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What do Wave 3 companies look like?

Posted on Saturday, Apr 19th 2008

By Sudhakar Ram, Guest Author

In response to Hari Swaminathan’s questions, I found it appropriate to explore what Wave 3 companies look like and how they will be different from the current set of IT service providers. Given that this is an emerging area, I am offering a set of models and expect that through dialog we will be able to enrich the base of possible models as well as their descriptions.

IT Budget Owners

These will typically be large Indian services companies who graduate to owning the IT budgets of customer organizations and committing to business deliverables rather than providing capacity at a cost. While service level agreements (SLAs) may be adequate to manage uptimes, response times and turnaround times, these are inadequate to manage and monitor business alignment and business impact. In fact, large outsourcing engagements often fail for these reasons.

Apart from bringing new efficiencies to the current set of commoditized services, the IT Budget owners will commit to highly personalized service offerings as well as providing a risk cover (at a premium) to technology obsolescence and refreshes. The more sophisticated players will evolve to committing business improvement metrics relating to end user productivity, customer service levels, new business through eCommerce platforms etc. and drive higher revenues and profitability to their companies.

Software Product Providers

This model is well understood and the Indian companies playing in this space need a deep understanding of the horizontal or vertical domains that they are building solutions for, typically with strong front end teams or partnerships. The play for Wave 3 companies here is to maximize bang for the R&D dollar – by generating twice or thrice the functionality for the same R&D spend, thus out-developing the local players.

The other opportunity for Wave 3 players is to focus on the unique requirements of emerging market players in Asia and Africa and build products that are very specific to these regions.

Software Solution Integrators

Some Wave 3 companies will take the route of becoming solution integrators. They will be focused on delivering complete solutions to end-customers through a combination of their own intellectual property and third-party components, combined with configuration, customization and integration services.

Solution integrators who are willing to bear project risks and work on a fixed price mode could benefit from better pricing and margins. Further opportunities for value creation will emerge when the integrators are also willing to link part of their compensation to some specific business results / metrics. This will call for deep domain expertise and vertical specialization among the integrators.

Platform-Based Services

I consider this the most exciting area of opportunity for Indian companies. One set of opportunities revolves around platform-based BPO services like credit card processing, claims processing etc. Here, the application platforms provide the differentiation, but the business revolves around the actual processing – a convergence of IT and BPO. This is similar to what First Data Resources provides for credit cards and ADP for payroll.

The other set of opportunities lies in leveraging the Web and the India presence to provide specialized services at an affordable cost. As an example, we could have a travel booking service aimed at individuals and families that could guarantee the lowest rates or the best travel experience. This would mean providing travel and ticket expertise from India at an affordable cost to a western customer, who may lack that expertise.

I see growth in Wave 2 services starting to taper off; I don’t see the IT services industry being able to achieve the 100 billion dollar mark any time soon with just these services (I am not including BPO / ITeS in this). To be able to accelerate our growth as an industry, it is important that the established players as well as new entrants actively pursue the Wave 3 opportunity. The payoffs to the successful aspirants are enormous!

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[…] under: Business, Competition, India, Strategy — Subbaraman Iyer @ 2:35 pm Mr. Sudhakar Ram in a new post has explored different business models for Wave 3 companies. While he has elaborated different […]

Wave 3 companies business models for Indian companies « Serendipitous moments Tuesday, April 22, 2008 at 12:27 AM PT

Mr. Sudhakar Ram in a new post has explored different business models for Wave 3 companies. While he has elaborated different options, he has fallen short of making a compelling case for each of the business models. I would also add that some of Indian IT services firms have played in these sand boxes for quite some time, though they haven’t made it their core business.

Secondly, if the Indian IT service firms have to make this transition, it is going to call for a transformational change in approach. It is not that the new business models are flawed, it is the transition that is going to be risky as it would be a roller coaster ride. Since Mr. Sudhakar has opened the dialog here are my comments:

For my comments please see my blog post here:
https://subbaiyer.wordpress.com/2008/04/22/wave-3-companies-business-models-for-indian-companies/

Subbaraman Iyer Tuesday, April 22, 2008 at 12:28 AM PT

Subbaraman Iyer,

You seem to have a low opinion about Indian companies and their ability to provide higher end services!

As I have mentioned in the past, the road to Wave 3 is not easy and requires a change in mindset from operating with an India centric mindset to a global mindset. It requires the ability to grow from being an ‘Order taker’ to a ‘Thought leader and driver’.

I am quite confident that several Indian companies, both the established ones as well as the new entrepreneurs will make this transition.

Sudhakar Ram Tuesday, April 22, 2008 at 12:45 PM PT

Dear Sudhakar:

On the contrary, I have a high opinion of the Indian companies. Some of the leading companies have a global mindset as well. That definitely is not the issue.

The key issue is that reinventing one’s business demands much more than just changing a mindset. It takes a huge leap (not just of faith but also leadership) to make it from order taker to be a thought leader. Most Indian vendors have entrenched their positions at a particular phase in the services value chain in line with their business model (of cost arbitrage) over considerable years and it is not going to be easy to jettison that and adopt a new religion. Such a business transformation entails huge risk, and while Indian companies are capable of managing tactical risk, they have n’t demonstrated an appetite for major strategic risk. This is well corroborated by the fact that most of the acquisitions made by the leading companies have been small, niche and specific despite the valuations of even big companies being attractive. Hence to them scale and size in that area of the value chain has been a priority. Clearly the aspiration to develop into moving to a significant power position seems to be absent.

Till now it has been an easy ride both with revenues and margins. They have just been subject to margin pressure with the rise of the wages and the appreciation of the Indian rupee. The next couple of quarters will provide an inkling if there are threats to the top line.

Let me reiterate, that moving to Wave 3 is a business imperative. Nonetheless they are looking for a risk free road map to get there.

Subbaraman Iyer Tuesday, April 22, 2008 at 10:29 PM PT

[…] India, Model, Perspective, Strategy — Subbaraman Iyer @ 4:50 pm I wish I could share Mr. Sudhakar’s optimism about Indian companies just operating a switch to change their mind set to becoming a thought […]

Why is the shift to Wave 3 going to be difficult? « Serendipitous moments Wednesday, April 23, 2008 at 3:09 AM PT

Dear Sudhakar:

I have just elaborated on my response to you quoting historical perspectives about the Indian mind set and Prof Yves Dor’s research. You can read it at:
https://subbaiyer.wordpress.com/2008/04/23/why-is-the-shift-to-wave-3-going-to-be-difficult/

The growth of the Indian IT services companies can be attributed more to enlightened opportunism rather than a master plan.

I would also argue that for the 3 basic and necessary conditions for organizations to reinvent themselves are curiosity, perseverance and self-criticism. The Indian industry has been on such a roll during the last few years, that I have hardly seen anyone reflecting about their future, forget about being in a self-criticism mode.

Any year that passes in which CEOs (don’t destroy at least partially) one of their favorite mental view of their success is a wasted year.

Subbaraman Iyer Wednesday, April 23, 2008 at 3:17 AM PT

Dear Sudhakar and Subbaraman,

Here’s my take:
1. Sudhakar is confident about the ability of Indian companies in making the transition, with out explaining the ‘how’ of it. As Subbaraman says in his response, it is not as if we can throw a switch and bingo- we start functioning at Wave 3 level. It will be interesting to learn from Sudhakar as to how he sees his company Mastek managing this transition (if he finds it convenient to share those thoughts that is).

2.Subbaraman, I quote from your blog:

“Just because one does exceedingly well in a particular position in the value chain, doesn’t guarantee that one can transition to a higher level in the value chain.”

It also does not make it impossible to transition to the next (higher?) level in the chain. In fact, if I am a leader at the Adaptive layer, while it is difficult to let go from the comfort zone, I also understand that it is imperative I make the transition or lose out. But being a leader gives me enough strength ( a war chest, traction with customers etc) to plan my transition in a phased manner.

One might argue that there is a chasm between each layers, and as the old chinese saying goes, one can not hop, skip and jump over a chasm; one needs to leap over it.But is it always true?

How about, say a firm like TCS or Infy (or Mastek for that matter), aiming for 20% revenues from Wave 3 work over the next 2-3 years, and increase that % to beyond 60% in 5-7 years?

To do this, what kind of organizational and branding changes are required? Will it call for creating an SBU or two within the org that nurtures a different kind of DNA? Will it help to have a mechanism to identify Wave-3 capable talent from the existing org and retooling their skills?Will strategic acquisitions ensure a faster transformation?

My point: Between the two of you, the problem statements have been defined very well.Please share some thoughts on the solution approaches, rather than defending your views.

Thanks for an insightful discussion.

regards,
Kumar Narasimha

Kumar Narasimha Wednesday, April 23, 2008 at 10:33 PM PT

Subbaraman and Kumar,

Subbaraman makes a compelling argument about how difficult it is to make the leap to Wave 3.

In my experience people and organizations transform out of two basic drivers – aspiration or desperation. Unfortunately, it is often desperation that is a more powerful motivation.

I am optimistic about many (not all) Indian companies making this transformation for two reasons – firstly, the pressures on growth and margins create the desperate environment for transformation; and secondly, the Indian companies are run by bright and competent people who have seen what happens to companies that don’t embrace the future. The story has repeated itself among hardware companies, software companies, Big 7… the list is long!

As for Kumar’s point on how to get there, it would be presumptuous for any single individual to chart out how the industry will grow from around $25 billion to $100 billion with a series of ‘How to” steps.

I see human ingenuity, on a mass scale playing out. Thousands of individuals in companies, large and small, will come up with their unique approaches to getting beyond labor arbitrage into value based models. While the 4 categories I have outlined in my post are indicative, when we look back, a decade from now, we will find many more categories.

The only aspect I am convinced about, is that the Indian Industry will make it big and cross the $100 billion mark (in IT) well before any of us expect it!

At Mastek, we are taking the Software Solutions Integrator path, in line with our own DNA. We are a high-end enterprise solutions provider for a few verticals (currently Insurance and Government). We provide technology enablement to our customers’ business transformation initiatives. For example, when the Mayor of London wanted to ease congestion in London by imposing a congestion charge on vehicles coming into London, along with our partner Capita, we built / integrated the technology platform that supported this initiative.

Sudhakar Ram Friday, April 25, 2008 at 9:08 AM PT

Dear Sudhakar:

I would agree with you that desperation and a burning platform is a great trigger to go through a transformation exercise. I guess the question that needs to be asked is : Is the platform burning enough?

I am sure under your leadership Mastek will rise to great heights.

Thanks for an interesting discussion. It got me all charged up and brush off the cobwebs in my brain.

Subbaraman Iyer Monday, April 28, 2008 at 9:30 AM PT

[…] wish I could share Mr. Sudhakar’s optimism about Indian companies just operating a switch to change their mind set to becoming a thought […]

Why is the shift to Wave 3 going to be difficult? | Expanding Thought Sunday, March 13, 2011 at 7:59 PM PT