Focusing on the Non Linear Revenues

Non linear revenue growth is revenue growth without increasing headcount. These are revenues that are generated from products, platforms and solutions which provide saving to the clients and result in higher revenue productivity per employee and improved margins for companies. After reaching a significant size and scale vendors have to start looking at non linear revenues as adding headcounts will no longer be profitable. Non-linear revenues account for only 4-8% of revenues currently for large IT companies but over the next 5 years, they will be as much as 30-35% of revenues. During the recent financial crisis non linear revenue focus has gained prominence as a win-win strategy for both the vendors and clients.
For TCS non-linear revenue growth is a “strategic priority” and focusing to substantially increase its revenue from non-linear businesses from 4% to 10% of total revenue by 2012. TCS pursues three initiatives - Software Products, Platform based BPO services, and iON – an IT-as-a-service solution for Small and Medium Business. Cloud based software services, ‘Managed Services’ and ‘Accelerated Solutions’ bring non linearity to the mainstream IT and ITES businesses of the Company. Platform-based BPO services are standardized offerings for services such as payroll processing and where pricing is usually is output or transaction-based.

Infosys plans to increase the non-linear revenue contribution from under 10 per cent now to 33 per cent in the medium term. IP, platforms and pricing models bases on unit of work form the three broad areas of Infosys’ non-linear initiatives. Products or integrated platforms like iEngage for social media; Flypp for telecom appstore apart from good old Finacle is their new focus. Infosys is also looking to acquire small product companies with strong intellectual property in a bid to move increasingly towards a non-linear business model.

Wipro non-linear growth models have resulted in about 11 per cent of its revenue compared to 8% previously coming from such initiatives. Wipro is emphasizing on shared services and platforms for non-linear growth. Wipro started aggressively on the nonlinear initiatives in 2007 and has been able to generate good revenues. Wipro management is confident of achieving higher realizations in FY12 on the back of non linear services and productivity gains. Investments in non linear initiatives are in a primitive stage and will pay off in the longer term.

Cognizant recently started again talking on non linear revenues as the company hit the 100000 employee mark. Earlier Cognizant focused on efficient global service delivery, ongoing service improvements and economies of scale. Cognizant is using an ‘outcome’ or ‘effect-based’ model to provide the services by leveraging its global delivery network, talent pool and best practices. Cognizant earlier focused on cloud based offerings as a way to generate non linear revenues.

Non linear revenue growth will be a ‘win-win’ situation for vendors as well as the clients as there is an incentive for higher productivity and more efficient use of resources. The shift towards more non linear revenues also increases revenues as well as margins for the vendors. With slow down in pace of hiring the non linear revenue model will gradually pick up over time. The downside of the non linear revenues is high initial investment in developing the products and services, engaging costly resources and short term pressure on margins as these initiatives take time to deliver.

 Discussion points:

1. How to focus on improving the Non Linear Revenues?
2. What verticals are to be for focused Non Linear Revenues?
3. What strategy the vendors should adopt to maximize the revenues and returns?