Home >Opinion >Columns >Opinion | An orthogonal move into the market for IT services

Let me say at the outset that I expect that many readers of this column are not going to agree with its premise. I say this because I tested this premise last week during meetings in Mumbai with institutional investors in Indian information technology (IT) services. While these investors were kind enough to give me a hearing, not all agreed with the conclusion. That said, I am going to soldier on gamely.

I believe that IT services firms might soon see a move coming at them from an orthogonal direction. Firms such as Microsoft, Oracle and SAP have long been at “right angles" to IT service providers. They provide software for enterprises while making way for their IT services partners such as Accenture, IBM and Indian-heritage IT service providers to help integrate their software. Over the years, this symbiotic relationship helped these firms conquer the enterprise space with the licence-based software they were selling.

While the software product world remains intact, its delivery has changed significantly. Software has moved to the “cloud" and is now increasingly delivered “as a service" where product firms charge a periodic smaller fee for enterprises to use their software, rather than charge a large one-time licence fee. According to analyst firms, this “software as a service", aimed at enterprise clients, has grown at over 16% per annum since 2014. The integration issues remain, however, since each firm’s software needs to be stitched together with other parts of the client enterprise’s IT topology. It takes software application integration providers to effectively deliver these pieces of software—and their periodic updates—to enterprise clients.

During the same time period, computing infrastructure has also shifted to the cloud. Amazon, once considered little more than an online retailer, made a sudden and concerted push into the cloud services space, and in a few short years, has built a behemoth out of Amazon Web Services (AWS). Some estimates put today’s market value of this division at around $600 billion. Amazon stepped into the market and disrupted the normal delivery mechanism. By automating many aspects of computing infrastructure management, it provided the same or better hardware computing capability more inexpensively than enterprise clients could manage, whether or not they had outsourced to an offshore IT service provider.

Many held that AWS would never become a sizable business for Amazon. The security issues around cloud-based computing delivery were too much of a barrier for enterprises to move to the cloud—or so ran the refrain. It didn’t take long for AWS to prove that its security was top-notch. It won a contract with the US’ Central Intelligence Agency (CIA)—which in many ways served as a turning point in the security debate. Players such as Google, Microsoft and Oracle soon realized that they needed to get into the cloud game in order to stay ahead. Microsoft, in particular, has had excellent success with its Azure platforms. “Infrastructure as a service" has grown by over 38% since 2014.

IT services firms that had moved into providing remote offshore infrastructure management of their enterprise clients’ stand-alone data centres found themselves flat-footed and could not respond in time to the onslaught. For a while, there was discussion at these IT service providers about managing “private clouds", “public clouds" and “hybrid clouds"—most of which have fallen by the wayside as Cisco, Google, Microsoft, Oracle and others stepped into the ring along with AWS.

One sure-fire way that software product providers have used over the years to increase “stickiness" among clients is to have software services arms. For instance, Oracle has always had a consulting and services team, as has Microsoft. These are usually left to battle it out with other integrators such as the Indian IT service providers in a “co-opetition" model where the software product provider co-operates with the chosen IT service provider, even if it first competed for the services component of a software transaction and lost.

I believe, however, that with software product providers such as Microsoft and Oracle morphing themselves into cloud infrastructure providers, they are bound to want a larger piece of the pie by becoming a “one-stop shop" for their enterprise clients. One way to do this is to beef up their own consulting and services arms, or better yet, buy out robust consulting and services providers who already have a long history of working with them.

These buy-outs need not be total. While I was a partner with KPMG in the US in the late 1990s, Cisco paid $1 billion to buy out 20% of our consulting business. This was so that it could better direct KPMG’s efforts, especially in services provided to large telecom firms, in order to induce these telecom firms to buy more of Cisco’s gear rather than going to other hardware firms as the US telecom service providers moved increasingly to the internet-based protocol for data services. After Cisco’s investment, KPMG Consulting set out to hire 2,000 professionals in the US who were Cisco integration experts.

There are a few medium-sized IT services providers in India who have significant ownership stakes in play today, many of them held by private equity firms or investors who are looking for an exit. Like Cisco 20 years ago, there is a decent chance that a product-cum-cloud provider might want to buy out that stake.

Siddharth Pai is founder of Siana Capital, a venture fund management company focused on tech.

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