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IT firms bullish on business models

D John Samuel Raja

News of the US slowdown affecting the profitability of Indian software companies might scare investors, but software companies seem to believe that their existing business models will see them through these turbulent times.

Business Standard sent a questionnaire to the leading south-based software companies to find out how they were coping. Only Polaris Software, Satyam Computers, SSI Technologies and Cognizant Technology Solutions responded.

All the four IT companies were unanimous in saying that their current business model was sufficient and they saw no reason to change it.

Arun Jain, CMD of Polaris, said, "There has been no major de-risking of the business model. Polaris' existing business model, ENTITY (Extended Technology Facility) is a long-term relationship with a commitment to the customer." According to Jain, the model which provided freedom for every client to decide upon the ratio of work to be allocated between the onsite and offshore teams, had been very successful in retaining clients.

But fourth quarter results reveal that both-- turnover (topline) and net profit (bottomline)-- are under pressure. The turnover and net profit were at Rs 784.1 million and Rs 182.6 million respectively, representing a sequential (fourth-to-third quarter) growth of 6 and 9 per cent, respectively.

Cognizant Technology Solutions, a US-based e-business and applications provider, is also sticking to its business model of using software development centres in India to offer cost effective services.

Lakshmi Narayanan, chief operating officer of CTS, said: "Cognizant's business model remains the same. Our model of building a deep relationship with large customers and providing value as we grow our relationship will continue. Our business model of using India to provide a competitive advantage will continue."

Revenues in the first quarter (January-March, 2001) increased to US $43.4 million, up 60 per cent from $27.1million. Net profit during the same period increased by 61 per cent to $5.6 million, as compared to $3.5million in the first quarter of 2000. The company is projecting its continued growth as proof to the viability of their business model.

Madras-based SSI Limited, which recently acquired US company AlbionOrion, has positioned itself as the offshore development centre and AlbionOrion as the front end.

According to a company spokesperson, "The advantage of this model is that AlbionOrion customers and prospects continue to deal with their current contacts. At the same time, because some part of the account is now transferred offshore to SSI development centers in India, the customer is offered better rates than before."

He agreed that the success of this model required close interaction of the sales and marketing process and the delivery process between geographies.

Meanwhile, Satyam Computer seems to believe that many of the factors that have contributed to 'strong' fourth quarter performance will aid them in the next few quarters also.

The company recently reorganised itself into several virtually independent business units, each with it own P&L responsibility, besides delivery and business development resources.

To a question whether the slowdown in US has affected the company, all the four companies replied in the negative.

According to many analysts, the effect would not be immediate as there was 'lag' between order execution and realisation of payments.

Arun Jain of Polaris explained: "The Banking, Financial Services and Insurance segment, which is Polaris' operating space, is least impacted by the US slowdown and remains insulated even under the present circumstances."

More than 72 per cent of the company's revenue accrues from BFSI. The rest is divided between ERP/EIS- 11.3 per cent, Network and Communications- 4.4 per cent and others.

As for SSI, the company is confident of it's strategy of projecting Albion Orion as the front end and SSI as ODC will protect them from any dramatic shift.

Cognizant which has posted comfortable profits in the last quarter was more confident saying, "It's business as usual".

But with many IT companies planning to open development centres in Asia-Pacific region, it remains to be seen whether the same business model would be successful in new marketplaces. Satyam has taken several steps to increase business from non-US markets including setting-up of a center for Enterprise Application Integration at Satyam Europe's Development Center at Basingstoke, UK, and opening of a Middle-East Solutions Center in Dubai Internet City and establishing its Asia-Pacific headquarters at Singapore.

Lakshmi Naraynan of CTS, differed and said, "A good number of companies are looking at alternate geographies as part of their de-risking strategy. But, the US-marketplace is the largest and when it comes to slowdown, it will pick up more rapidly than other geographies. For a dollar spent in the US, the return is much more than other places even in this slowdown".

With so many differing opinions, it's the investors who are more confused and worried.

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