The focus is on offering high-value services and gaining expertise in niche areas rather than hiring more people
IT companies are devising new strategies to ward off pressure on bottom lines due to recessionary trends in the US. They are now looking at non-linear growth models to shore up revenues.
It means that instead of deploying more manpower, the focus will be on raising output by offering high-value services and acquiring expertise in niche areas. The new model could trigger consolidation in the market and ensure better pricing of products and services, say experts.
According to a Forrester report, clients are looking for solutions that would help them automate discrete business processes or aspects of product development.
IT and product development service providers are, hence, developing solution accelerators, which are pre-developed software that technology and services firms use to automate a particular business process. Around 30% to 70% of the code can be reused across clients.
"In their effort to build solution accelerators, companies will look at mergers and acquisitions. This will help them acquire specific processes and domain expertise that plug the missing gaps. "Some companies such as Infosys and HCL may adopt an acquisition strategy to gain ready-made expertise available," said Forrester senior analyst Sudin Apte.
Another factor that could trigger M&As is the aggressive growth targets set by some of the firms. " IBM has said that it plans to produce 25 solution accelerators a quarter and HCL's eyeing $100 million to $150 million revenues in two to three years. Most big companies are targeting 30% revenues in the next 3 to 5 years from solution accelerators," he added.
While the non-linear growth is seemingly coming into vogue with Indian IT services providers, it is simply the result of the fact that continuing on a linear path would mean lower growth.
"Companies such as TCS, Infosys and Satyam can't hope to continue growing their headcount as it would be unmanageable. Besides, the supply of manpower is also a problem. So, an adjustment to the business model is necessitated. We are already seeing attempts to move into higher margin business such as consulting and a push into services such as remote infrastructure management.
Another route is through inorganic growth, and we have seen a marked increase in M&A activity by top tier providers in India, a trend we expect to continue through 2008,'' Datamonitor analyst (BPO) Patrick O'Brien.
Infosys Technologies, for instance, is planning to acquire companies in Europe and Japan for $200 million to $300 million to move away from linear-business model.