The enterprise software industry cost structure is deconstructing in front of our eyes. The traditional infrastructure side is under attack by open-source and data-center virtualization; the application space is dealing with SaaS; and the traditional services model has already crumbled under the onslaught of Infosys and Wipro’s global delivery model. Yet, and I hate to say that, there is complacency in the air.
Wait a minute I can hear you say, are you out of your mind! What do you make of Oracle’s $20b acquisition spree? What about Microsoft’s massive transformation that Ray Ozzie is driving? And how about taking into account Accenture’s target of having 50K HC in India? I grant you that these are big moves. They are even necessary. But they are not sufficient.
The telecom story
I have spent a better part of my 20 years of working life in the wireless/telecom industry. I have watched the painful deconstruction play out there. I will be the first to admit that the nature of the deconstruction in the enterprise software industry is different and therefore requires somewhat different strategy responses. But there is something that we can learn from that whole experience.
In the wireless industry there are two worlds that have emerged. One world is represented by Bharti Airtel (BA) which now has 28 million subscribers in India and has an average revenue per user (ARPU in the industry lexicon) of $8 a month. The other world is represented by Verizon Wireless (VW). VW has about 55 million subscribers in US having an ARPU of about $50. Both offer similar quality of service. (Some even argue that BA coverage and quality is better.) Yet, believe it or not, BA has substantially better margins! The reason is that it has a “lean” business model. And, inevitably, that business model is getting exported to other places. And who’s traveling with that business model? It’s the two prominent vendors to Bharti Airtel - IBM Global Services and Ericsson.
Some vendors like Lucent and Nortel have missed the emerging markets boat. This is now regarded as a fatal mistake. It’s not that they didn’t restructure – they did. But they did that in the context of preserving their wallet share of business from the like of Verizon and Cingular. What they did was necessary but not sufficient. They captured the last part of the growth in the mobile subscriber penetration in North America and Europe but missed on the new ‘S’ curve altogether.
Parallels with the enterprise software industry
The IT spend as a percentage of company revenues is peaking in North America. Nick Carr sounded that alarm in 2004 with his book Does IT Matter? The reality is that over the next 10-20 years most of the discretionary IT spend will happen in emerging countries.
My bet is that just like the wireless industry, two customer worlds will emerge. One world will be the world of Citibank, the largest bank in the world. The other world will be the world of ICICI Bank, the largest bank by market cap in India. Today the second world is very small. Citibank has tier 1 capital of $79b and ICICI bank is only 5% of that. But fast forward 10 years and things will be different. The relative bank size gap would have shrunk (Citibank growing at 3.9%; ICICI Bank is doing 30+%) and the business model difference would have grown (ICICI Bank is aggressively growing the bottom-of-the-pyramid). And quite likely, margins of the new-world bank will be higher than those of the old-world bank.
Are Oracle, Microsoft and Accenture doing enough to be relevant to the new-world enterprises that embrace the “lean” business model? I am afraid not. Like Lucent and Nortel, they are aggressively restructuring for preservation in the old-world customer space but that alone will not be enough.
Being successful in emerging markets requires in-market incubation of new products and business models. In my previous post, I stated that “our IT industry has a lot to learn from others in this respect”. Look out for some examples in the next article of this series.
Previous articles in this series:
Anatomy of New Growth in India
Later article in this series:
Can’t Escape In-Market Incubation Any Longer
[Growth Anatomy Series Roundup is here]
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