Blue Ocean Strategy – SpiceJet flying to destinations unchartered by rivals

Tough competition, margin pressures and too many big carriers flying in the regular busiest routes like Singapore, Kuala Lumpur, etc has forced the Indian low-cost carrier (LCC) SpiceJet to spread its wings to destinations like Kazakhstan capital Almaty, Uzbekistan capital Tashkent, Chinese city Guangzhou and Chinese special administered region (SAR) Macau that are left unchartered by major full service peers and sought government nod to fly to 10 new destinations like this. SpiceJet already flies to war region Kabul Afghanistan, tourism-cum-trade centers of Colombo, Dubai and Kathmandu and the airline is expected to fly to Male, Riyadh and Dhaka soon. "We follow a blue ocean strategy for international flights which means flying to places where not too many airlines go. We would like to go to more points in China," SpiceJet CEO Neil Mills said. Mills is targeting routes where the airline will have a first-mover advantage at least six months to one year head start, particularly where its competitive rivals other Indian LCCs are not flying, not much competition and where setting up operations and getting permission is difficult, due to tough bilateral rules. SpiceJet's strategy to fly to the above said destinations with no competition from the other Indian rivals could benefit it as there is demand on these routes which will allow it to charge rewarding fares and increase profitability.

SpiceJet Blue Ocean Strategy is to develop new markets instead of competing with experienced big players in the established routes which are no longer profitable due to margin pressures and other costs along with cut throat competition. But the Blue Ocean Strategy of flying to war torn Afghanistan Capital Kabul carries a huge risk and only three Airlines fly to this destination but there has been significant medical tourism traffic from Kabul into India along with strong trade between the two countries, basic supplies are carried mostly through air rather than any other mode of transport and with supply constraints allowing airlines to charge between Rs 10,000 to Rs 29,000 for a one-way flight that took just two hours — making it one of the most profitable routes from India. Flying to former Soviet Republics like Uzbekistan, Kazakhstan, etc is also a good move because there have been good growth in terms of trade between the countries in this region and India and more over close to 1000 students from India are going to these countries for studying medicine and also students from these countries are also coming to India for studies as part of exchange programs that include cultural, academic, scientific, etc. National carriers from Uzbekistan, Kazakhstan are flying to India since past few years and there is also good opportunity for growth in tourism traffic between India and various countries in the Central Asia as tourism is being mutually promoted by all the nations.

A look at other international routes announced by SpiceJet like Madurai-Colombo, Delhi-Dhaka-Rangoon/Yangon, Delhi-Riyadh, Delhi-Guangzhou, and Trivandrum-Male reinforces its Blue Ocean Strategy of flying to unchartered routes not served by competition. Large Tamil population in Si Lanka along with strong business links has encouraged the airline to connect Madurai and Colombo and expects demand to be strong. Delhi Riyadh route is again significant as there is large movement of labor as many big contracts won by Indian companies and Muslims from India travel to this country in large numbers for this purpose. Guangzhou is China’s third most important city and it’s the manufacturing capital and lots of Indian Traders frequently travel to this city and no Indian airlines fly to the city and Macau is famous for its casinos and tourism. SpiceJet is also experimenting with this first-mover advantage within India too by flying to smaller towns and cities and connect them with multiple metros and larger cities, where no Indian airline flies at the moment. SpiceJet already connects 16 destinations, including Jabalpur and Amritsar, as well as Hubli and Tirupati, among others and it is doing this through its acquisition of the 78-seater Bombardier Q400.

SpiceJet adoption of the Blue Ocean Strategy of flying into new destinations underserved by its rivals with good revenue potential and taking big risks will only work for shorter time as first mover advantage will be lost once all the competitors start entering into these destinations once they see the profitability in those routes. So SpiceJet have to make money fast and hope that the bilateral agreements between India and nations like Saudi Arabia, China that makes it hard for getting licenses by the other Indian rivals will be there for some more time. Volatility in aviation turbine fuel (ATF) prices which is imported into India is another concern as most of the Indian Airlines are struggling to keep their costs under control in terms of fuel expenses. Maintaining two different types of aircrafts new-generation Boeing 737 for playing between major routes and Bombardier Q400 for flying to smaller cities and minor routes is like operating two low cost carriers which will put pressure on managing costs and technical maintenance costs will also raise. Another risk is the domestic strategy of flying to smaller cities and towns which are point to point as Air Deccan earlier failed to make profits in this model. But SpiceJet is forced to take these risks and adopt a Blue Ocean Strategy as the airline in the last financial year made losses of around Rs 600 crore and it picked up 12 million passengers. Neil Mills, the current CEO is aggressively looking to turnaround the airline with these strategies. 

Discussion Points:

1.Will SpiceJet strategy of flying to destinations unchartered by rivals generate profits?
2.What should they do additionally to keep up revenues and increase profitability along with safeguarding its market share?
3.Despite its Blue Ocean Strategy, SpiceJet is not able to compete with other players like Indigo Airlines, Jet Airlines. What should they do improve their performance?

Significant Growth in Healthcare Outsourcing opportunity for Indian IT Vendors in 2012

At the end of June 2012, the US Supreme court upheld the main elements of the Patient Protection and Affordable Care Act, which President Barack Obama signed into legislation in the year 2010. The law mandates all the American citizens to buy health coverage in 2014 or else pay huge penalties if they fail to buy and the employers should offer healthcare coverage for their full time employees and their dependents or they will face penalties. After this decision more than 30 million uninsured Americans are estimated to buy healthcare insurance because of the reform, and new projects are expected by Indian IT Vendors like data conversion, creation and management of electronic health records, as well as claims processing and insurance sales. Indian IT Vendors can actively vie for the deals worth up to $22 billion (Rs 1.2 lakhcrore) and according to NASSCOM, Healthcare accounts for another 4% of the IT-BPO industry, which is expected to grow slower this year, at 11-14% from 17% last year. According to TPI, a sourcing advisory the new law allocates about $37 billion for creation and management of electronic health records, data conversion, beta testing and change management.

According to Everest Group report titled, “IT Application Outsourcing (AO) in the Healthcare Payer Industry – Annual Report 2012”, the US$20 billion healthcare IT outsourcing (ITO) market nearly doubled its cumulative contract value in 2011 compared to 2009. Processes that are outsourced to Indian IT vendors include Application development and maintenance, testing services, and software package implementation and North America market is the primary market that outsources in healthcare payer segment. India is the preferred delivery location in this segment followed by China, the Philippines and Latin America and more than US$3 billion worth of payer AO contracts are due for renewal between 2013 and 2018. The Everest Group Service Provider Landscape analyzes more than 15 AO service providers, eight of which are mapped on the PEAK Matrix. The Leaders include Accenture, Cognizant and IBM; Major Contenders include CGI, Dell Services, Infosys and TCS; and Emerging Players include Mphasis. Other aspiring service providers in the payer AO space include Fujitsu, HCL, Hexaware and Mahindra Satyam. 

<!--[if !vml]--><!--[endif]-->Cognizant Technology is far ahead of its peers in terms of Healthcare vertical revenues with US$1.74 billion 37% (YoY), followed by Wipro, TCS, Infosys & HCL Tech. Infosys dethroned HCL Tech and it shows that Infosys is seriously targeting more deals in this vertical as evident with 42% YoY growth. Even TCS is also focusing aggressively on healthcare segment and Cognizant is keeping up its growth. Cognizant was the first player who bid aggressively in healthcare vertical and has built significant domain capability in healthcare and domain which makes it difficult for other Indian IT vendors to match it. Table source: “Report Card for the Indian IT Majors: Pecking Order Analysis of the “WITCH” Group”

Healthcare Vertical has become a critical for all the Indian IT vendors due to the ongoing reforms in the US and also the trillion dollars spend that is expected in coming years in United States. Analysts estimate the US’ healthcare market at $2.5 trillion and projected to grow to $4.6 trillion by 2020. For capturing this opportunity Indian IT vendors have to invest in developing and acquiring domain expertise in terms of people, processes and technologies. Analysts also predict that there will be significant rise in the M&A transactions particularly in Healthcare domain as most of the Indian IT vendors do not have necessary domain expertise and skills in healthcare domain and they are aggressively looking at the M&A route to acquire companies that have healthcare domain skills and expertise. Regulatory conditions also force the Indian vendors to set up delivery centers in United States and service the clients locally and also have to recruit local talent for this. Infosys and TCS have announced that they are looking for acquisitions in this segment both in US & Europe.

IT Application Outsourcing (AO) in the Healthcare Payer Industry – Annual Report 2012, published by Everest Group, an advisory and research firm on global services identified five key themes is fuelling IT services demand in the U.S. healthcare payer market: Compliance with regulatory reform, Consumerization, Claims transformation, Convergence of information across healthcare entities, Consolidation and M&A. Healthcare vertical also provides an opportunity for the Indian IT Vendors to also focus on nonlinear revenues that will lead to more revenues and increased margins and profitability. Outsourcing penetration levels is very low in the healthcare Payer Industry and in future this segment is expected to grow rapidly and present a significant opportunity for the Indian IT Vendors to focus and improve their presence. 

Discussion Points:
1.What is the impact of PPACA act on healthcare BPO particularly for Indian Outsourcing vendors?2.What are the strategies adopted by Indian Outsourcing vendors to capture revenues from US healthcare outsourcing due to the changes and reforms in Healthcare?
3.What are the processes in healthcare that can be outsourced to Indian vendors?

India IT-BPO Industry 2012 – Contradictory Growth forecasts by Top Indian Players

Indian Outsourcing Industry (ITO/BPO) top players include TCS, Infosys, Wipro & HCL technologies and these players gave contradicting growth forecasts for their companies wherein Tata Consultancy Services (TCS) and HCL Technologies, announced good growth in earnings for the quarter ended June 2012 and despite the challenging macro environment gave good growth forecasts for the year 2012 while Infosys and Wipro, announced not so great earnings for the quarter ended June and not so great growth forecasts for the year as both the companies are still struggling with internal restructuring and Infosys seeing budget cuts by their Clients. Both Wipro & Infosys have seen major changes in the Leadership where in new CEOs took over and also saw significant changes in the internal organization structures and they are struggling to adapt to changing business environment. The global economic slowdown is a matter of concern for the IT industry, fall in volume growth and pricing, shortening of contracts and slow decision-making, geopolitics (since it is election year there are visa hurdles) and currency arbitrage particularly weakness in rupee are major concerns for the Indian Outsourcing industry.

TCS has been doing well since past three years post the 2008 subprime mortgage crisis and has been able to sustain double digit growth in sales and profit in the changed outsourcing demand. The growth has been good across the verticals and across geographies not limited to few specific verticals and geographies and has benefited the most by the upsurge in outsourcing demand in the past three years. For the quarter ended June 2012, TCS reported volume growth of 5.3% and it saw growth across markets, industries and service lines. The reason for such good performance by TCS is because the company identified and invested in various non-linear opportunities such as software products, platform based BPO offerings and Cloud offerings like software as a service (SaaS), and focus on unit-priced contracts for the past few years. Also TCS has scale in terms of presence in major geographies, skills, capability and focuses towards creating intellectual property. TCS is also looking at inorganic growth wherein it is looking at a deal size of USD 50 million to USD 500 million if the target is a strategic fit particularly looking at inorganic growth to strengthen its European presence.

Infosys earnings for the quarter ended June 2012 were disappointing and the company did not give guidance for September 2012 quarter and cut its guidance for 2012-13 to 5% which is far below the NASSCOM ’s forecast of 11-14% growth for FY13. Infosys is still struggling with internal leadership and organizational changes as it had a new CEO and Chairman and is facing difficulties with its business model adaption to the new demand environment as there is a continuous commoditization of traditional IT services (Application Development & Maintenance) and it is finding it difficult to maintain premium pricing during contract renewals. Major part of Infosys business is from discretionary IT projects and it is looking to migrate large part of its business into non-discretionary since couple of years and looking to utilize discretionary resources to focus on growth of consulting and systems integration (33 % business comes from CSI) and products, platform and solutions (PPS) business. Infosys’s product efforts are centered on Finacle which is core banking solution, and other platform-based services for the likes of Airtel Money. Infosys built a US$ 2 Billion Packaged implementation business   and also focusing to create an IP-based and non-linear revenues. Infosys is looking at both organic and inorganic routes for growth and has a healthy cash pile which can be used for acquisitions that helps to penetrate new markets, create new markets and acquire intellectual property.

Wipro too had a new CEO coming in 2011 but is still struggling with internal reorganization issues and announced a 1.4% QoQ dip in dollar revenue following a decline in most of its businesses (BFSI fell 2% & Retail & Transportation fell 4%) and geographies for the quarter ended June 2012 and  guidance for the quarter ending September 2012 is also disappointing. Despite the acquisition of several companies fore inorganic growth in the last decade to strengthen its business verticals, which Wipro calls the "string of pearls" strategy, the company has not been able to overtake its peers both in terms of revenue and profit growth. But CEO TK Kurien is confident about Wipro recovering as it had done well in terms of adding clients and its strategy comprises of three phases which is growing the existing client base to continue to get short-term sustainable revenue, invest and broaden its customer base and make sure they do not get caught up in the changes and swings of their client business and prepare to face adversities. Wipro believes it is doing well with the first phase and expects the second phase to take another 8 to 12 months and the third would be a year-round story.

With strong QoQ growth across verticals (infrastructure management services (9.2%), enterprise applications services (4.8%) and engineering and R&D services (3.9%)), HCL Technologies posted better-than-expected results. But HCL Technologies is still struggling with its BPO business as it continues to be sluggish with a 2% fall in growth but it has moved to an outcome-based pricing model from its current input-based model. For the first time HCL Tech crossed $4 billion in terms of revenue and the company signed eight multi-year, multi-million transformational deals, while in the fiscal 2012, it won 52 deals. HCL Tech believes despite over all IT spends being flat there are contract restructuring and significant churn in the renewables market and it looking to capture significant share through these two. HCL Tech CEO believes that Indian IT industry should look to convert challenges to opportunities and is focusing on the specialization, domain competency and vendor churn is playing out for HCL Tech and it is aggressively investing in the areas of infrastructure services, engineering and ERP (enterprise resource planning). HCL Tech has also inorganically with its acquisitions of companies like Axon and these acquisitions have been key drivers of growth for the company.

Indian IT industry is facing many challenges in the current year and all the four top players have announced specific strategies that will help them overcome the growth problems and are investing in technologies like Cloud Computing, Platforms, products & other nonlinear initiatives According to NASSCOM, aggregate revenue for the Indian IT-BPO sector is estimated to cross USD 101 billion for FY 2011-2012 and exports accounted for ~USD 69 billion( IT Services $40bn, BPO $16bn & Engineering Services & Products $13bn) , growing by 16.3% over the last fiscal year and for FY2013, the export revenues are expected to grow by 11-14% while the domestic revenues will grow by 13-16%. 

Wipro Non Linear revenue strategy focus on Cloud, Mobility & Analytics

Early 2011 Wipro dismantled its joint CEO model and appointed TK Kurien as CEO who restructured Wipro into more simple, agile and customer centric with focus on core momentum verticals and the four key industry verticals included 'Banking, Financial Services and Insurance (BFSI)', 'Energy & Utility', 'Retail and consumer products' and 'Healthcare'. Wipro has been undergoing a massive restructuring exercise under TK Kurien, who is making extensive cultural changes within the organization, to bring back sustained growth for Wipro as it lost its number three position to Cognizant Technology Solutions. Some of the changes are aligning the organization structure with demand generation process and efficiency, variable component of management and mid management salaries linked to client and employee satisfaction, focusing more on existing accounts for more revenues, new team for chasing the change the business deals and focusing on increasing the non linear revenues from emerging areas like cloud, mobility and Analytics. “The future is clearly the non-linear model. We are already seeing signs of it. The linear model will break. Our focus will now be on cloud, mobility and analytics,” said Kurien. “I want to leave behind a legacy of growth. Thought leadership will not bring revenues.”

Wipro is focusing on analytics, social media (for enterprises), cloud and mobility for its future revenue growth and hopes these new service lines grow by 30% YoY and it is aggressively investing on these non linear initiatives. Wipro is looking to invest $1Bn in overseas acquisitions over the next 18 months and looking at deal size of around $50Mn - $300Mn and looking for specialized companies in analytics, cloud computing and mobile communications. Wipro is focused on industries including health care, financial services, energy and utilities, and retail and is looking for regions like Saudi Arabia and in parts of Northern Europe and Asia for their acquisitions. The company recently acquired Promax, an Australian company specializing in trade promotion for strengthening its analytics practice which gives it a head start over competitors in a segment where its peers are looking to enter for future growth. According to industry sources, Wipro had around 250 analytics clients and the company is strongly betting on Analytics for non linear revenue growth. Wipro has been showcasing client wins in new areas like analytics and cloud. "The company's keen focus is to grow its new focus areas like Analytics (35 new accounts in the year), Cloud (40 new wins in this quarter) and Mobility (50 new customers added in FY13)," reads a recent report from brokerage house Prabhudas Lilladher.

Wipro is also focusing on mining its 138 largest clients by using dedicated engagement managers and a report by Motilal Oswal highlights the fact that post restructuring, Wipro has seen impressive client additions and mining of large clients to increase its number of customers in the higher contribution buckets (USD100m+ clients up from 1 to 7 in 5 quarters). In a recent conference call with analysts, Kurien also mentioned that the company was investing in sales capabilities and had divided its sales teams into hunting (new client acquisition) and farming (mining existing customers) teams. Consequently, Wipro's sales and marketing expenses were the highest since the fourth quarter of 2003-04, adds the Prabhudas Lilladher report. Wipro restructuring is almost complete and company is looking at specializing in sub -verticals with longer revenue cycles, build capabilities in analytics and cloud computing through acquisitions and standardize its back-end using lean manufacturing principles for revenue growth. Another area where Wipro is betting big is mobility and company had less than 150 people working on mobility solutions earlier; the number now stands at over 1,500. Wipro Technologies has announced that Wipro’s Mobility Solutions will collaborate with Kony Solutions, Inc., a mobile application development platform provider and will offer an integrated portfolio of mobile application technology and services to enterprise customers in the US, UK, Australia and West Asia.

Wipro revenue growth for IT services was lowest among peers in Q4 FY 12 and its guidance for the first quarter of FY13 was muted and the company blamed it on certain delays in deal closures during the fourth quarter FY12 and lackluster domestic market revenues, especially in the telecom and government verticals. Wipro is also seeing pricing pressures, challenges in its key BFSI vertical and problems in some of its largest clients who are slowing down spend and internally with in Wipro it has to improve its cost structure and CEO Kurien also said that he is looking to trim the middle management and encourage them to improve their performance. Wipro is also targeting a different strategy which will allow its clients increasingly look at it as a combination of a consultant and technology company and have a say at the management or board rather than being just looked at as technology providers. Analysts believe Wipro will log a net profit of 15% CAGR FY12 through FY15 fueled by a significant contribution form these non linear initiatives. 

Increased focus on Non Linear Revenue growth by TCS for FY 2013 growth

Tata Consultancy Services (TCS) became the first $10-billion Indian IT company in March 2012 and this significant achievement is fueled by the solid base it created over the past few decades and the domain depth & expertise it has acquired across different domains. Despite the persisting macroeconomic challenges, slower GDP growth & job growth, and continued currency volatility, TCS, in FY2011-12, registered 15 % increase in net profit to Rs 13,517 crore, while its revenue increased 31% to Rs 48,894 crore. TCS believes there is significant potential for growth as the addressable market is still large which is also expanding continuously and market growth is further assured with relatively low current level of penetration. To further fuel the growth momentum TCS is focusing its efforts to generate more revenue from its non-linear businesses that includes three strategic initiatives-- software products (TCS financial solutions), platform-based BPO, and iON (IT-as-a-service solution for small and medium businesses). It is also planning to increase its focus on new technologies such as smartphones, mobility and cloud to drive growth and has made significant investments in these areas. TCS, with a brand value of $4.1 billion is competing with the big boys like IBM, HP and Accenture.

TCS Financial Solutions increased its client base by adding 39 new clients in FY12. TCS BaNCS is a market ready universal financial platform for banking, capital markets and insurance, offered by TCS FS. Recently Malaysia-based financial services group AmBank has decided to deploy 'TCS BaNCS', integrated banking suite, spanning conventional and Islamic banking, will support both retail banking and lending functionalities and also has bagged a contract from South Africa's Nedgroup Insurance Company (NIC) for deploying TCS BaNCS Insurance, part of the it's financial services platform, will serve as the new policy administration system for Nedgroup short-term insurance services. TCS also announced that Letshego Holdings (LHL), a leading consumer lending company based in Botswana, has selected the TCS BaNCS suite as the core banking system for its Greenfield venture into retail banking in Africa. The integrated core banking solution will process loans and deposits across seven countries in Africa — Botswana, Swaziland, Tanzania, Uganda, Zambia, Namibia and Mozambique. TCS is increasing its focus on Africa as it is trying to increase its revenues from the region.

iON uses scalable cloud computing technology to deliver automation suite to SMBs, eliminating the need for them to invest in any IT assets and requiring them to pay monthly rentals rather than a one-time license fee. The suite includes human resource management, customer relationship management, payroll and finance management solutions along with niche industry-specific solutions. iON is being marketed through a channel partner network of 109 cloud service providers and has 256 mid-market customers. The company also said that it wants to ramp up over 1,000 customers this year and targets a revenue of $1 billion in the next five years.

Through its Platform-based BPO offering, it offers services in segments like Life Insurance and Pension Policy, Analytics and Finance and Accounts. TCS was the first Indian IT Services Vendor who initiated platform-based BPO in 2007 as the then CEO, S Ramadorai felt that platform-based services can be ‘templatised’ and some processes can be leveraged across different sectors. This strategy has been successful for TCS as it yielded dividends and this offering has been well received by TCS clients, which has been proven by the fact that TCS has bagged multi-million dollar deals in life insurance and pension policy, analytics and finance and accounts verticals. For example, since some processes in retail are similar to manufacturing which will eliminate the need to develop applications or write codes from scratch. Diligenta, UK subsidiary of the company has won the Friends Life Deal based on its insurance platform offerings. TCS has aggressively invested in developing its Platform BPO offerings in the past few years.

According to Motilal Oswal Report on TCS, as a part of its disruptive innovation strategies, TCS is increasing investments in many areas including new sensor-based technologies, intelligent infrastructure, platforms for genomic research, information fusion for enterprises and green technologies. The company has significantly increased its intellectual property (IP). It filed 460 patents in FY12. Cumulatively, TCS has filed 855 patents till date, of which 72 have been granted.

In the recent TCS Annual General meeting, Ratan Tata announced TCS's growth plans, "Our focus is to find a balance between traditional markets like the US and Europe and other emerging markets like Australia and the Middle East, which present good opportunities. Going forward, TCS will be focusing on non-linear growth since the situation in the West continues to be a concern."  Future opportunities for TCS are extremely good and banking, financial services and insurance (BFSI) segment continues to be the thrust area for the company, TCS CEO and MD N Chandrasekaran added.  The company has opened multiple development centers in Latin America, China and Philippines. With all these initiatives, TCS is hoping ride over the economic volatility and demand concerns and company is all set to a lead revenue growth in FY13 too. TCS expects analytics, mobility, cloud computing and non-linear platform-based services to contribute 10% of its total revenues by 2014-2015, which will be around $1 billion given the company’s $10 billion-plus revenue last fiscal.