IT,ITES AND ANALYTICS
KEY POINTERS TO UNDERSTAND THE IT INDUSTRY
Global
Size
Key
IT industry Size and Segmentation
of Indian IT industry and share of different segments
performance parameters
Recent
trends in the industry practices
Factors
could affect the growth and the profitability of an IT
Services Company and how Indian IT companies are affected by it
How
to overcome the risks and sustain growth?
Impact
of cloud on Indian IT Services industry
Industry
Trends on Analytics
IT industry is classified into 4 segments and globally the
industry grew at a CAGR of 5.7% between 2009-14.
GLOBAL SIZE AND SEGMENTATION
Exports contribute to about 70% of Indian IT industrys revenu
Indian IT industry Overview
Operating parameters
KEY OPERATING PARAMETERS
Exports Growth
Billing Rates
Utilization Rates
Employee costs
Exports growth has slowed significantly from more than
30% to less than 15% in the last couple of years..
EXPORTS GROWTH
Billing rates for the Indian IT players have remained
almost flat over the last few years.
Offshore Billing Rate
Indian
IT services exporters
have not been able to raise
billing rates over the past
few years, ever since the
financial crisis in 2008-09.
In
fact, rates declined by 1-
2 per cent y-o-y in last 2-3
quarters as a result of pricing
pressure from BFSI clients
and stiff competition from
players who were able to
pass on the benefits of rupee
depreciation to clients.
Utilization rates started to improve in early 2013 after
declining over the previous couple of years.
Utilization Rate
Employee costs remain high over the years indicating
linear growth of the industry.
EMPLOYEE COSTS AS A PROPORTION OF REVENUES
KEY INDUSTRY TRENDS
11
Foreign IT service providers closing arbitrage gap
Large
MNCs like IBM, Accenture, Cognizant, and Capgemini setting up sizeable development centres in India, the cost
arbitrage enjoyed by Indian IT services companies so far, has
shrunk significantly.
Global IT companies have expanded in India both organically
and inorganically.
MNCs increasing focus on lower-value contracts
Multinational
IT services companies, which historically focused
on large deals, are now looking at smaller deals with shorter
turnaround periods to support growth.
This will land them in direct competition with Indian IT services
companies across the value chain.
12
Increasing SLA driven business models
Indian IT services companies have been slowly but surely
moving away a from a time and material based business model
to a fixed price and service-level agreement (SLA) based model.
The global slowdown also gave this trend a push, as clients
looked to
save costs.
Adoption of cloud-based services on the rise
According
to TPI, an organisation who tracks IT deals in global
market, the number of cloud-based service contracts awarded to
Indian IT vendors increased by 100 per cent y-o-y in 2011 to 220
contracts and it is estimated to further rise to 300 contracts in
2012.
13
Sharp rise in contract expiries leading to increased vendor ch
The
global outsourcing industry is going through a
transformational phase where more contracts are expiring.
In such a scenario, clients try to renegotiate contracts to suit
their business needs.
Hence, while renewing their contracts clients are looking to
optimize
costs by reducing billing rates or getting more value for the same
money.
14
Analysis of Risk
15
Type of Risks
CURRENCY RISKS
POLITICAL RISKS
COMPETITION FROM LOW COST COUNTRIES
GEOGRAPHICAL RISKS
VERTICAL RISKS
Verticals
are the industries which the clients belong to. Verticals
include BFSI, Telecom, Retial, Pharma, Manufacturing, Logistics etc.
If
a software company is too much dependent on one or two
verticals, it is considered to carry a high vertical risk. (Ex: Aricent
Technologies)
16
Type of Risks
SERVICE LINE RISKS
Service lines are the type of work that a software company is
doing for their clients.
It could vary between low-end and high-end.
Low-end Service lines
Low-end service lines are Programming (CAD), Maintenance,
Support, Testing, Infrastructure Management Services etc.
These services are highly commoditized and there is strong
competition from low-cost countries.
Companies typically get $25/hr to $30/hr for the low-end
services
High-end Service lines
IT consulting, Systems Integration are high end service lines.
IT consulting require significant business management skills
and overall business perspective rather than IT and
programming skills.
17
Companies command much higher billing rates for these high-
ILLUSTRATION OF VERTICAL AND SERVICE LINE RISKS
Service
Verticals
Lines
BFS Tele Manufa Ret Pharm Logistic Utilities Medi
I
com cturing ail
a
s
a
Program
ming
Maintena
nce
Testing
IMS
Systems
Integratio
n
IT
Consultin
g
18
Which of these risks affect the Indian IT companies?
CURRENCY RISKS
High
About 70% of industry revenues
are from exports
POLITICAL RISKS
COMPETITION
FROM LOW COST
COUNTRIES
19
GEOGRAPHICAL RISKS
High
High
Competition from countries like
Vietnam, philipines, China etc
High
80% of exports to US and UK
(62% to US and 18% to UK)
Indian companies are affected by all these risks in a big way
VERTICAL RISKS
20
SERVICE LINE RISK
High
About60% of industry revenues
are from 2 verticals: BFSI and
Telecom
High
More than 90% of the revenues
come from low-end service lines
ILLUSTRATION OF VERTICAL AND SERVICE LINE RISKS
Service
Verticals
Lines
BFS Tele Manufa Ret Pharm Logistic Utilities Medi
I
com cturing ail
a
s
a
Program
ming
Maintena
nce
Testing
IMS
Systems
Integratio
n
IT
Consultin
g
21
OVERCOMING RISKS
22
Difficulty of overcoming a risk involves:
How much of existing competencies can be transferred?
How much of new learning or effort or investment is involved?
OVERCOMING RISKS
Geographical Risks
BFSI
Application Development
US
BFSI
Application Development
Germany
This involves understanding the practices (cultural, business
and regulatory) of the new geography
Existing competencies in Vertical and Service Line will be
helpful to over come this risks
23
OVERCOMING RISKS
Vertical Risks
BFSI
Application Development
Healthcare
Application Development
This involves understanding the new vertical
Services Line Competencies can be used to over come this
risks
24
Service Risks
Application
Development, IMS,
Support etc
IT Consulting
This risk is very difficult to overcome because:
Very little of existing competencies can be
transferred
Tough competition from big players
(Accenture, EDS (HP) etc)
Brand positioning of Indian IT players
But it is important to overcome the service line risk as:
This involves moving up the value chain (removing other risks
is more a horizontal movement)
Billing rates can be improved only by moving up the service
25
Cloud Computing
TRADITIONAL IT SPENDING
CLOUD CHARACTERISTICS
The cloud platform
comprises of three kinds
of services:
Software
as a Service
(SaaS)
Infrastructure as a
Service (IaaS)
Platform as a Service
(PaaS)
NEW ROLES UNDER CLOUD
COMPANIES IN CLOUD
Cloud Segments
Major companies
SaaS
Salesforce.com, Taleo, Netsuite,
Citrix online
PaaS
Salesforce.com, Netsuite, Microsoft
(Azure), CA Technologies (CloudPro)
IaaS
IBM, Rackspace, EMC, Amazon, HP
Cloud
Global cloud market is expected to grow at a CAGR of
about 30-35% to reach about $700 bn in 2020.
GLOBAL CLOUD MARKET SIZE
Domestic cloud market is also expected to grow at a
CAGR of about 35-40% to reach about $ 20 bn in 2020.
DOMESTIC CLOUD MARKET SIZE
BENEFITS OF CLOUD TO USER
Cloud
services offer trememendous flexibility of usage and
scalability, which, if applied effectively, can reduce IT costs for a
company considerably.
The
flexibility of cloud services is highly suited to web sites and
web services, which have peaks and troughs of data usage.
For
example: During the Indian Premier League cricket
tournament for example, sports websites will witness a flurry of
activity and will require further processing and data storage
support during that period.
Small
and medium enterprises (SMEs) will be more pliable to
move to cloud services due to the easy access to enterprise
applications which is provided by a service provider over the cloud.
BENEFITS OF CLOUD TO USER
Other advantages of cloud services include protection from
technology obsolescence as the cloud provider takes care of the
upgrades in the software and incurs regular maintenance.
The
application can be used on a pay-per-use basis as the cost
of the software is amortised over a large number of user
companies by the service provider.
BENEFITS OF CLOUD TO VENDOR
For
the vendors and service providers, the opportunity comes
from access to a whole new market the SMEs, who are averse
to making significant upfront investment in IT.
This
would result in overall market expansion for the vendors,
who had so far achieved limited success in targeting this
segment.
BENEFITS OF CLOUD
and Reduction in costs
CONCERNS OF CLOUD
For User Organizations
Security a concern in shared
resources
Bugs in platform service or
software application hurts more
than one user
Connectivity
issues will hamper
productivity
Loss
of control on data in case of
server abnormalities
Sunk
costs incurred on IT spends
For Vendors
IMPACT OF CLOUD ON LARGE ORGANIZATIONS
In the short-term Large companies that require a substantial amount
of customisation will not adopt cloud services easily.
IT
service companies, who provide enterprise application services
(like SAP or Oracle) to large companies, may not see much change in
their business models in the short-term.
Over
time, once the useable life of their IT infrastructure comes to an
end, they would be more willing to migrate to cloud services for their
non-critical applications like payroll, admin etc
Though close to 70% of Fortune 500 companies are
adopting cloud in some form, the proportion of the IT
spend on cloud is about 3-4%
CLOUD ADOPTION RATE
% OF FORTUNE 500
COMPANIES
% of TOTAL SPEND
ALLOCATED FOR CLOUD
Big companies are
adopting Cloud only for
non-core areas
IMPACT OF CLOUD ON SMEs
Rapidly
growing cloud market among SMEs is already compelling
traditional IT service providers to rethink their business models to
include pay-per-use models.
Services like those for CRM, payroll etc have been adopted by SMEs.
ERP
software developers like SAP have now ventured into making
versions and parts of their software which can be used over the cloud.
Hardware
players like IBM are also venturing into providing
infrastructure services over the cloud.
PROPORTION OF SMALL AND MEDIUM ENTERPRISES USING
CLOUD
IMPACT OF CLOUD ON INDIAN IT SERVICE COMPANIES
SHORT-TERM CONCERNS
As a majority of the Indian IT service exports revenues come
from IT spends made by large enterprises, there will not be a
significant disruption in the service line share of Indian IT
exports over the next 5 years.
LONG-TERM CONCERNS
The largest share of revenues currently comes from customisation
of enterprise software, building business specific applications and
managing enterprise IT infrastructure.
However, services provided over the cloud are standardised and
have minimal scope for customisation. Over the long term, thus,
spends on CAD are expected to reduce.
Integration and maintenance services for enterprises are also
expected to reduce. However, these services would then be
provided to the cloud service providers instead of the user
IMPACT OF CLOUD ON INDIAN IT SERVICE COMPANIES
NEW OPPORTUNITIES
Tier-I companies like TCS, Infosys, Wipro and HCL along with
some mid-size companies like Persistent have already begun to
create frameworks and offer cloud computing services.
The cloud computing market is expected to open up new business
for Indian IT service providers in the long-term owing to the
following:
IT service companies are building expertise in cloud service
delivery platforms and are expected to garner business from
providing consulting and migration services to existing clients to
migrate their non-critical applications to the cloud.
Small and medium enterprises adopt cloud services readily, Indian
IT service players looking to develop SaaS applications.
The estimated cloud services market for Indian service providers
was $2 bn billion in 2012-13, comprising largely of SaaS.
Analytics : Overview
ANALYTICS : INTRODUCTION
Analytics
is the discovery of meaningful pattern in data
Analytics is a decision-making science which has been in use for a
long time.
Companies have always been using analytics to find out various
meaningful patterns, trends or some meaningful conclusion from
various forms of data.
It
helps to take various business decisions based on real data
instead of intuition or apparent pattern.
With the evolution of enterprise IT, today companies are able to
capture various transactional or behavioral data (of customers) in
digital form at minimal cost.
Performing
analytics on that data has become pertinent as
TYPE OF ANALYTICS
BASIC OR DESCRIPTIVE ANALYTICS
Descriptive
analytics is used to understand the trend or pattern in
past data.
Very few basic questions like, "What has happened?", "Why did it
happen?", are answered through descriptive analytics.
Standard
reports on regular basis ( e.g. monthly MIS), adhoc
reports, query drill down to understand various underlying
parameters and alerts which have some predefined constraints are
few examples of descriptive analytics.
It
can be performed using standard tools like Microsoft excel, SAS
(Statistical Analysis Software), SPSS (Statistical Product and Service
TYPE OF ANALYTICS
PREDICTIVE ANALYTICS
Predictive
analytics is used to forecast future trends or patterns
in various scenarios.
Questions
like - "What is going to happen tomorrow to a
particular parameter (e.g. sales, profit, etc)?", "What will happen if
there is a constraint?" - are answered through predictive analytics.
Statistical
modeling, forecasting or predictive modeling fall in this
category.
Although,
predictive analytics can be performed using standard
tools similar to descriptive analytics, it requires significant
statistical and domain knowledge to predict the future.
TYPE OF ANALYTICS
PRESCRIPTIVE ANALYTICS
Prescriptive
analytics is used to prescribe optimum action for
the company to achieve some target within a set of constraints.
Questions
like - "What is the right thing to do to increase
sales?", "How to spend my advertising money?", "What is the
right price at which this product should be launched?" - are
answered through prescriptive analytics.
Optimisation
using scenario analysis, predicting future
constraints are few actions which are known as prescriptive
analytics.
Doing
this not only requires high level of business knowledge,
but also super computers to process various forms of complex
Analytics : Industry Trends
Earlier, analytics was exclusively used for marketing functions.
However, currently, all the companies have started using
analytics for other functions like operations, finance, human
resources, etc..
ANALYTICS REEVENUES BY FUNCTION
MARKETING AND SALES
Marketing
and Sales was one of the first function to adopt
analytics to understand customer profiling.
Nowadays,
enterprises are also spending money to find out
the right pricing strategy for their various products and
services.
In
a tough macroeconomic environment, companies
emphasise more on marketing and sales analytics to grow
their business.
Although
this is used by most of the companies across
verticals, BFSI and retail are major users of marketing
Human resource (HR):
Although
it contributes to the least proportion of the
industry's revenues, HR is one of the fastest-growing areas of
analytics.
Analytics
tools are being used across organisations to
understand sentiments among employees, assess root causes
of various cultural differences, engagement pattern, etc.
OPERATIONS:
Supply
chain analytics, which is used for scheduling,
optimisation of processes in the operation function is a major
source of revenue.
It also involves predictive modeling of downstream demand-
supply scenario, thus optimising the upstream work to
optimise cost or increase revenues for clients.
FINANCE:
Finance-related
analytics is mostly used for fraud and risk
management purposes.
Increasingly,
more raw data is being used in finance-related
analytics to detect fraudulent activities and assess various
market risks instead of using a single point score to quantify
risk.
This
is mostly used by the BFSI sector.
MAJOR INDUSTRIES ADOPTING ANALYTICS:
Following industries contribute to 70-80 per cent of analytics
players' revenues
Banking: the most suitable product for a particular customer to enable
higher sales.
Insurance: Determination of premium amount for exotic and traditional
products and tracking fraudulent activities while processing claims, etc.
It is also used to analyse risk at the portfolio level while reinsuring some
of the insurance companies.
Healthcare and life sciences: Analytics is used in managing the
supply chain, pricing strategy of new drugs and scenario analysis
during drug developments.
Telecommunications: The pricing strategy for different value-added
services and marketing those to right targets is the most common use of
analytics in telecom.
Retail: Effective usage of sales and marketing budget is a crucial
activity for retail players. Analytics is also used to determine store
efficiency, supply chain optimisation, customer churn pattern, retention
EMERGING INDUSTRIES FOR ANALYTICS:
Following industries contribute to 20-30 per cent of analytics
players' revenues
Energy/utilities : Demand forecast using pattern in downstream enduser industries is the major usage of analytics. It also used by various
players to determine prices of their services or products.
Media/entertainment: This industry uses analytics to optimise
marketing cost, to understand the socio-behavioural pattern of
customers and to determine effectiveness of any ad spending.
Transportation: Optimisation and scheduling of different activities is
core to any transportation company and analytics can help them in this
area
MAJOR ANALYTICS PLAYERS:
VARITEY OF PLAYERS WITH DIFFERENT POSITIONING:
As the industry is expected to grow very fast, many players are
entering the industry.
The number of players is likely to increase at a rapid pace over
the next few years.
While the niche players offer domain expertise and rich
experience, players from IT services and ITeS leverage on the
long-term relationships that they have with clients across
industries.
Clients are also very comfortable with sharing confidential data
with IT services vendors as they have a proven system of
information security.
All kinds of players will exist in the industry with different
positioning and each of them will have different kinds of offerings
in the long run.
EMPLOYEE CRUNCH : THE BIGGEST CHALLENGE
Talent
crunch is the major challenge for the industry and it is expected to
intensify over the next few years.
In
the past few years as well, there has been a huge demand for
readymade talent in the industry.
The
primary reason for this is multiple skills are required to be able to
work effectively in this field.
The
major skills required include in-depth statistics/mathematics skills,
computer programming knowledge to work with big volume data and
strong business knowledge to understand the meaning of different
patterns in data.
The
number of people in the industry to grow to 35,000 in 2016-17 from
MARKET SZE AND
OPERATING PARAMETERS
Indian analytics market to grow by 6X over next 5 years
MARKET SIZE AND GROWTH
KEY OPERATING PARAMETERS
Billing Rates
Utilization rates
Off-shorability
Analytics services earn significant premium in terms of
billing rates as compared to the traditional outsourcing
services like IT services or ITeS.
BILLING RATES
Operating margins are in the range of 40-50 per cent for most of
the analytics players. In terms of cost structure, employee cost
is the biggest cost, followed by sales and marketing cost.
MARGINS
Higher utilization reflects better demand growth
UTILIZATION
The
utilisation levels of various analytics companies are in
the range of 85-90 per cent.
This
is significantly higher than the utilisation of IT services
players who typically enjoy a utilisation rate of 75-80 per cent.
The
bench duration of employees is also never more than 1-2
weeks given that there is strong growth in demand for
analytics.
Moreover,
the skill sets required are also common in nature
and can be used across various projects
HIGH OFFSHORABILITY
Analytics
Thus,
has far higher offshore potential.
it allows a greater proportion of work to be delivered from
the offshore location.
It
not only saves cost for clients, but also improves service
providers' margins.
Industry
sources suggest that more than 90 per cent of
analytics work for a typical project is being carried out from
offshore locations.
ITES
About 80% of Indian ITES revenues come from customer
care and transaction services.
ITES: REVENUE BY SERVICE LINES
About 80% of Indian ITES revenues come from customer
care and transaction services.
ITES: BILLING RATES FOR DIFFERENT SERVICE LINES
About 80% of Indian ITES exports revenues come from US
and UK.
ITES: EXORTS REVENUE BY GEOGRAPHY
