Clouds In The Sky

After a long time in the industry has a technology come which people are so excited about – everyone trying to define it and everyone trying to explain what they think it is. It is surprising that still, most articles on Cloud Computing start with defining what the author considers constitutes cloud computing. 

Most however seem to agree that a cloud enabled infrastructure enables:

• Dynamic provisioning
  
• Scalability and flexibility
  
• Universal access
  
• Computing cost as opex with little or no capex expenses
  

What is not talked as much as the hype on the cloud but is bound to get relevant as people get into enabling it for their enterprise are aspects related to:

• Security on the cloud ( yes, there are people already talking of it) is something which needs to be considered at all levels from application layer to infrastructure layer
  
• Very high dependency on the WAN bandwidth for performance of the applications. Until now, for those enterprises with critical applications on computing infrastructure within their enterprise, they were mostly accessing it over a LAN for a large part of the population typically in the head office. Other users would access it over a corporate MPLS network. Now, everyone does the same and while it is possible to get dedicated access and get the same experience, the network charges are bound to go up
  
• The big challenge of application migration where applications will need to move from existing infrastructure in-premise to cloud infrastructure. This will throw up a whole lot of issues where currently running applications for years will need to be unseated and moved to a new environment or even may be get a parallel application environment stood up in the new cloud infra. However as more critical applications start moving on this path, unless these have been recently deployed, challenges will come forth on getting the exactly same environment in the cloud. It is not unheard of, to have critical applications in large enterprises running on hardware or software systems, some of which are end-of-lifed. They continue to run as the cost of finding an alternative or migrating to the new version or system is much higher than running it with higher maintenance for its useful life before retiring them. It may not be easy to re-create environments which require setting up an old out-of-support version of Oracle for a customer who some part of the ERP is connected to an application which runs on this environment. The older the systems and the more customized the applications, the greater would be the barrier to move them to the cloud.
  
• Lack of control for businesses over IT. Now this is something which seems pretty rampant but not discussed so often : it is not uncommon to find businesses running small (or even mid to large) IT departments outside the “corporate IT” for certain applications and systems that they closely work on. In some F500 companies, if aggregated across teams, this is even upto 50% of the size of the corporate systems. In other companies, while businesses use the common services of “corporate IT” they dictate the requirements : “Well, this is a mission-critical application related to blah blah ... and we need a dedicated environment for this application. We cannot have it share computing power with any other application and need a high-end server with ....” With cloud, to some extent, businesses will lose such control and may not be so amenable to have their applications moved to a cloud.
  

Overall the adoption to cloud will happen in a phased manner where enterprises will test the waters or rather test the clouds, with some early applications. That process is bound to take a while, but moving test and QA environments would be a better bet for lot of reasons. That is the subject for another post!

Extending STPI Tax Concessions

15 years back, the Indian government, granted tax concessions (between 5-8%) to enterprises operating under Software & Technology Parks of India (STPI) to give a boost to this (then sunrise) industry. It was considered wise to give this booster shot to help such companies earn more and enjoy a tax concession.

It is now time to decide on either extending or allowing this concession to cease as per the provisions in force. The industry ( which now extends below software companies and includes many ITeS -- IT enabled Services) is rallying to get this extended for another 3-5 years. It will surely help them with a direct impact on their bottomline. If that does not happen, it is likely to adversely impact their earnings by that margin.

While there are no clear clues, it is being widely hoped that the government will extend this concession but negotiate with the industry on the duration. These times of recession are surely not the best to have some more tax outflow but the government has to also look at how this impact tax collections -- which would be a big amount once these tax are brought in force.

For now, the industry groups are waiting for the new government formed to review and come up with a recommendation, but this is surely going to impact most companies operating from India. It is still not clear, if this will impact the pricing levels for future contracts, but surely, it does not help the service providers much and they will then need to take a call if they fork out this extra money from their coffers or try to increase their billing rates marginally -- or most likely as it will be : a little bit of both

Production and Non-Production Support : Experience Matters

One of the other challenges in maturing (and this one in the IT services space) has been that most of the IT services companies based out of offshore have traditionally been engaging with customers in supporting their non-production environment and have little experience managing production systems. In any bank or a large manufacturing set up the production environment is sacrosanct and critical for uptime and performance. However the rest of the non-production systems like Development environment, Test Environment, Staging Environment are not deemed as critical as business depend on them as much as they do on production systems.

One of the key reasons for offshore based IT services companies having little experience managing production systems is that most of the offshore based IT service providers grew on a staple business diet of application development and maintenance. This resulted in these companies developing expertise, best practices and propositions in this space. However almost all of these activities are centered around the non-production systems. When their application (or an enhancement) development, test, QC activities are complete, these were typically handed over to the onshore based service providers who would be running the customers’ production systems for deployment. Offshore based IT services companies have had little opportunity to get into the production environment due to this and probably made little effort as that space was being dominated by the strong, traditional outsourcing service providers. It was easier to get the bucks coming in doing the application development and maintenance work, as they had cracked that part of the puzzle but these companies did not venture out in the production environment space.

This has come haunting these companies when they eyed the IT infrastructure services space. In this area the customer requires companies to manage their IT infrastructure environment, most of which is in the production space. In this space, the offshore based IT services companies have had little past experience and understanding of the underlying complexities. Also, the maturity of the IT systems in the local domestic market and those in US and Europe are not the same ( the latter being more mature and evolved over a longer period of time).

This is where, often in opportunities which involve support of production systems, traditionally onshore based providers have an edge as they grew in that space. Offshore based service providers are now inching towards this space with some having made more stride than others --- but clearly this can be generalized for the class as a whole.

Lack Of Product Focus in Indian IT Companies

While so much is written and read about the IT industry in India, two areas stand out and are conspicuous by their absence in all these discussions. And it is not surprising that these are two areas which otherwise in other parts of the world are in many ways the essence of IT industry. These are:

- The hardware industry

- The software product industry

While it may be incorrect to say that these two sub categories do not exist, fact is that these are hardly mentioned, known or existing the form to be reckoned with globally.

While India has made great strides in the space of IT services, the IT product area has not been something that can be written much about. While there have been hardware products designed to some extent, and there is ample cheap labor ( which can be seen in non IT manufacturing growth), core product design has not progressed much. It requires a different kind of rigor which the IT industry is yet to imbibe. Curiously the same IT services companies are working with leading global IT product companies to help in their IT.

Maturity and leadership in IT technologies will get a big boost when IT products are designed, planned and manufactured in India. This is true of several other economies where this can be seen and India should surely be on this track.

Needed : An Indian SOX

With the Satyam accounting scandal that has not just rocked the Indian IT industry but overall the Indian business community, the need for stricter norms for publicly traded companies is loud and clear. It is surprising that no one is yet talking but just like Enron, Worldcom and other disasters led to the Sarbanes Oxley regulation in the US, this is the right time ( though late) bring about such a regulation to ensure such disasters are never repeated.

That the business of business is business is known, but when businesses go about creating or evaporating wealth by doing pure accounting, the impact is felt across the socio economic levels of not just the country but globally in case of such enterprises.

A lot of Indian IT companies are taking extra pain to demonstrate their transparency and voluntarily going ahead with key disclosures to substantiate their financial position. This is a great booster and helps enhance the credibility of the industry which many perceived to have taken a beating with the events of the past week. 

Satyam - The End of A Beginning or The Beginning of An End?

The events of this week with Satyam Computer Services, India's fourth largest IT services company, has left all shocked and stumped.

Industry associations and government are keen to ensure that this does not in any way dampen the "India story". In a basket of mangoes, there can be a few bad mangoes which does not make the basket bad. Enron did not mean that all American business enterprises indulge in fraud and similarly this is an aberration which needs to be highlighted and quickly addressed.

The customers, employees and shareholders are the most impacted with this. For others, it is more on an "environment news" - but for anyone who is one of these, the damage is closer and devastating for employees and shareholders.

It is good to see that the government has taken up some rare and unprecedented action ( at least to my knowledge) of instilling this confidence by constituting a new board. Once the true state of the finance position is known, the team will chalk out a program to stabilize, recover and then grow.

This is important for Satyam and for the offshoring and IT outsourcing industry from India in general. Something to closely watch and these events just reinforce that nothing can be taken for granted.

Satyam Computer Services : An Acquisition Candidate?

While a lot has been written recently on the developments at Satyam Computer Services in the recent week, clearly with the directors resigning including the high profile Vinod Dham, it has impacted their image. The recent World Bank issue which reportedly banned any business withthem for few years did not help any further either. There is more news tumbling on the nature of holdings by the promoter but this post is not about these developments really, but their possible impact in terms of a possible acquisition.s

So, is Satyam a good candidate for acquisition by either traditional onshore providers (like IBM) or even offshore players (like Infosys or TCS)? It may not be as easy, even when the time comes after the next quarterly announcements which is expected to clear their holding and cash reserve position. Here are some considerations:

1. It is too big with over 50,000 employees for a simpler acquisition assessment
2. It has been aggressive with its pricing, often taking on business with lower margins which may not fit every company's norms
3. It has a very negative image currently with possisble impact on future earning potential which does not strengthen a case for letting it exist as a separate entity after the acquisition
4. It would not bring any differentiator to at least the offshore based providers, except access to a resource pool of their employees and the existing customer base. No major technology or service differntiator would be involved.
5. For onsite based providers, most who wanted an India story have a big India presence already (IBM has over 70,000 employees) and so it may at least appeal to a major onshore based provider which was left behind in building an India story. This probably would be from a European provider as most US based onshore providers already have a big India presence.
6. While always counted among the top 5 of offshore based players, it was probably the one without a professional management team, when looked at by outsiders. There are others also in the Top 5 who are also led by the founder or his family but with all other factors inclcuded Satyam stood out in that count.
7. The current economic climate does not motivate many to look at Satyam for an acquisition in an all-cash kind of deal.
8. There has been a start of exodus and poaching of some of their brighter employees which will only worsen with time, if a promising suitor doesn't move quickly
9. Satyam has played in most segments but does not lead in many and by too much. The best areas known as its SAP practice and to some extent its engineering services practice.
10. The promoters have caused damage with the news trickling and their other interests (in real estate etc.) to make any new company do a thorough scrutiny of its books before deciding on it.

Surely a story to keep tab on in the coming weeks.