and hardware is getting commoditised.
This implies, say analysts, that margins are under pressure. Xerox’s sales figures, for instance, declined for three consecutive quarters as customers delayed purchases amid the recession. The acquisition of Affiliated Computer will give Xerox the ability to cross-sell to different customers, bringing the hardware and software parts of the business together. ACS employs around 5,500 people in India, while Xerox currently has around 500 people, comprising primarily marketing, sales and support staff.
Xerox is simply a case in point. A little over a week back (September 21), Dell announced the acquisition of Perot Systems for $3.9 billion which, according to analysts, will give the former an enlarged footprint in India, as well as give both the companies a chance to diversify while make Dell a services’ powerhouse — both globally and in the country, too.
Perot Systems is relatively small — $2.7 billion in sales, whereas Dell is a much bigger $54-billion firm. Dell’s service globally is largely centred on its (dwindling) hardware/ infrastructure sales, while Perot Systems is a leader in infrastructure services and outsourcing. Dell needs to shore up its sagging revenues, while Perot acquires an enviable international client base.
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And the margins in services are definitely better, say analysts. In the PC business, for instance, the margins are 4-5 per cent, while servers would rake in margins of 7-8 per cent and storage would account for around 10 per cent. But in services, the net margins could range anywhere between 17 and 20 per cent, according to Gartner India Principal Research Analyst Diptarup Chakraborti.
Even Finnish handset giant Nokia realised that when, in June this year, it announced a collaboration with Intel to license 3G to it. In return, it allowed the world’s largest chip maker to introduce its processors in mobiles. Nokia is licensing its intellectual property (IP), and there’s a potential revenue stream associated with this IP in future chipsets, reason analysts.
More importantly, Nokia is also leveraging its “very large installed base” to launch a successful services’ model. “We started out by connecting people with calls and SMSes. Now the internet, mobile and personal computer (desktop and notebook) talk to each other as devices converge. This prompted us to redefine our vision to keep in touch with consumers. Since the services and devices are integrated, we want our consumers to buy a Nokia solution,” explains Nokia India Director (Marketing), Vineet Taneja.
The move into services, albeit a good one, say analysts, comes as Nokia is struggling with falling handset prices and increased competition in the high-end mobile phone market — particularly from the likes of Apple’s iPhone and Research In Motion’s (RIM’s) BlackBerry.
Moreover, a sale of handset per person is very slow, while the replacement cycle is getting longer. Telecom operators also want the consumer to do more with the mobile and hence the evolution of the subscription model and the need to create an eco-system.
“In the early 1990s, it was about computerisation. So, it started with PCs, then moved to servers and storage and now they are talking about applications. Moreover, the hardware business has a good degree of commoditisation. Other than Intel and Apple, there are very few in the IT hardware segment that have a key differentiator. Precisely because of this, when a CIO starts to talk he takes into consideration only price. Many firms have realised this are looking for a differentiated approach and this explains the current trend,” says Ascentius Consulting Principal Analyst Alok Shende.
Typically, explains Shende, there are three types of sales’ practices — transactional, consulting and enterprise. In the transactional sale, the customer knows what he wants and it is a matter of price performance. In the consulting scale, the approach is of solving a business problem and hence it is more about a solutions sale. It is the third, that is, the enterprise scale, where transformational approach is required. The decision is also taken at the CEO level.
“If you look at players like IBM and HP, this is where these guys are looking at and hence creating the capabilities. What IBM did with Bharti was unheard of globally. Services also give a good diversification strategy for these players,” he adds.
For instance, “Airtel started with communication (telephone calls), then moved to content (eg DTH and IPTV). Now applications are gathering momentum and boosting our business prospects,” explains Jai Menon, Director for Technology and Customer Service at Bharti Airtel, as well as Group CIO of the Bharti Enterprises group.
Applications cut across all three segments of the company — consumers, small businesses and enterprises. The enterprise segment, with over 1 million transactions every month, involve applications like that used by the Chennai Corporation for tax collections and Bangalore police to monitor, inter alia, errant drivers.
Personal computer major HCL Infosystems, too, which is in the midst of raising Rs 825 crore through qualified institutional placements (QIPs) and issuance of warrants, plans to use these funds for setting up back-office centres, growing its security business and look at acquisitions. The company, which has presence in IT hardware, services and distribution, sees growth in the systems integration services — especially in verticals like telecom, utility, health and e-governance. It has even appointed a new CEO for HCL Security, its 100 per cent subsidiary. HCL Security aims to get a sizeable share of the $1-billion security market in India by focusing on system integration activities.
Oracle, too, is now moving beyond selling just database, middleware and enterprise resource planning (ERP) packages to sharpening focus on its applications business in India, according to Oracle India Managing Director Krishan Dhawan. The applications include on-demand, hosted and software as a service (Saas) offerings.
“IBM announced its shift towards services way back in 1992,” concludes Chakraborti of Gartner India, adding that “...it is only in the last 2-3 years that the services segment has started to make a contribution.” He adds that the engagement one can have with customers is limited in a hardware business.
“After PC, server and storage, what else can you talk about?” he asks, adding: “Going ahead, we think there will be further consolidation among the IT sector. I think in the next few years, only 5-10 firms will exist in each prominent segment.”