IT SERVICES COMPANIES NEED TO TRANSFORM THEIR BUSINESS MODEL

Rachana Khanzode, December 22, 2008
The Financial Express

The impact of global economic slowdown is not limited to large IT companies but mid-caps are feeling the heat too. Industry veterans are getting ready to face the challenge. Arvind Thakur, the chief executive officer of NIIT Technologies is one among them. Being a part of NIIT since its inception, Thakur is responsible for the software and key organisational functions of the company. A graduate from IIT Kharagpur and postgraduate (industrial engineering) from NITIE, Bombay, Thakur feels that non-linear growth is expected to push the industry to a large extent. He is implementing it at NIIT too. In a recent chat, he also points out that India makes a big market and an opportunity for the industry to tap into.

Excerpts:

How has the current economic slowdown impacted the mid-size services companies?

Mid-size services companies have not been materially impacted. The results of the quarter ended September 30, 2008 indicate that most companies have shown healthy sequential growth. NIIT Technologies grew 5% sequentially in the last quarter. The economy is currently experiencing its worst financial crisis and each industry will have its own challenges. The real issue with the current meltdown is the liquidity crunch.

Fortunately, IT services companies generate cash surpluses and are hence comfortable in riding the storm.

Will non-linear growth become a strategy for the mid-caps and do we see its adoption at NIIT?

The competitive landscape requires the industry to transform its business model. Low cost services will need to give way to value added models where growth in revenues do not imply proportionate growth in headcount. Such businesses are non-linear and they become even more relevant in the current context as revenues will grow with reduced people costs.

NIIT Technologies has been an early mover in this direction. Our foray into managed services and IP-asset based services are the cornerstone of our non-linear strategy. Already a significant portion of our revenues are derived from such businesses. We see a huge opportunity in the non-linear business in the area of remote infrastructure management and at NIIT, we are clearly focused on it. According to Nasscom, the area of remote managed services is about $70-$80 billion and less than 3% has been captured at the moment. Last year, 20% of global revenues accrued from such businesses. We set a goal to increase it to 25% in this financial year and hope to increase it to 40% over the next three years.

Recently we unveiled ‘IPF3,’ our insurance process framework, for the commercial insurance industry.

Earlier this year, we acquired German-based Softec to create IP-asset based solutions for the airline industry. These are affirmative initiatives to support our non-linear strategy.

How does this impact your hiring patterns?

We want to reduce our dependence on headcounts by at least 22-25%. At the same time, we have improved our employee utilisation from 77% in the last quarter to 83% in this quarter. We recently launched our software-as-a-service model and our pay-per-use model will help us generate revenues without depending on the headcounts.

Financial services industry is now impacted in Europe too. Was NIIT associated with any of the banks and what has been the impact on the company?

Our focus on BFSI is mainly in the insurance sector. In that aspect, the current scenario in the BFSI vertical in European markets has not impacted us.

Will India play a bigger role in making up for business especially for mid-caps? Do we see India adding more revenues to NIIT?

The Indian IT services and ITeS market has been growing at a CAGR of 25-30% over the past 3-4 years. IDC predicts that the domestic market will touch $50 billion by 2011-12. India Inc is witnessing a growth spurt in the areas of IT adoption and enterprise IT infrastructure. NIIT Technologies has always had a strong presence in the domestic market. About 10% of NIIT Technologies’ revenues are derived from this market. We are sharply focused in the government sector for IT transformation and specialised GIS (geographical information systems) solutions. In the corporate sector, we are largely focused on manufacturing and retail industries where we have delivered enterprise services including package solutions and infrastructure management devices. Even in these trying times, the economy is predicted to grow at a robust clip of 7% becoming the focus of many companies. Innovative solutions will evolve for this market like our recently launched SaaS (software-as-a-service) business.