Indian Outsourcing Vendors - Non Linear Revenues critical for growth

For Indian Outsourcing vendors non-linear revenues have emerged as a new growth area for keeping the revenue growth engine running. These revenues account for only 10%-15% of revenues currently for large IT companies and they are planning to increase these revenues to be 20% of total revenues in the next three years and 1/3^rd of total revenues in five years. Non-linear pricing models result in higher revenue productivity per employee and improved margins for companies. According to Morgan Stanley Research, a 5% shift of overall revenues to non-linear revenues that have higher EBIT margins of ~50% vs company average of 24-30% and can add 90-110 bps to the overall company margins. All companies have a margin gain of ~1% for every 5% move to non-linear revenues, assuming they are able to generate ~50% EBIT margins on the non-linear revenues.

Large Indian vendors have started signing big deals based on the non-linear pricing and models since couple of years and they are very confident to sign more such deals in future. Infact non-linear has become focus of these vendors and they feel that non linearity is essential for surviving in the highly competitive and commoditized outsourcing industry. All the vendors consider products, platforms and cloud offerings as non linear offerings. They have been investing on the platforms for almost a decade and recently started investing significant resources in cloud computing. Products like TCS Bancs and Infosys Finacle focusing the BFSI segment, the dominant focus vertical for these vendors are the only product offerings. Vendors also invested significantly in the R&D and have innovation labs and involve employees at all levels in innovation.

Tata Consultancy Services Limited

TCS non-linear strategy includes Financial Solutions that are End-to-end universal banking and insurance products and solutions. TCS BaNCS platform, developed in 2006, is a scalable platform that provides improved customer service through a high degree of straight through processing. Recently TCS Diligenta bagged the $2.2 bn Friends Life deal in UK and will deliver IT infrastructure and IT services with some policies migrating to TCS BaNCS Insurance, a globally recognized insurance platform. Since the Pearl Group deal in 2006, TCS had developed a platform in the U.K. to integrate multiple legacy systems on a single platform and these now functions on the cloud paradigm and TCS will migrate the policies of Friends Life to this one over the next 2-3 years. TCS is currently working on a suite of products targeting small and medium businesses (SMBs). Its ‘bank in a box’ offering for rural and cooperative banks has met with encouraging success in the Indian market.

TCS iON a cloud-based offering for small and medium enterprises and offers SMBs convenient options for businesses that are looking for cost-effective solutions to their IT needs. Also offer Application Cloud that is Software/Solution for end-to-end Business-IT application requirements for clients. On the BPO front it is offering Platform BPO which is vertical as well as horizontal platforms (HR, F&A). Currently for TCS, non-linear initiatives contribute about 5.5% of the total revenues with asset leveraging solutions contributing about 4%. The management has reiterated its target of generating about 10% of the incremental revenues through non-linear model by the end of this fiscal year. TCS is betting big on SMBs and platform based offerings as their non-linear initiatives.

Infosys Limited
IP, platforms and pricing models based on unit of work form the three broad areas of Infosys’ non-linear initiatives. Finacle, its traditional banking product suite leads their non-linear Initiative in IP based revenues. In expanding its IP based product portfolio Infosys launched cloud based business platforms and applications for functions like HR, procurement, social commerce, digital marketing. Cloud based offerings include a mobile app store platform Flypp, iEngage for social media and TalentEdge, a cloud platform for enterprises to streamline HR function. Aircel is using Flypp to develop its appstore. Infosys plans to increase the non-linear revenue contribution from under 10 per cent in 2011 to 33 per cent in next five years.

Another non-linear play is changing pricing models which is to transform the basic pricing model from competitive & commoditized rate card (Time & Materials) to per transaction (in BPO), per device (infrastructure management), per ticket (maintenance) and to a limited extent on business outcomes (e.g., uptime, cycle time reduction, share of revenue generation). Platforms are a major non-linear strategy for Infosys and it has more than 20 clients on platforms. Infosys’ biggest BPO platform play is its FY10 acquisition, McCamish Systems (a platform-based insurance processing solution provider). Smaller platforms such as Newspaper-in-a-box, HR outsourcing (Hire-to retire), Shopping Trip 360 (retail analytic solution) generate very limited revenues. 

Wipro Limited
Wipro has adopted four methods to drive non-linear revenue growth which is IP-led, shared services models, expanding its partner network, and leverage outcome-based models. Wipro is emphasizing on shared services which is servicing multiple clients simultaneously using common resources. Shared services drive over 50% of Wipro’s non-linear revenues and has been servicing its India infra management clients under this model from its Global Service Management Centre in India for nearly four-five years now. Platforms wise Wipro has an order-to-cash platform for manufacturing companies that it monetizes based on the number of concurrent users. Wipro has a ready-to-market hospital management solution on SAAS model.

Wipro deal with Unitech Wireless (linking Wipro’s revenues to the success of Unitech’s cellular network roll-out) is another non-linear initiative more outcome-based model. Flex Delivery’ is a non linear delivery model that Wipro uses to provide managed services to customers who require post implementation support for their enterprise applications and addresses the key pain areas of application management outsourcing. Wipro non linear thinking is more towards delivery innovation and shared services rather than products and platforms. Wipro plans to achieve 15% of revenues from non-linear pricing modes in next one year from current 11%.

HCL Technologies

HCL is focusing to become $10-billion company and it is planning to achieve this target through services such as transformation ideas, more business IT alignments, non linearity in the business model, on-site presence and less dependence on freshers. HCL Technologies drives ~12-13% of revenues from non-linearity which is higher than their Indian peers. Its focus on non-linearity is through transformation deals, investing in BPO platforms, products and end-to-end services. The company signed 20 transformation deals in Q1FY12 in manufacturing, media and publishing, telecom, BFSI and retail. HCL non-linear offerings include infrastructure management services and platforms related to telecom expense management and life insurance, which it had acquired post the buyouts of Liberata Financial Services and Control Point Solutions in July and August 2008, respectively.

Non Linear Revenues Challenge

Marketing of the non linear offerings have to be done by the vendors as they had not marketed these services earlier. But last couple of years with client’s budgets getting tougher and clients asking for more business value from vendors these offerings have started to pick up. The risk involved in non linear offerings is one of the factors that deter these vendors. Non linear models involve domain expertise, lateral hiring and need specific infrastructure and technologies. Vendors need to invest significant amount of resources and the non linear models need time to deliver and clients were not ready to wait for the ROI. Monetizing of non linear initiatives is a big challenge. Vendors have to be careful in terms of non linear models and offering outcome based-pricing models that are tying up revenues to specific business outcomes. Business outcomes can be influenced by other external environment and economic variables and in such case Vendors will loose billing and conflicts arise. Clients and Vendors have to work together for non linear models development and their success.

Vendors should understand client’s business and clients should give access to other parts of organization not only the IT department. The relationship is very crucial for the success of non linear models. Sales teams should be encouraged to sell more non linear pricing and increase its share in the total sales. Dedicated sales force for selling the non linear pricing solutions is another option. Sales and marketing teams along with the management should come up with the right mix for the linear and non linear models. The mix is critical because overall revenues will get affected when the billings get delayed or scrapped or conflicts arise in outcome based- billings. Vendors have invested in platforms for almost a decade and they have seen success in platform offerings in the past couple of years. But do not contribute significant revenues. Some vendors have even acquired smaller companies abroad for their platform based offerings and they are signing deals in this area. But Indian vendors have realized the necessity of the non linear revenues and are planning to increase the share of such revenues to 30% of total revenues in next five - seven years.  

Discussion points:

1. What is the best mix of non linear to linear revenues should Indian vendors target?
2. What are the risks involved in the non linear models and how to tackle?
3. Are Indian Vendors investing for non linear revenues & what should they do for success?