How the Indian IT-BPM industry can implement successful alternate business models

The Indian IT-BPM industry today is at a crossroad. From a demand side, there are fundamental shifts in customers’ buying behavior, with a greater emphasis on end-to-end ownership, standardization, time-to-market and delivering business outcomes. From a supply side, there is a challenge of skill and expertise to address new business opportunities in the digital space. Industry estimates indicate that USD 50 billion to USD 100 billion could be at risk by 2020 due to mismatch in talent supply, infrastructure and the lack of an innovation ecosystem.

It is therefore an imperative for technology players to develop alternate business models that can deliver significantly higher value for end customers in a way that de-links revenue growth from FTE growth. While there has been a lot of talk about alternate business models over the last few years, providers need to address three key choices to capture the opportunity provided through these models-

  • Choice of markets: How should providers identify target markets most amenable to Alternate Business Models?
  • Choice of intrinsics: What core intrinsics should service providers develop to differentiate themselves in the market place?
  • Choice of execution model: Which execution capabilities should service providers invest in order to build winning Alternate Business Models?

The last few years have witnessed a significant shift in customer’s outlook towards the purchase and use of technology services. 4 major driving forces are behind this shift, as outlined below:

  • Customers are increasingly looking to accelerate “time to market by adopting standardized solutions and architecture.
  • Disruptive trends in the form of cloud, mobility and big data have rapidly increased the realm of technology solutions/offerings in the last few years.
  • Technology is being seen as a primary driver of business growth and is becoming a core part of CEO’s agenda as opposed to being on the CIO’s agenda alone.
  • The competitive boundary is blurring and is leading to a convergence of software, hardware and services providers.

All of the above drivers are creating a greater pressure on the service providers to deliver better business outcomes in a shorter time to market. The increasing emphasis on time-to-market and business outcomes by customers is likely to cause a dramatic shift in the customers’ applications landscape over the next few years – SaaS offerings and virtualized/IaaS implementations are already dominating the mix, while most package implementations will eventually migrate to PaaS.

Overall at an industry level, this is likely to significantly shrink the role and relevance of custom applications. The expected shift in customers’ applications landscape is likely to result in significant pressure on revenues from today’s core/ traditional business models of service providers. For example, a 25 per cent penetration of cloud-based CRM solutions within enterprises and SMEs will likely result in a loss of over USD 12 billion in revenues for players with traditional business models (VARs, SIs, MSPs and Package Vendors). This is also likely to erode profit pool to the tune of USD 2 billion.

Around 60 per cent of this shrinkage in revenues from traditional business models will be captured by the players with “Alternate Business Models” (SaaS vendors, SaaS channel partners, SaaS hosting providers) and the remaining will be passed on to end customers and will be reinvested in transformational initiatives. An extrapolation of this example to the entire technology spend (roughly USD 1 trillion) would indicate that service providers with traditional business models can expect a shrinkage in revenue pool of the order of USD 100 billion. Over USD 60 billion of this is likely to be captured by vendors with Alternate Business Models.

To identify opportunities and relevant target markets for Alternate Business Models, service providers need to shift their view of the market opportunity to a granular level across six dimensions – geographies (USA, UK, Europe), customer segments (SMB, B2C), industry verticals (Banking, Telecom), industry sub-verticals (for example Retail banking, Non-life insurance), business processes (policy administration) and services offered (IT, BPM, managed services) .

It will be difficult for service providers to capture this opportunity with existing business models due to multiple challenges, such as the fragmented customer base in SMEs, language barriers, the need for extremely low-cost offerings in emerging markets and the need for an onshore presence to serve public sector enterprises and government. However adopting an Alternate Business Model based approach (such as IP-based targeting of governments as well as BRIC countries, cloud-based solutions for SMEs), can open up this huge opportunity for providers.

Service providers can prioritize the target opportunities for Alternate Business Models in multiple ways that include:

  • Focus on a business function with in-depth capability, proprietary IP and ready-to-use tools. Aim to leverage these to capture opportunities across geographies. For example, business acquisition across geographies.
  • Targeted focus on a geography and customers within it, with localized capabilities, IP and an integrated solution spanning multiple business functions. For example, non-life insurers in India.

Once the providers have finalized the target market, they need to assess their readiness along four key areas to build a winning Alternate Business Model.

  • Business outcomes: Providers need to define the business outcome they will deliver for their end customers.
  • Intrinsics: To deliver the chosen business outcome, providers need to choose their source of differentiation vis-à-vis competition along four dimensions
  1. People expertise: Providers can choose to differentiate on the back of a team of experts that have specialized capabilities ranging from project management to deep domain expertise and industry thought leadership. E.g., Consulting companies differentiating through their industry experts
  2. Process expertise: Providers can also differentiate themselves on the back of superior understanding of customer’s business process either through a set of best practice improvement ideas, benchmarks on key process metrics or through patented process flows they have developed
  3. Technology/ IP: Providers can build proprietary IP through either a technology platform or software product and use that as a basis for competing in the market.
  4. Data and analytics expertise: Providers can invest in superior data management and analytics capabilities and/or combine it with proprietary databases and use it as a basis for competition.
  • Execution model: Once providers have finalized their source of differentiation in the market, they will need to identify the appropriate execution model to deliver the proposition to customers. This would require providers to make choices around 4 dimensions:
  1. Go-to-market model: To succeed in Alternate Business Models, providers need to build capabilities in selling products as well as solutions – beyond just selling services. They also need to build capabilities in indirect, channel based models as required.
  2. Talent deployment model: Today’s traditional business models largely focus on delivering services through dedicated teams. As providers move to ABM, they might need to shift the talent deployment to factory type, shared resources across customers.
  3. Technology deployment model: In current environment, customers own most of the technology infrastructure and service providers deliver services on customer’s owned infrastructure. But for Alternate Business Models, providers will need to build capabilities in owning infrastructure, assets and delivering it to customers on-demand
  4. Pricing model: Lastly on the pricing models, today the most prevalent pricing models are effort based pricing (T&M or Fixed price) and transaction based pricing. Alternate Business Models would require providers to build capabilities in newer pricing models like IP based pricing models and outcome/ risk based pricing models.
  • Foundational capabilities: In addition to the competitive differentiation and execution model, providers also need to invest in foundational capabilities across five areas to build a winning Alternate Business Model- Consultative selling, Product/ IP management, Customer relationship management, Alliance/ partnership management, and Risk management

abm

The above McKinsey framework is a useful tool for providers in two ways:

Service providers can use the framework to plot the three different choices – target market, intrinsics and execution model– on the framework and test for its robustness. Service providers can also plot their current business model for the same offering and understand the big shifts they need to make in their business model to capture the ABM opportunity.

Source: Nasscom.in

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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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