SMAC is the new flavour of IT services companies
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Mumbai: The Indian software industry’s exports may grow by about 13% in fiscal year 2014 to $87 billion (around Rs.5.4 trillion today), driven by its ability to offer solutions that integrate new business models such as analytics and cloud-based services, which are part of SMAC (cloud, mobile, analytics, big data and social media services) with traditional ones, according to Nasscom’s Strategic Review 2014 report.
Traditional services account for a major portion of the revenue of Indian information technology (IT) firms. Application, development and maintenance work alone accounts for 35-40% of the revenue of most IT firms.
But with increased automation and platform-based services that can be replicated across segments and non-linear initiatives, analysts agree that SMAC (social, mobility, analytics and cloud services products) will allow the IT industry to offer more value to clients.
Non-linear initiatives, unlike in the traditional model, are not dependent on the number of people engaged in a project for their revenues.
Growth of IT companies will be dictated by cloud, mobile, analytics, big data and social media services, according to a survey of 410 global IT decision-makers by research firm Offshore Insights, released in February.
It predicts that Global 2000 firms will spend 15-16% of their IT services and outsourcing budgets on SMAC and India will export $15 billion worth of SMAC software and services in fiscal 2017. In the coming two years, the firms surveyed expect to spend around 10% of the total IT budgets on big data and analytics, about 9.5% on cloud services (including software as a service, and platform as a service), around 5.3% on mobile apps and devices, and 3.4% on social media.
“These (SMAC) service lines will get to mainstream with deals becoming big and complex. Most clients see merit in combination of two or three technologies if not all four,” said Sudin Apte, chief executive officer (CEO) and research director of Offshore Insights.
While certain elements of SMAC are possibly over-hyped or are re-classifications of traditional service lines, these present an attractive opportunity for Indian IT services companies over the next few years, Credit Suisse Research said in a 12 July report.
SMAC technologies account for less than 10% of the total revenue of IT companies, but according to research firm International Data Corp.’s (IDC’s) estimate, Indian IT vendors will generate at least $225 billion in SMAC-related revenue in 2020.
To put the figure in context, the aggregate full-year revenue of Indian IT services vendors is forecast to touch $118 billion in fiscal year 2014 and $130 billion by 2015.
Indian IT services firms have begun talking about SMAC-driven growth in earnest.
During its December earnings call with analysts, Cognizant Technology Solutions Corp. reported it had exceeded its 2013 revenue target of $500 million from SMAC technologies; it didn’t give a forecast for 2014.
Cognizant Technology’s CEO Francisco D’Souza said client demand for SMAC solutions had shifted over the past two years from small pilot projects to deeper integration into enterprises’ IT environments.
He estimated that 30-40% of SMAC revenue comes from “business-as-usual” upgrading and maintenance engagements as opposed to discretionary budgets.
The company said it will turn its sights in 2014 towards investments in new technology trends such as sensor technology, machine learning, “Internet-of-things” (the trend of devices increasingly getting connected online) and artificial intelligence, to keep pace with evolving client demand for efficiency-driving IT solutions.
According to Jennifer Hamel, research analyst with research firm Technology Business Research (TBR), Cognizant’s operating margin increased 70 basis points year-on-year and remained unchanged sequentially at 19% as it reinvested in global delivery expansion, vertically oriented BusinessCloud platforms, and more recently in emerging technologies. A basis point is one-hundredth of a percentage point.
Cognizant is not the first India-centric firm to look beyond SMAC to the next wave of technology innovation, noted Hamel, adding that Wipro Ltd and HCL Technologies Ltd, too, actively invested in and promoted machine-to-machine (M2M) and embedded systems capabilities throughout 2013.
HCL Technologies, according to a 17 December 2012 note by Erin Hichman, an analyst with TBR, will “leverage its Big Data capabilities in order to drive towards its goal of a $1 billion in revenue from SMAC within the next five years”.
Wipro, on its part, made two acquisitions—it bought a nearly 10% stake in New Jersey-based Big Data company Opera Solutions for $30 million in May; and another 10% in US-based cloud computing firm Axeda in June for $5 million. Axeda’s core strength is in its cloud and M2M solutions.
India’s largest software services exporter, Tata Consultancy Services Ltd (TCS), has a separate digital enterprise unit in Silicon Valley to club its SMAC computing technology services under a single roof.
Analysts believe the focus on SMAC services will not only help TCS expand its non-core business, but also help it become the first Indian company to cross $100 billion in market value. On 20 August, Viju K. George, an analyst at JPMorgan Chase and Co., wrote that TCS could achieve the feat if, among other things, it moves beyond just traditional IT services to a SMAC framework.
Infosys Ltd, the country’s second largest IT services provider, has SocialEdge to track consumer conversations on social platforms such as Facebook and Twitter, and execute targeted campaigns on social media; mConnect—an enterprise middleware; ShoppingTrip360—a retail analytics tool; and Infosys Cloud Ecosystem Hub to help companies build, manage and govern a unified hybrid (private and public) cloud environment.
Mid-cap firms aren’t left behind.
C.P. Gurnani, managing director (MD) and CEO of Tech Mahindra Ltd, said his company does not measure the impact of SMAC separately, “but all of them (SMAC technologies) are substantial businesses for us”.
In fiscal 2013, “networks accounted for about $200 million, mobility for almost $200 million now, analytics also for about $200 million, and so did security and cloud together account for about $200 million”, he added.
Tech Mahindra posted a full-year revenue of about $2.6 billion for fiscal 2013.
At mid-cap IT services firm Persistent Systems Ltd, intellectual property (IP)-led revenue accounted for 17% of the company’s overall business in the December quarter, Mritunjay Singh, chief operating officer, said recently while declaring the company’s December quarter results.
“Our clients have started to invest in technology after a downtrend seen in the last four-five years…and what we will see is not more investment, but shift in investment from traditional to new technologies like SMAC,” he said.
Chairman and MD Anand Deshpande said Persistent Systems continued “to focus on products and IP-led revenue, tracking new industry trends, and encouraging innovative ideas that solve real-world problems”.
Another mid-cap IT services firm Zensar Technologies Ltd has partnered with start-ups in areas of SMAC. With the emergence of these new technologies, organizations are looking at integrating applications across enterprises seamlessly, with the ability to allow for easy anywhere-anytime accessibility, company executives said when declaring results for the September quarter.