Will Google and Amazon disrupt Indian IT services business?

Infosys and TCS may not be so dependent on the infrastructure business as HCL Tech but a core part of the IT infrastructure is witnessing a new layer.

K Yatish Rajawat October 25, 2014 15:18:38 IST
Will Google and Amazon disrupt Indian IT services business?

When the change is upon you underestimate its speed, when it is far away you overestimate its speed. The disruption that is cloud computing has been talked about for more than 7 years. The word was coined in 1996 inside the office of Compaq computers. But companies did not realize the impact of it. Even when Salesforce.com unveiled its cloud based model in 1999 the real impact of it was not realized, very few companies or even customers realized its core offering.

Now the impact is clear and present, IT customer instead of buying costly fixed arrays buy capacity as they need or when they need it. They do not have to worry about the maintenance or the upkeep of the hardware. This is changing the game for the largest IT company in the world IBM. IBM's revenues have been going down for the last eight quarters, and it has been keeping activist investors at bay by doing financial engineering. IBM problems may seem distant and limited to a company in Armonk, but it has important lessons for Indian IT sector.

I had pointed out in an earlier article that Indian IT sector is ripe for a reset, a number of experts wrote off these arguments, saying these models are sustainable. Some industry watchers also mentioned that Indian salaries are far lower than US therefore there is a long way to go for a reset. When some things are going fine but there is a tug that tells you that they are not perfect, what will you do ignore it. A good CEO will not wait for the reaction but work towards creating the disruption itself.

If companies increasingly move their application and storage to the cloud it creates a new layer of vendors within an enterprise. Companies like Google, Amazon, and even telecom services company like Verizon provide cloud computing services. Nobody would have thought that Google, an internet search company would become an advertising company and disrupt the model of Indian IT services companies. Or even a book retailer like Amazon would offer cloud based computing services. A telecom company like Verizon was expected to get into loud computing space as it was natural extension of its data connectivity business.

Cloud was also a natural extension for Indian IT companies as it perfectly complements their other services and solutions. Packaging services or making them relevant with current trends is not something that Indian IT companies have really understood.

UP IN THE CLOUDS

IBM's challenge is multifold with cloud computing, while its hardware business is affected as companies like Google have started designing its own servers. Most people see Google as an internet company, but it really is an internet infrastructure company. The company designs its own servers, hardware and even data centers. It may be the largest owner of fiber optic network outside the telecom world. And it does not buy servers off the rack from an IBM or a Dell, so the fastest growing company in the data center business does not buy IBM.

Moreover, the customers of IBM's hardware are offered a solution that is pay as they use. Now, IBM can play a catch up with Google or some of the other 15 cloud infrastructure providers. But it would be fighting a losing battle as the prices in the cloud infrastructure business are already at rock bottom. Companies like Microsoft have also started playing in this space offering software as a service.

What does this mean for the Indian IT service providers? The cloud infrastructure providers will slowly and steadily expand their services from providing storage to software and then to application support and customization. This is one end of the competition that Indian companies are not prepared for. Application maintenance and support is the core of the IT services business. Some companies like HCL Technologies get 45-50 per cent of their revenues from application services. HCL Tech is also big in the infrastructure space and derives35 per cent of its revenues from it. Now both these service lines are up for disruption, the question is will HCL Tech do the disruption.

Infosys and TCS may not be so dependent on the infrastructure business as HCL Tech but a core part of the IT infrastructure is witnessing a new layer. This is both an opportunity and a threat, opportunity because it is possible to acquire cloud computing companies at this stage. Threat because these companies can also acquire an IT services company and become a full-fledged service provider.

HCL was a late entrant into the business but it caught up because of its focus on infrastructure and networking side of the IT services business. Now this is the same business that is getting disrupted. The eponymous and sometimes erratic research firm Gartner says, 19 per cent of the organization are using the cloud for production computing while 20 per cent are using it for public cloud storage services.

Banks and financial services that are the core customers for IT services may not be moving towards a public cloud storage services. But they will sooner or later start looking for private cloud services that promises them a high level of security and inter-operability.

Customization, enhancements and maintenance is the way that Indian IT services companies get into Fortune 100 clients. They need to start thinking of disrupting the market with an offering that combines dynamic pricing on hardware with cost effective services.

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