Should IT services players focus on productised services rather than products?

Revenues from products stagnant at just 3 to 4% of the revenues of Indian IT services majors

With revenues from product stagnant at just 3 to 4% of the revenues of Indian IT services majors, is it time for them to shift focus to productised services rather than just products.

According to a report by J P Morgan newer technologies such as social networking, mobility, analytics, and cloud (SMAC) individually or convergence of some of these can make productised services easy. Productised services means solutions enabled by SMAC offerings.

The ability to do so efficiently will mean SMAC contributing an incremental 3-5 years revenue pool of $5 billion that should help raise the industry’s revenue compounded annual growth rate (CAGR) by at least 1% point.

The advantage of this model is that unlike other technology application adoption curves, this has non-linear take-off. “We see inflection point in adoption kicking in during CY14 with revenue take-off occurring with a slight lag. So, the SMAC contribution will likely be non-linear and partly back-loaded over the next 3-5 years. But we reiterate that this pattern of take-off is more the norm than the exception when talking of technology-led commercial advancements and thus should not detract from its promise. Today, the offshore leader in these rather early days of the SMAC journey is TCS,” said Viju George and Amit Sharma of JP Morgan Asia Pacific Equity Research in their report.

The advantage of productised services is that it allows for “Standardising” solutions, which entails re-engineering and platform development (well within the ambit of larger IT Services companies’ repertoire of capabilities) while the cloud architecture offers inherent “scalability” advantage. “Typically, the relative lack of standardization or scalability are prime reasons that product models have failed to take off,” said the report.

Phaneesh Murthy, CEO of iGate also agrees and says that Indian IT services industry has been great at services rather than products. “Most of the companies when they talk about non-linearity, they were talking about selling products. But India is not good at building global products, but is a great market for services. If you want to break linearity of people and revenue then you need a shared services model or outcome-based model. That’s what we are saying IP based shared services model,” said Murthy.

In case of both TCS and Infosys, which have been talking about products, though the individual number is large, the total percentage to revenue is small. In case of TCS revenue from products is around 340 million and Infosys it is $300 million in CY12.