Bangalore: India’s $70 billion software exports sector that counts General Electric and Citigroup among its top customers could see a drop in business volume in the short term as these clients shift to newer pay-per-use billing models and seek to avoid high upfront investments in buying and deploying software products from Oracle Corp. and SAP AG .
S. Gopalakrishnan, co-chairman of India’s second-largest software company Infosys Ltd, said if the shift to newer models of billing by outsourcing customers is dramatic, the immediate revenue earned from deploying business software products could be hit.
“We don’t know how fast this will happen, but definitely this will have an impact on the industry,” Gopalakrishnan said in an interview on the sidelines of the Nasscom summit. “The industry will have to prepare itself to provide services based on a very different model.”
For instance, a PeopleSoft implementation would be undertaken as a project and by the time it was complete, Infosys would have got all its payments, although the client wouldn’t have started using the system.
“But if the shift happens, we will get zero revenue till the implementation is over and clients start paying us on a pay-per-use basis, maybe for three years or five years,” he said. “So, it’s a very, very different model. Imagine what will happen to our revenue profile and such. Till now, you got all your software revenue and suddenly you have to go to pay per use model.”
Traditionally, customers paid millions to buy business software solutions, such as enterprise resource planning, that help automate and integrate business processes, and then spent even more in maintaining these systems. With enterprises now looking to cut costs, they are increasingly exploring ways to shift some of this capital expenditure to operational expense.
“There will be a dramatic drop in revenue. In the previous example, let’s say if we charged $10 million for the implementation, we will get zero till that time, may be $100,000 or $200,000 per month over a period of three-five years. It’s a significant change from that $10 million we could have booked, and now there is zero revenue and we are getting $100,000 per month,” said Gopalakrishnan.
Experts such as R. Ray Wang, founder of enterprise research firm Constellation Research Inc., said the IT services model has been exhausted.
“IT services firms will have to move beyond volume-based, cost-competitive staff augmentation, testing, maintenance and advisory services. The classic time-and-materials, skilled body shop market has maxed out,” he said in a January research note.
A lot depends on how fast these customers make this shift though.
“It depends on how dramatic this shift will be. If it’s really dramatic, you will see significant disruptions. If the external environment becomes challenging, the disruption could be faster. Companies will be forced to look at their costs and business models. But if the external environment improves, these transitions will be slow,” Gopalakrishnan said.
“Because of the base...traditional services will continue to be the bulk of the business. Having said that, industry will have to invest in new services based on the trends that we see such as big data, which includes analytics, mobility and in future we may have to look at the Internet of things,” Gopalakrishnan added.
For India’s top technology firms seeking the next big thing beyond traditional people-based services, it’s a now-or-never situation, said Wang.
“The software mega vendors may in the near future encroach upon the IT services space via acquisitions, leaving a number of their valued partners in the lurch,” Wang said.