India’s pre-internet era technology services companies are going through challenging times. Clients are asking companies to cut costs on an ongoing basis for existing projects as new technologies allow the same work to be done for a lot less. In a free-wheeling conversation with Malini Bhupta of Moneycontrol, the founder and chairman of Persistent Systems, Anand Deshpande, talks about the challenges facing tech companies and what it has taken him to move 50 percent of his company’s revenues away from effort-based billing.
Indian IT is going through a turbulent time. How do you view it?
The effort required for the same work is going down. The fundamental reason behind all the issues in the industry stems from this one factor. Earlier, where you had a bullock cart, now you have a tractor. This is happening because of continuous and significant advances in software technologies, tools and methods. The way people are writing code on the cloud, a lot of software that was written for scaffolding and keeping the systems up and running are not needed anymore. So you can get a lot done with a lot less as you are using standard components and standard technology that is available. You don’t have to rewrite everything. That is the main difference.
Are these changes impacting global technology companies, too?
You need to see the world in three broad buckets. One set was born in 2008 [and continues] onward -- they are known as born-in-the-cloud companies. People also call them ‘born digital’ because they have always built everything in the cloud. Then, you have companies that were born between 1994 and 2008, which are known as the internet companies like Yahoo and Google. These companies could not have existed without the internet. Then, you have companies which were born before 1994, which are the pre-internet companies like IBM, Oracle and Microsoft etc. The team sizes for building products for born-in-the-cloud companies are in an order of magnitude smaller than the internet companies, which are in an order of magnitude smaller than the pre-internet companies.
The born-in-the-cloud companies are that much more efficient than the pre-internet companies and the consequence of this is that most of the pre-internet companies are going through a major transformation right now in terms of redoing and retooling themselves. They will have to look different in the next few years to be able to survive.
How are these sweeping changes impacting Indian companies?
India business has traditionally been based on effort. If you see, the billing rate has been based on effort and not on work. Work is not coming down but effort is going down. All of us in Indian IT industry, referred to as Nasscom IT industry, are facing the same problem. All are based on effort-based business model. The customers are expecting a cost reduction and they are really expecting you to do it with a lot less people. Rather than see it as a negative, I think this is an opportunity for the industry to do the same work with half the number of people and pass on a significant portion of the savings to the customer but also retain some of it to improve profitability.
Some of the large IT companies claim that overall IT spends are not growing. Is that correct?
It is only partly correct. If you see Gartner and others they will say that IT spends are growing in single digits. The other thing is that IT has gotten broader and wider. If you look at the technology roadmap, the new stuff is growing at a rapid pace. Companies are having a hard time keeping abreast. Every business is looking to transform itself into a software business.
What are the challenges that Indian IT companies face, especially the pre-internet companies? What will happen to the existing business?
The main reason behind the problems is that the effort required for the same work goes down. Ideally, I should be able to get the job done at 30-40 percent less cost. If I were to look at a buyer of services, they would have bought hardware, then the software stack. And, on top of it, they would have bought the application stack and then they would have an application, development and maintenance team to keep running it. Of this stack, the ADM piece was 25-30 percent of IT spends. Today, the cloud infrastructure spend is higher.
The ADM piece shrinks significantly. The parts that are embedded in the cloud is also software. In the last few years, the amount of software that touches the business is getting wider and wider. In the past, an airline, for instance, had all the information on a data centre and you had to call the airline to get things done. Now, that is available on the mobile app. All the software did not exist five years ago and tentacles are getting wider. The new stuff is not tightly integrated with the old stuff. The speed at which things are built and deployed is very fast.
The implication of this on the Indian IT companies is that a significant portion of their existing business which focuses on helping their customers run their business will be consumed differently. There will be a shift from long-term and larger deals to a larger number of smaller and shorter deals. This is a challenge for the IT companies on how they sell and how they deliver profitably in this environment. However, the work/opportunity for the Indian IT industry is not going away.
Are customers spending on all these new things?
It is not that customers are not spending but the new business has new bidders and some are new. This is a new market from the customer's point of view. From an employee's point of view, new skills are required. Clayton Christensen writes extensively about this phenomena. If a market is shifting very rapidly and you are an incumbent, the people who are running the old business find it hard to respond to the new stuff. The new stuff for an existing customer is going to come at the expense of the existing business.
How has Persistent gone after the new business?
Let me give you a historical perspective. Businesses go through ‘S’ curve. Rather than stretch the ‘S’ curve we need to find a new ‘S’. We have seen four S curves and two downturns. And that will give you a sense of where we are. The first ‘S’ curve was in 1999-2001 when we were 100 people and we were focused on software companies, which were data-centric or companies which were building databases. We did esoteric stuff for these Valley-based companies. We got our VC funding from Intel Capital in 2000. After the Y2K phase, we decided to create a category around outsourced product development. In an IT project you have well defined projects and you do a trade-off between time and money. When you do a product, people decide when you ship the product and then they finalise how much to spend. Then, you decide how to develop the best possible product in the defined time-frame. We grew rapidly in this and we were 500 people in 2003 and grew to 2,500 in 2008.
In 2008, again there was a spending freeze and I met 150 of our customers. We came forward and decided that we had to focus on cloud, analytics, collaboration and mobility. Gartner picked it up as SMAC later. The other observation we had was that CEOs are different in their thinking from other CXOs. CEOs are topline focused rather than bottom line focused. Secondly, they worry about some things, rest they delegate. Also, CEOs are strategic and not tactical. We realised we were not offering strategic input. We realised we had to do something that would get us a seat on the table with CEOs. We identified “sell with” customers and go with them to sell. We did an IPO in 2010 and in FY14 we were 8,000 people. Also, with a similar objective, we started the Accelerite business, which is to take over non-strategic products of our technology customers and breathe new life into them based on our product engineering expertise. This also made us more strategic to the CEOs and their priorities.
We realised that while building products you can do a lot with a lot less. A lot of our business was effort-based and if effort goes down, billing goes down. We decided to move our business in two different ways. We found that everybody wants to become a software company. We realised we could go after a larger market because whatever product development we had done was relevant to everyone else. We decided to do this without charging on the basis of effort.
Can you give an example of work you are doing with companies?
We announced a partnership around Watson IoT and we are responsible for continuous engineering of the product. We bill on percentage of sale of the product not on effort. The product sells more, we make more. There has to be continuous use of software that gets delivered on things.
Another project we have taken on is with USAA, which is a bank that serves the US armed forces. They have a good security mechanism and risk-based access controls. We convinced them that what they had could be marketed. So we are responsible for selling and distributing that in the market. They have software that can be marketed to other geographies.
We have also teamed up with Partners HealthCare, where Persistent together with Partners, will develop an open-source platform to lower the barriers for knowledge exchange across health care providers and enable a new generation of decision support apps in the clinical environment.
What are you focusing on?
We continue to use the product development cycle. We are calling it Software 4.0. We are focusing on data, digital and IoT. And, we have used these three basic themes as the big integration theme on which our future will be based. The business model we are going after is not effort-based. The proof is in the billing. The faster we can move away from effort-based [work] the better. We have defined our customer base over three verticals -- healthcare, financial services and industrial IoT. We have picked a few partners in these verticals. For healthcare, we have Salesforce and we are a platinum partner and we are selling together in that sector.
What percentage of your business is effort-based?
Now, 50 percent of our business is not effort-based. This has happened over the last two-three years. The migration is very difficult. Collecting 30 percent of the business is IP-based and it has been done frugally. It is hard to build a next generation product-based business. We decided to go after stable and less glamourous business. Now, we have half a dozen products we have built and are being seeded into the system.
How do you see the future given where you are?
We have gotten to a stage where we have brought down our effort-based revenues to 50 percent and we have some way to go before we realise stronger profits from the new restructuring. Of course, we think that we did USD 429.01 million last year. We think half the business we have stands a good chance of growing profitably. In the next 12-15 months, we will grow slowly but after that we will see tailwinds. The next plateau for us is a USD 1 billion. Over time the ambition is to make the non-effort based business to account for 70 percent of revenues.
What about margins?
If you look at product companies, they make reasonably good margins. The traditional services business will see margin compression. We want IP and new business to become a dominant part of the business. But till that happens we are investing and taking risks. I am taking a big bet on IoT and believe it will pay off in the long-term.
Read more: Persistent leads IT pack in shifting away from 'effort-based' billing
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