Rising SaaS adoption to ensure global sway of IT services firms

According to experts, comparing Indian IT services with Google or Microsoft may not be fair as the US has the ecosystem to support high-end R&D in the tech sector.
The debate on whether or not the Indian IT services industry is a global success is far from over. While some believe that India leads the world’s IT services industry, others are of the view that the country has fallen short as it has not been able to create popular, game-changing products the way technology giants Google and Microsoft have. 

Both seem valid arguments, However, with the rising adoption of SaaS (software-as-a-service), experts say the Indian firms will only become a bigger player in the global IT industry.

“Today, Indian IT industry is worth more than $150 billion. No country exports this much of services. Five of the top 10 (global) IT firms according to m-cap are Indian. Three of the top five IT services firms are Indian,” said TV Mohandas Pai, former chief financial officer and board member, Infosys, and chairman of Aarin Capital. “India domi­nates the software services industry globally.”

Tata Consultancy Services, with a revenue of $22 billion and a m-cap of $114 billion, is the second largest IT firm globally after Accenture. Infosys, with a revenue base of $13 billion and m-cap of $55 billion, is the fifth largest, while HCL Tech and Wipro figure in the top 10.

According to experts, comparing Indian IT services with Google or Microsoft may not be fair as the US has the ecosystem to support high-end R&D in the tech sector. 

“For a country to create products, there are some essentials. First, you need a huge domestic market. Second, you need capital and many tech-savvy enterprises. These are not available in India even now. Total IT spending in India is around $30 billion, whereas this is at $1 trillion in the US,” said Pai.

The history of the evolution and growth of the Indian IT services industry shows that domestic firms took advantage of the opening up of the US industry during the 1990s. In post-liberalised Indian economy, consumption had also started shifting from mainframe to customer services. This opened up opport­unities for Indian firms. During the 1997-2003 period, domestic firms captured the new demand with their large talent base. Large enterprises such as SAP and Oracle supple­mented the demand during 2003-2009. The demand is currently being driven by WebEx and new-age technologies such as AI, machine learning (ML) and big data.

“Indian firms have done a great job of moving up the value chain in the services industry. The have pivoted to the new digital service space, taken share of the consulting and integration segment, and built highly profitable businesses which are the envy of the global services industry,” said Peter Bendor-Samuel, founder and CEO of Everest Group.

For most top-tier IT services firms, the revenue contribution from digital services stands at over 40 per cent. “Some Indian IT firms have taken huge strides in recent years to compete with the likes of Accenture, IBM and Deloitte in specific areas. While Indian firms still get favoured for their scale, they are increasingly viewed in a more strategic light by many clients,” said Phil Fersht, founder and CEO of HFS Research. He also said that Indian IT firms’ decision to focus more on the services side of the business was deliberate, owing to the difference in business models. 

In services, companies generate revenue by managing IT operations of global companies by writing codes and using software developed by third parties. Product development, on the other hand, is an expensive and long-gestation process, which requires significant efforts not just to produce a successful software product, but also on marketing and publicity, and sustaining competitiveness.  

However, in the past few years, domestic biggies have been creating successful IT products. In 2017, TCS set up a separate unit called Digitate, which is a pure-play software products company. Digitate houses TCS’s AI-powered product brand Ignio. Infosys, too, clubbed most of its product businesses under its subsidiary, EdgeVerve.

HCL Tech also set up a new business unit, HCL Software, last year, consolidating all the IBM intellectual property partnerships and acquisitions. HCL Tech had acquired select IP products from IBM for $1.8 billion in 2018.  Many new-age SaaS firms have come up in India and have begun to capture market share. Firms such as Zoho, Freshworks, and Druva have built succe­ssful products and are servicing global clients.

Experts say that as the global technological landscape continues to evolve with the adoption of new-age tech such as AI, ML and big data, Indian IT firms will remain relevant. Also, as more platform-based solutions are offered in the SaaS format, the world will require IT firms for continuous support.

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