The SaaS-ification of enterprises and how Big IT can ride the wave

Call it the SaaS-ification of enterprises. In the past six months, more global corporations have been adopting cloud services faster than ever before.

Why now?

Covid-19 imposed restrictions on physical infrastructure of enterprises, or led to shutdowns, depending on industries and geographic markets. In order to restore operations, enterprises across the spectrum, from multinationals to small and medium businesses, have been forced to strengthen their digital operations.

At the same time, online companies such as Amazon have capitalised on the post Covid-19 opportunities. If enterprises have to stay competitive against the growing population of born-on-the-internet companies, they need to digitally transform themselves.

“We have been able to help customers who had made investments in digital realise business value of those investments in an accelerated manner,” said N Ganapathy Subramaniam, chief operating officer of Tata Consultancy Services (TCS), during the press briefing for its earnings for the second quarter of financial year 2020-2021. TCS, which made $22 billion in revenues in financial year 2019-2020, is the largest IT services firm in India. “Investments we have made on products and platforms will help clients variabilise their entire cost structures, as well as adopt something that is native to the cloud. All this is happening in a touchless (way), and accessibility is a very important attribute – this is what will drive the multi-year transformation cycle,” he explained.

TCS isn’t the only IT services player that has benefitted from the shift to the cloud. 

Rival Infosys raised its revenues forecast for the year on the back of a robust pipeline of digital transformation contracts. “Our digital and cloud capabilities combined with intense client relevance are helping us achieve differentiated results in the market as is visible in 2.2% year-on-year overall revenue growth and 25.4% growth from digital offerings, which now are at 47.3% of revenues,” Salil Parekh, CEO and MD at the Bengaluru headquartered IT services firm said last week.

What does this mean?

TCS’ chief executive officer Rajesh Gopinathan shed some light on this during the quarterly earnings call by giving a range of examples. In retail, ecommerce and touchless fulfilment has become a cornerstone. In automobile manufacturing, the entire dominance of a dealer-centric customer outreach is now getting challenged by much more digital front-end solutions. 

“So, something as traditional as the auto industry is significantly experimenting, I wouldn't say still shifting, but experimenting with something that was almost unheard of a year back or so,” he told Analysts. 

In healthcare, there is a structural shift afoot from location-centric and a centralised architecture to a decentralised service delivery architecture. “We are seeing a shift from more fee-based to value-based models as the data-centric nature of the healthcare industry keeps on unfolding. In industry after industry, we are seeing a meaningful commitment to leveraging technology in very core business model changes,” Gopinathan explained.

Let's take a specific example. A large American department store company has a 24x7 store solution that provides an interactive dashboard with a detailed view of the health of the IT assets of each store, such as servers, databases, routers, POS terminals, printers, scanners, and so on. Using this, its operations team now completes their ready-for-business assurance checks for every store in minutes every morning. Store managers can start their day without the fear of disruption due to application or infrastructure issues and any business loss thereof.

Why is this exciting Indian IT firms? Because there is a terrific window of opportunity in partnering enterprises in their migration to the cloud -- building and implementing microservices for them. 

“Enterprise clients had been putting off such decisions they knew they should have been doing. So, decisions that were pending from 2014 or 2015 are now getting pushed through,” a senior manager at TCS told TechCircle, on the condition of anonymity.

“Clients have been forced to act (because of Covid-19), and the clients who have not acted will be forced to in the next two quarters,” he added.

What changes in terms of technology budgets?

Earlier, $60 of every $100 was spent on IT infrastructure like servers and physical datacenter rentals. The remaining $40 would be paid for services. 

With cloud, the overall cost can reduce to $80 (from $100) -- that's the magic of cloud for IT spends. Half of the $80 will go into services and the remaining half into infrastructure. As cloud services get automated, the expenditure on services will reduce even more. 

So, it is going to get very competitive for IT services players. They have to innovate better and faster. 

Even IBM, which has extensive offshore delivery operations in India, has gotten serious about the cloud. Last week, the 109-year old firm said it would spin-off its managed infrastructure services unit from the global technology services division to a new publicly listed company. The move, IBM CEO Arvind Krishna said, would accelerate Big Blue’s growth in the cloud services market.  

The money is not in the management of infrastructure anymore, which is the preserve of the AWS and Microsoft Azures of the world. For IT services firms, the opportunity is in migrating legacy applications of enterprises to cloud and building microservices-based applications for the client’s cloud operations. This will help clients compete with their online counterparts better and faster.

What are the revenue implications?

Cloud entails subscription billing. As more of the digital core of enterprises moves to cloud, everything is going to move to subscription-based revenue for IT services firms.

They will bill enterprises for changing legacy applications to modernised micro-services, and subsequently generate revenue based on every transaction or action enabled by the microservices. 

Keep an eye on the IT infrastructure and cloud revenues of IT services firms. “Our customers are also seeing the cooperation of their ecosystem (partners) take off in a big way,” N G Subramaniam told the media, “to open up a lot more of microservices and APIs, so they can build partnerships and foster collaborations beyond their organisations, which will accelerate their growth.”

When it rains, it really pours. Covid-19 had ushered in cloud-based ops for enterprises.