IT firms working vigorously, investing heavily to scale up product business

“Platforms and their components are becoming the key area of differentiation for IT firms. Those that do not invest in these areas will lose competitiveness and flounder. We expect to see significant investments by all Indian IT firms in platforms and components in the coming days,” says Peter Bendor-Samuel, founder and CEO of outsourcing advisory firm Everest Group.
 
According to the Everest Group, while TCS is best-placed to cash in on the emerging opportunities, Infosys and Wipro also have a growing portfolio of platform intellectual properties (IPs). Phil Fersht, founder and CEO of HFS Research, says that HCL Technologies (HCLT) has made a strong pitch for this segment after it acquired select IP products from IBM for $1.8 billion in 2018. “HCLT’s new software division will succeed if it invests prudently in sales and marketing resources," Fersht says.
 
The results of investments by IT players in this segment is already reflected in their quarterly earnings. HCL Technologies’ revenues from products and platforms grew by around 73 per cent (YoY) in the third quarter of the ongoing fiscal, making it one of the biggest contributors for the upward revision of its revenue guidance from 16.5 to 17 per cent in constant currency term for FY20. Its operating margin improvement of 70 basis points to 24.7 per cent is aided largely by this segment. TCS reported that its revenue from the products and platform business under regional markets saw 5.7 per cent rise YoY in Q3 of FY20. Though the Tata group firm didn’t provide revenue numbers from this segment, observers peg it at more than $1 billion annually.
 
“All domestic IT firms are keen to build the product and platform business as a separate unit, which they possibly can spin off in the near future. Going ahead, we will see more companies giving out revenue numbers from this business as this will enable them to get premium from the market,” says Pareekh Jain, a IT outsourcing advisor and founder of Pareekh Consulting. He added that after the first phase of growth in the the product and platform business, companies are opting to be vendor neutral to fuel growth in the next phase. “Currently, most Indian firms are trying to be vendor neutral. This will enable their competitors to use their offerings. Such open source approach is a time-tested model for growth that is followed by global product firms,” adds Jain.
 
Though the product and platform business is one of the major thrust areas for these firms, there are risks. Traditionally, conducting both services and product businesses under the same roof has created friction within organisations. That’s the reason global technology majors (like HP) have separated their products and services business.
 
Another area of concern is the risk of losing large outsourcing contracts from bigger product companies like Microsoft, Oracle or SAP as IT firms build their own platforms and compete with some of the global firms in the same space. But some analysts feel such fears are misplaced. “Today, the technology world is such that most companies both compete and cooperate at the same time. So, building up platforms on their own will not lead them to lose business from global product players,” says Sanchit Vir Gogia, chief analyst and CEO at Greyhound Research.