A few years ago, I wrote a piece on Rediff titled “Who Needs Software Products”. The Rediff business editor at that time added “…Services are Prime” to the title and totally took the punch out of it, but that’s a different matter (one of the reasons I decided to do my own blog!)
Anyway, in that article I posited the following:
1. The products business is very, very different from the services business.
2. The Indian services business is very profitable and the software business not always so.
3. The services business was far from becoming commoditized.
4. There were other opportunities for services companies to create IP (Intellectual Property) and gain competitive advantage instead of getting into licensed software.
Looking back, much has changed since then. Four years is a new generation in tech land. But by and large I would still stand by my conclusions four years ago as they pertain to the licensed software business.
But the thing is, the business of software has changed quite a bit. Licensed software as a business model is well past its prime. Now its about on-demand, hosted software sold on a subscription basis. For consumers and small businesses, this model is almost de rigueur for new products. With time, this will catch on in the large enterprises as well. Witness Salesforce.com’s recent success with Fortune 1000 companies.
On-demand, hosted software is often called SaaS or Software as a Service. Notice the word “Service” in it. SaaS brings the business of software closer to IT Services. Revenue characteristics of a SaaS business are more like an IT Services company. Other than that, there are more dissimilarities than similarities.
But take a little bit of BPO and add SaaS (sorry, couldn’t resist it!) and it gets really interesting. What you get is what is generally referred to as “platform BPO”. I googled “platform BPO” and a sample of what I got was not frightfully illuminating, so I won’t reproduce it. Actually, it is pretty simple to explain it. Just imagine your company had a payroll department that paid everyone, deducted taxes and took care of all the processes associated with paying employees their salaries. Now think of how it is done today. If you are in the US, your company, almost certainly is outsourcing its payroll to an ADP or Ceridian. ADP has the software and the services associated with the entire payroll function so you really don’t have to do anything more than specify each employee’s salary and bank account routing numbers. ADP doesn’t charge separately for the use of software and services. It bundles both together and charges a fee that varies by number of employees or size of payroll.
To a casual observer, platform BPO should be right up the alley of Indian IT Services players. Service delivery requires building software and providing BPO services. They do both. And the cost arbitrage is doubly advantageous.
However, that is not the entire story. Platform BPO is like the software business in many important ways. High initial investments require a pretty good understanding of the product-market space. Investing large sums of money requires confidence that comes more from understanding the customer and market than from a spreadsheet. Software companies have this in their DNA. Getting stuff done offshore is a little difficult, but not insurmountable. What is harder for them to do is to run a services operation. That is certainly not in their DNA. Yet, there are software companies like Amdocs who derive a large part of their revenue from platform BPO type services. Another area ripe for platform BPO type services is Analytics and Business Intelligence. Expect to see BI software companies making a play for a piece of the action.
What can Indian IT Services companies do? I know of smaller companies seriously pursuing platform opportunities. Unfortunately, they may not have the resources to make it happen. The larger companies, on the other hand, will find it harder to develop platforms through a top-down approach. Their best bet is to encourage skunkworks projects and hope that the ones with potential will show enough promise to justify investment. A greatly more expensive way of getting there is to acquire companies with platforms. Expect to see more of the latter.