Infosys announced last week that Bharti Airtel, India’s leading mobile service provider, has selected its WalletEdge platform to operate Airtel Money, the first mobile wallet service in India. This announcement is interesting from a few different perspectives. First, it will provide a new source of revenues for the Indian telecom industry, which has been struggling with low ARPUs for several years. Second, it’s a boon for the banking industry, which will find a way to accelerate financial inclusion initiatives in line with the recommendations from the Reserve Bank of India. Obviously, the urban Indian consumer will also benefit from the “pay anytime, anywhere” convenience of such a service.
I also look at this deal from an IT services industry perspective, and I believe that it embeds a set of very interesting attributes that will become increasingly prevalent in the way IT services vendors engage with their clients moving forward:
In their Asia Pacific Tech Market Outlook For 2012 report, Andrew Bartels and Frederic Giron show that government and business IT spending in the emerging markets of Asia (including China, India, and the ASEAN countries) will reach US$180 billion in 2012, growing by roughly 13% over 2011. While emerging Asia’s IT spending is surging this year, economic obligations in the developed markets of North America, Europe, and Japan will ensure continued austerity — and limited IT spending growth. In other words, emerging Asia is clearly a lucrative region of opportunities for US, European, Japanese, and South Korean vendors looking for new sources of growth to offset lower business prospects in their home markets.
Asia is a region of highly disparate countries, with regulatory complexity, cultural differences, and a limited pool of skilled resources. These barriers to entry and expansion will compel vendors to look beyond organic growth, which is simply too time-intensive. Instead, mergers and acquisitions (M&A) of local/regional incumbents with local know-how, skills, and client relationships will increasingly be a strategic imperative for vendors targeting emerging Asia. I’ve highlighted some examples from the Indian market below, but I foresee similar trends in the overall ICT sector throughout emerging Asia:
In an interview with the Economic Times in India, Dell announced yesterday that it was readying a war chest of about US$1 billion for IT services related acquisitions in India. Here is why I think this announcement is important for Dell:
First, Dell needs to continue strengthen its global delivery network and industrialization capabilities. Dell bolstered its IT services market position with the Perot Systems acquisition in 2009. Since then, the company has made clear its development ambitions in India from an offshore perspective — including during the first analyst event they hosted in India in September 2011. The company lags far behind the services behemoths, including IBM, which has more than 100,000 staff in India working for international clients.
The India domestic market is also becoming a top priority for all major tech vendors. Forrester expects this market to grow by 20% in 2012 in local currency (see my recent report on the future of IT services in India). Japanese companies like NTT Data have launched aggressive inorganic growth strategies to tap this booming market (Dimension Data in 2010 — which was at the time part of the top 10 IT services firms in India via its Datacraft subsidiary — and more recently Netmagic Solutions). And Forrester expects more Japanese investments in the coming few months.
While IBM, HP, and Wipro Infotech are leading the IT services market in India, Dell is still marginal in terms of system integration and managed services activities. So it’s high time that Dell strengthens its presence in India.
At its 2011 Analyst Event in Boston, Nokia Siemens Networks (NSN) outlined more details of its recently announced strategy review. In our view, the new focus NSN is taking is right. NSN is focusing on growth segments of the infrastructure market and will generate large savings from operating expenses and production overheads. In addition to its focus on providing the most efficient mobile broadband network infrastructure, NSN also highlighted the importance of customer experience management (CEM) as an integral part of its strategy.
NSN also provided more guidance on which market segments it no longer considers core. These include wireline, microwave, Wimax, perfect voice, and business support systems. Some of these, microwave and Wimax, it already spun off. NSN estimates that the overall revenue impact of its non-core disposals will total 10% of its current revenue base. The impact on profit will be less than 10%, as these non-core disposals are low-margin operations.
NSN believes that telcos increasingly demand end-to-end solutions from their equipment vendor partners. No equipment vendors can credibly deliver such end-to-end solutions on their own. Hence, NSN is positioning itself as an ecosystems manager for end-to-end solutions. As part of its innovation drive, NSN increasingly focuses on devising concepts for solutions rather than simply focusing on product upgrades. For instance, Liquid Net is a concept for network infrastructure design that supports a more efficient usage of underutilized infrastructure capacity based on a range of NSN products. Similarly, NSN places great emphasis on its CEM solution, which helps telcos to transform their services offerings by enhancing network-related features that affect customer experience and satisfaction.
Nokia Seimens Networks’ top management has finally pulled the emergency brakes, after months of unsuccessful attempts to find a buyer. Going forward, NSN will focus on mobile network infrastructure and the services market. All other areas are non-core and subject to disposal. We estimate that about two-thirds of NSN’s current portfolio will remain in this new focus area. NSN will retain an attractive product and services portfolio and innovative solutions, as for instance its Liquid Net offering. However, some elements, like convergence offerings, will be difficult to pursue credibly in the future.
In our view, the new focus NSN is taking is right:
NSN is focusing on growth segments of the infrastructure market. NSN aims to provide the most efficient mobile networks (including network outsourcing and sharing) to extract maximum value for telcos’ operations by developing intelligent network solutions and boost customer experience management.
NSN will generate large savings from operating expenses and production overheads. NSN targets savings of €1 billion annually by the end of 2013. NSN tries to achieve this goal be focusing on organizational streamlining, real estate, information technology, product and service procurement costs, G&A, and supplier consolidation. Despite good revenue growth in recent quarters, NSN’s revenues per employee remain well below that of Ericsson’s in 2010 and even lags Huawei’s. NSN’s plans to reduce its global workforce by 17,000, or 23%, will go some way to address this imbalance.
T-Systems’ Analyst Summit 2011 in Frankfurt was dominated by updates on the progress the company made regarding its restructuring projects. As a result of these efforts, T-Systems has created the basis to become a more efficient and agile ICT services provider going forward. Still, in our view, the period between mid-2010 to mid-2011 was a lost year for T-Systems — despite the obvious progress T-Systems made in addressing its past challenges.
In some respects, T-Systems had become a victim of its own success in 2009 and 2010. T-Systems was clearly overwhelmed by its multibillion deals (with clients including Linde, BP, Shell, E.ON, MAN, Continental, etc). Delivery capacities were stretched to the limit, manifesting in serious transition and transformation challenges. T-Systems was forced to allocate more capacities to big deals, thus depressing margins to just over 2% in Q3 2011 (see chart below). T-Systems still aims to reach the peer-group average EBIT margin.
Source: company reports
About a year ago, T-Systems began to restructure its entire operations in a mammoth project, effectively redrawing the entire organisational structure and reshuffling the top management team, except for the CEO and CFO. The Analyst Summit provided some insights that these efforts are beginning to bear fruit:
During its Fujitsu Forum, which was attended by over 10,000 customers and partners, Fujitsu presented itself as a company in transformation from a fairly disjointed business to a more streamlined international business. Fujitsu’s new strategy has three main components:
Focus on organic growth: Fujitsu is investing more in its sales and services structure as well as its internal IT systems. It aims to get better in what it has already been doing, such as exploiting its large software and hardware portfolio, including smartphones, thin clients, handsets, tablets, mainframes, laptops, and super computers. In terms of services, Fujitsu is pushing its multivendor maintenance capabilities and its IT outsourcing experience. Fujitsu considers its product knowledge and near- and offshore mix a key, unique selling point vis-à-vis its competitors. Given Fujitsu's weak marketing and sales structures of the past, we would believe that it is high-time to improve its go-to-market approach.
Target emerging markets: The main focus is on Russia, India, and the Middle East. Fujitsu is ramping up local operations and also adapting its go-to-market approaches. For instance, in India it is using its promotion campaign via auto rickshaw on “see-try-buy” basis. Fujitsu’s goal is to double emerging markets sales by 2015 from €800 in 2010. Given its Asian roots, it is astonishing how long it took Fujitsu to realise the opportunities at its doorstep.
Mobility, cloud, and smart computing will drive tremendous growth and significant changes in the IT industry over the next few years. My fellow analysts have brilliantly covered these topics in the past few months.
I would like to build on these views and focus more specifically on the productivity race that the IT services industry and its clients have been in during the past 10 years or so. While IT services vendors have managed to improve their output levels in order to protect margins in a market of severely eroding price points, I believe they will rapidly reach a plateau if they continue to use traditional methods. Instead, the most successful IT services firms of tomorrow will increasingly leverage disruptive methods in order to fulfill the client expectations to always “do more with less.”
Ever since the Internet bubble burst a decade ago, clients have pushed their providers to find ways to provide them with continued price decreases for similar or greater output levels. This was achieved thanks to two main levers to decrease the amount of resources required to run IT systems by end user firms:
Fewer resources: Optimizing the utilization of resources in order to reduce their consumption. For example, most projects around asset management, infrastructure standardization, consolidation, and virtualization yield the most evident returns as sources of productivity improvement. This is the case in particular in developed countries where companies need to cope with multi-layered legacy technologies that render IT systems as complex and expensive to maintain.
Yesterday we received the very sad news that our great friend and wonderful colleague Julie Giera passed away earlier this week. Although we were well aware of the fact that Julie had been battling breast cancer for several years, I still find it difficult to comprehend the news – in particular since we had lost another great analyst colleague – Andrew Parker – only a few months earlier.
Julie was one of the great stars and a leading voice of Giga Information Group – the analyst firm later to be acquired by Forrester in 2003. She was instrumental in establishing and extending the Giga brand and influence across a wide community of different stakeholders, including many CIOs as well as the senior executives of many tech vendors. She later continued that fame with Forrester where she quickly became a thought leader around the broader IT services market change issues. Julie was one of the founding members of the vendor strategy research team and many of the key reports that she authored over the last years are still relevant today and represent key highlights of our team’s research portfolio. A lot of her great research can still be viewed and downloaded online, so check out the following:
The public sector is certainly hot these days – definitely in the hot seat, in hot water. Concerns about public sector finance persist, with the discussion in some cases targeting specific causes beyond just vague notions of overspending. The Economist recently came down pretty hard on public sector unions.
However, for some tech vendors, the public sector really is hot – as in a hot opportunity. Despite revised earnings and warnings about public sector forecasts by some tech vendors, others are instead optimistic. Steria, a French IT services company, is not too concerned about the lingering malaise of the public sector, although it has not been immune to the crisis. A UK public sector spending moratorium in 2010 brought all projects of more than £1 million to a temporary halt, for review. Steria and other suppliers and service providers held their breath through much of the fall.