Citigroup captive set to escape ?

In thre WSJ Market Watch the tail end of last week there was coverage of the potential disposal of its India-based outsourcing captive (see http://tinyurl.com/6bu6hs). The quote went

India-based business process outsourcing arm Citigroup Global Services Ltd. and its technology and infrastructure outsourcing arm Citos are up for sale, the Economic Times reported Friday, citing unnamed sources.

Now, there are not really enough similar examples to call the start of a trend but I do that is worth considering what the potential impact of a number of the captives being released to market.

The first thing to consider would be who the potential acquirers would be. In the case of Citgroup Global Services the rumours are IBM, Capgemini and TCS are potential suitors. If one of the big 3 India firms acquires this, or similar assets, then there will be a an increased market concentration - as those in the top 3 potentially put clear water between themselves and the next 3 competitors, as they search for yet further economies of scale. Of course, if the likes of Satyam or HCL were to be the acquirers then the big 3 would become the big 4, and there would increased competition for the largest deals.

If the acquirers are from the Western market focused companies then the dynamics of the West-versus-East debate begin to blur yet further. At the moment it can be difficult to tell who is an Eastern company and who is Western (see http://tinyurl.com/5lctm9).

The final question to ask is around why Citi might be considering an exit in the first place. One argument could be a refreshed focus on their core business, with an IT and business services captive being a potential distraction. Another argument could be that they don't foresee high enough future returns and are seeking to exit at close to the top of the market - as there indications of a relative slowdown in the India market in the year ahead. I suspect that the real reasons is to crystalise some returns from the earlier investment.

Fiji as another outsourcing investment destination

I was reading about the strategy that is being developed to catalyze the ICT industry in Fiji (see http://tinyurl.com/6a7oyc). The initial obstacles that the strategy seeks to address are:

• the high comparative cost of telecommunications, in comparison with other benchmark countries in the region
• the low volume of buildings that have been specially designed and fitted for the ICT companies of the future
• the provision of the basic infrastructure of power and water
• an initial locus of smaller ICT companies, around which other firms can begin to create a cluster

While these are all very laudable and correct there is something else missing in the strategy - focus. Aiming to compete on the international stage based on low-cost and skilled labour, competitively priced infrastructure and local mid-market firms is not enough. These traits are also offered by other countries in the region and ones with a large enough scale of both labour and infrastructure that they can be more price competitive than Fiji will be able to.

Just like the Philippines is developing a capability around Software as a Service and Vietnam is becoming known for its software testing expertise, so Fiji needs to develop its own focus. It also needs to work on strategic partnerships with other countries in the region and international, so that its focus works in concert with others.

Low cost is simply not enough.

Indian software and Chinese hardware: the other Fusion?

This mornings Hindu newspaper featured an article about the Chinese telecoms equipment manufacturer, Huawei, and its operations in India. Their Bangalore R&D facility has around 1,600 staff and Huawei India generates revenues of over $600 million (see http://tinyurl.com/6xuvts). It then goes on to provide a lot more information about Huawei in India - too much to include here.

What the article did make me think about was the power of China and India working together, rather than them being positioned as the main toe-to-toe competitors of the future. Of course, Huawei seems huge potential in the India domestic business and has been addressing the market there for some time, taking on the more traditional telecoms equipment manufacturers like Ericsson, Nokia-Siemens Networks and Alcatel-Lucent. It has won deals with BSNL, MTNL, TATA Indicom and others.

However, the real potential is in the co-operation of Chinese hardware manufacturing with Indian software development. Chinese hardware manufacturing has rightly gained the reputation for producing low-cost hardware, becoming the electronics manufacturing engine of much of the global industry. India has, also rightly, gained reputation in the global software industry - using a combination of its English language skills, software engineering excellence and low-cost labour to make a major global impact.

I think that there will be more and more China-India co-operations in the global technology market, with increasing investment in India by Chinese capital - and vice versa.

Oracle: continued growth and a demanding future

If I may borrow the phrase that my friend Richard Holway uses to describe UK companies that deliver consistently good results, Oracle is in danger of becoming 'boring'.

Oracle set out five years ago to deliver a minimum 20% compound growth in non-GAAP EPS, and for the past four years has been exceeding that target – posting a CAGR of 26%. The continuation of the acquisition strategy, together with good fiscal management, has generated consistent returns and the bravado that once characterised it has faded, for the most part. The growth in free cash flow being generated continues to impress, with the 4Q08 figure growing 38% to $7.159 billion.

In terms of the basic results, full-year 2008 revenues grew 25% to reach $22.4 billion, new software licences grew 28% to $7.5 billion, and software licence updates and product support grew 24% to $10.3 billion. Since the software licence updates and product support figure represents a recurring subscription revenue stream, crossing the $10 billion annual threshold is significant and is a good insulator from macro-economic changes. Within EMEA the annual growth for database and middleware was 33% (or 20% on a constant currency basis), and applications grew at 46% (35% on a constant currency basis). Within APAC the situation was slightly different, with database and middleware only growing at 5% on a constant currency basis – the only weakish part of the overall story.

In the question and answer session at the end of the basic call, Larry Ellison was asked whether he anticipated the proportion of overall revenues that were delivered by Oracle On Demand to increase above its current level. His response was fascinating, stating that "Q4 was the first quarter we actually made money in the on-demand business." This will generate a whole series of questions in the weeks ahead. It's been assumed that the on demand or software as a service (SaaS) business model would gradually begin to usurp the traditional licence model, as customers drove the market in that direction. While this may well be one potential scenario, the SaaS advocates must also face the reality that the traditional business model also has steam left in it, generating continued profitable growth when not many in the SaaS business are able to. Of course, it is still possible that the SaaS industry as a whole will mature to the stage where it delivers the strong profitability that its poster children do – but a lot of lessons still need to be learned from the more traditional players.

Of course, many are also looking to see whether the next quarters are going to see the growth continue. In the current macro-economic climate posting continued growth is a challenge, and it will be a doubly difficult challenge for Oracle – given that 1Q08 was a strong quarter for Oracle. Even with this context Safra Catz still talked in her 1Q09 guidance about revenue growth in the 18–20% range. Clearly a lot can change in the weeks and months ahead, but the indications are still looking good that Oracle will continue to move ahead.

IBM and the African cloud

I've written before about the development of Cloud Computing and expressed worries that some of the economic structures are software-as-a-service may produce unfortunate development consequences in the developing world, with the potential for the flow of profits back to the developed world increasing - at the expense of developing nations.

To avoid these consequences it is going to be important for centres to be located in the developing world, staffed by local employees and working on initiatives that are of value to the local economies. So... I was pleased to see that IBM had opened cloud computing centres in both China and South Africa, working on issues that are relevant to those economies (see http://tinyurl.com/5cd2j9).

The centre in South Africa will focus on:

Web 2.0 technologies, service-oriented architecture (SOA), systems management, next-generation banking systems, and environmentally friendly computing designs as it nurtures information technology skills and addresses business challenges in the economic growth of Sub-Saharan Africa.

The centre in China will help to support research that focuses on transforming the economy of the nation towards a services-led economy.

However, these initiatives should not be viewed as a short term thing. They need to be viewed as long term investments from IBM into the regions, and also as part of an globally integrated research and development programme. The initiatives that they're working on are of direct relevance to the developing world locations where they are based, but are also more broadly applicable to a wider range of economies around the world.

What investments in Africa and China need to avoid is tokenism that could be viewed as an "uncle Tom" effort (http://tinyurl.com/3nxpbu). Many companies will open facilities that fall into this category. The fact that the IBM facilities are an integral part of their global research programme should ensure that no trace of tokenism exists around their African and Chinese Cloud Computing facilities.

Industry-academic co-operation in India

I've always encourage greater co-operation between the academic sector and the commercial IT industry, perhaps because I have worked on both sides and I can see the benefits that both can find in a better relationship. So, it was interesting to see the announcement of the research relationship between Infosys and IIIT-H (see http://tinyurl.com/3wpotb). IIIT-H is International Institute of Information Technology, Hyderabad and is one of the leading technology institutions in India.

The purpose of the research is:

Under this agreement, Infosys will sponsor research in unstructured data analytics, inference and diagnostics tools and the development of next-generation business intelligence tools at IIIT-H.

Co-operation, like this, between academia and industry is important and always needs to go deeper than the commercial partner simply funding "pure academic research". Both academia and their commercial partners both need to contribute value to the partnership (not just money) and both need to gain benefits.

For Infosys this is part of a much wider programme to deepen their relationship with academia, across multiple different disciplines and in different countries. As well as the obvious benefits around facilitating access to a talented recruitment pool, the research programmes will help to develop research that will ultimately lead to Infosys being able to bring better products and services to market.

For IIIT-H their are benefits beyond the pure research funding. The Infosys team bring access to a whole variety of real world material that fundamentally enriches and research process, resulting in better quality research.

Another Indian IPO

I noticed in The Hindu newspaper today (see http://tinyurl.com/68qwaq) that EdServ Softsystems Limited were planning their IPO. Formerly know as Lambent Softsystems they focus ob web learning systems, consulting and related areas. Their press release describes their core focus areas as:

Chennai-based EdServ launched HEADS (Humanware Education And Deployment System), a 4th generation technology education model that uses web-based e-learning to seamlessly integrate manpower demand and supply in number and skills right from development to deployment. HEADS model has a mandatory job fitment for every student fresher who registers for a career programme. The company acquired ELMAQ EDUCATION, a leading IT training brand in Tamil Nadu, sometime ago to grow aggressively in education and training space.

The reason that I am particularly interested in this IPO is that I think that there a number of market gaps around learning and learning services, and that Indian companies might just be where the next generation of global players in the education market emerge from. Many of the ways that technologists have approached education and learning are essentially very unsuccessful and fraught, from a pedagogical standpoint. In some ways there has been little in the way of pedagogical development since the early Greeks stood up and delivered lectures, for the masses to listen to and appreciate. Nowadays, the lecture is delivered with either PowerPoint slides or through the Learning Management Systems.

What I'm hoping will emerge in the next few years is a whole new category of learning systems, based on a new generation of pedagogical thinking. Our new collaboration and communication systems should allow us to develop many more social and collaborative models of learning. The interactive systems and pervasive models of computing should allow many more constructivist models i.e. where people learn through doing, rather than by reading about something.

Given that the very few new entrants to the labour market are likely to work for the same compay throughout their life, or indeed are unlikely even to work in the same discipline throughout their career, the ability to engage in continuous learning and personal development is crucial.

Companies that can provide solutions and services that focus on both individual and corporate learning have a potential to play a huge part in our future economy. However, this needs to move way beyond the current learning models embedded in much of the contemporary infrastructure provided by existing market players. The learning market is one where there really should be a whole new set of market dynamics emerging - if this doesn't happen then the unimaginative learning modes that currently fail to inspire many will continue, and the resulting societal impact will be that we fail to move ahead as much as the new technologies should allow us.

Make no mistake though. The real challenge is to the education professionals not to the technologists - the real developments that are needed as a matter of urgency are pedagogical not technological.

Malaysia and the impact of government on the IT industry

We normally think about the impact of government on the IT industry as coming mainly from policy-related things, like taxes and economic investment incentives. However, a huge amount of influence actually comes from the governments own use of technology. Public sector is often one of the largest verticals in any technology company, and had characteristically been relatively stable and predictable in terms of revenue growth.

So, a general slowdown in public sector spending on IT can have a very negative impact on the local IT industry - causing a further constriction in the economy. In this light I was concerned to see the article in ZDNet Asia from Lee Min Keong (see http://tinyurl.com/664cuz) that reported that a Malaysian government austerity drive would slow down domestic IT spending from government. While this is superficially attractive from a public sector perspective it is potentially damaging in the long term.

When Malaysia companies feel the pinch from reduced domestic spending they will be forced to take one of two actions. Either they will need to cut their costs and shed jobs, in an effort to make costs balance with reduced revenues of they will need to increase their export-led services. Although the latter is probably the best long term strategy, it simply cannot be implemented as a short-term fix. Building overseas partnerships and distribution channels is a lengthy process. So, it's likely that the cost reduction strategy will be followed and there is the potential for a negative spiral effect.

If the Malaysian government does reduce spending it needs to offer an alternative package of support and incentives to the local IT economy, to enable it to build its overseas revenue more quickly than they could on their own. reducing domestic spend without doing this would constitute an act of vandalism.

Yahoo and the post-Microsoft focus on Asia - more significant than Google

When Microsoft were circling around Yahoo, looking for either a potential acquisition or, latterly, an alternative form of transaction I took the view that a big part of the interest from Microsoft was in the Asian consumer assets that Yahoo had been building. Now the transaction appears to be completely dead, the Asian ambitions of Yahoo are expanding. In Computerworld Singapore today (see http://tinyurl.com/6zr2sr) there was coverage of Yahoo partnerships with five mobile operators in the APAC region - for them to take Yahoo' mobile search offering to market. The operators were Mahanagar Telephon Nigam Limited (MTNL, India), Hong Kong CSL Limited (CSL), Smart Communications Inc. (Smart, Philippines), Digital Mobile Phlis, Inc. (SUN Cellular Philippines), and Vibo Telecom Inc. (Vibo, Taiwan.

Yahoo also announced some APAC localizations of its Yahoo Go 3.0 software, with hints that further localizations for the APAC market are to be expected.

Although many are doubting and challenging the rejection of the Microsoft proposal by Yahoo, and wondering whether the Yahoo executives have a plan that will deliver solid returns, the expansion into the Asian consumer market might be just what Yahoo needs - and indeed they may have a headstart over Google in the region. China definitely has the largest Internet user community in the world, ahead of the US market and likely to widen the gap further over the coming years. The Asian market also have a strong interest in mobile Internet access and Yahoo has developed its platform here.

In terms of monetizing the huge Internet community it is likely that advertising will play a substantial role in revenue generation, and the partnerships with Malaysia's Maxis Communications Berhad and India's Idea Cellular Limited are a signal of how this might play out. I'd expect Yahoo to look for a lot more consumer and advertising partnerships in the Asian market. By following a strategy of accelerating partnerships the business will have opportunity.

For me the Asian parts of the Yahoo strategy are more significant than their evolving relationship with Google which, although interesting, is more short term than the long-term revenue expansion goal that the Asian strategy is chasing.

MindTree growing in Chennai

I met with some of the MindTree in Mumbai this year at the NASSCOM, when I was a judge in an innovation competition that recognized their achievements in the growing knowledge economy. Their Knowledge Eco System certainly showed that the company had given some considerable thought to the social, physical and psychological aspects that affect how information is managed, shared and exploited rather than just focusing on how it is managed (see http://tinyurl.com/3pqstt). Although I think there is still potential to further productize the approach there are strong foundations, with deep root.

MindTree has just opened a expanded facility in Chennai, recognizing the need for expansion as it moves to become a credible alternative in many areas to the larger Indian-based competitors. The facility, known as MindTree Coromandel, will be able to squeeze in around 2,800 employees. A fascinating aspect of the construction is that the physical environment is intimately linked with its future purpose, in an echo of the way the layout of some of the best business schools is linked to their instructional and pedagogical design. As the article about the launch of the facility in SiliconIndia quotes (see http://tinyurl.com/3mjldu):

A unique feature of the campus is The Arboretum, where new MindTree employees joining from other organizations will be assimilated into the MindTree culture and provided unique learning opportunities. The History Wall will provide visitors a glimpse of MindTree's impressive growth over the past nine years. Celebration Wall is the collage of images that will depict the experiences of a MindTree Mind. MindTree Coromandel will also have its own Baby's Day Out, the place where mothers can bring their children to and work from.

I see MindTree as one of the companies that is definitely worth tracking in the Indian market, as they're on the expansion path at the moment and have an interesting - if somewhat different - proposition.

Further M&A links between India and China

I'm always interested see signs of the emerging relationship between India and China, as two of the largest economic powerhouses on the planet. So the news in the Economic Times of India (see http://tinyurl.com/42e9wf) that Tata Communications International was acquiring a 50% stake in China Enterprise Communications (CEC) was interesting. CEC is based in Beijing and offer a range of IT solutions to the market, including IP-VPN services.

China is such a huge potential market that many countries are looking to invest for the long term. Within that China it is likely that telecoms will be one of the most active verticals, both as vertical in its own right and, perhaps more crucially, as an enabler for IT-related applications in all of the other verticals. One of the most significant things that CEC has to offer to Tata is their network, which operates across different regions of China and should be a good asset to enable a wide range of services.

Although it's easy to focus on the potential in the Chinese domestic market there's also an international or export-led angle to be considered. In the search for low-cost IT services locations China is the key competitor to emerge to India, offering services to economies throughout the world - but with a strong concentration of demand coming from Western Europe and the US. Having a network that spans across China will enable Tata to deliver global services to different parts of the world, provided they can access regional talent with the right level of technical skills and the language skills needed for the target markets.

To make complete returns from this investment Tata will need to tackle both local domestic and international opportunities. It does represent potential but really needs to be viewed as along term bet, rather a short-term dash for cash.

More consolidation in the India market

Today saw another piece of consolidation in the Indian technology market. ICRA Techno Analysis Ltd (ICTEAS) acquired Axiom Technologies Pvt Ltd in a transaction of undisclosed size. ICTEAS describes itself as being "in the business of IT products and services, engineering services and KPO". ICRA, as a wider group, is a diverse business than spans management consulting, IT services and BPO. Axiom has a strong focus on implementing ERP product, including being recognized as a Navision solution provider.

The ERP market in India is one that is going to be very active in the next few years. First of all, as the rate of industrialization in the India economy increases, so will the demand for ERP solutions to support that growth. Second, the increasing economic development of the Indian economy creates the general wealth and funds to be able to afford ERP, and the rising cost pressures from wage inflation are going to drive the improvements in efficiency and cost control that ERP can provide. Third, ERP is progressively becoming more suited to the needs of the mid-market, through improved usability, lower costs and greater simplicity.

For the Indian domestic market there will be numerous competitors vying for the software crown. Microsoft Dynamics (Navision, Great Plains, etc..), SAP, and Oracle's JD Edwards products are all viable contenders and have been growing well recently. It is this ERP opportunity that ICTEAS has been seeking to expand into for some time, and the acquisition of Axiom gives them this kick start.

The market is sure to see further consolidation in India, especially in the cadre of companies that are seeking to address the domestic market, where there is much greater competition that there is in the export market.

NIIT and non-linear growth

I've written lots before about the need to later the train-track economics of IT services companies, where the revenue and cost lines move up in parallel. The approach that most companies are doing to break the lines apart is to develop repeatable assets - with the economic multipliers effect that this has in software companies.

So... it was interesting to read today that NIIT had set itself ambitions for non-linear growth, taking the proportion of its revenue from asset-based approaches from 25% to 50% (see http://tinyurl.com/3m5oxm). The development of their assets is, in part, based on the acquisition of the German company Softec and is focused on the airline industry.

The focus on specified vertical markets is important. Horizontally focused business applications are gradually being usurped by vertical market competitors, or ecosystems of vertical and niche applications are clustering around the major players - such as Oracle, SAP or Microsoft. Anyone looking to develop a vibrant applications business and benefit from non-linear growth needs to build assets and target these towards specific industry verticals.

Taiwan and Vietnam together

Vietnam seems to be the locus of a lot of activity at the moment. Earlier this week I wrote about the new co-operation between China and Vietnam. Now it is Vietnam and Taiwan that are working together.

The aim of the co-operation (which I saw reported in the Thanh Nien news, see http://tinyurl.com/4dqox9) aims to build a new software technology park in Ho Chi Ming City and for this facility to be on-stream by 2012. Of course, this is not the first software park in the city but it will dramatically increase the infrastructure and allow new software firms to come to market. As the Thanh Nien article says:

The $1.2-billion Thu Thiem Software Park will be developed by local company SaigonTel and TA Associates Vietnam, which was established by three Taiwanese firms -Teco Electrical and Machinery Co., Shining Group and Industrial Bank of Taiwan.

It is the second software project to be located in the new urban area in Ho Chi Minh City’s District 2 after the US$610-million Vija Brain Park.

What is clear, now, is the Vietnam is becoming a centre that is attracting considerable amounts of overseas investment, as the technology market in that country accelerates. This overseas investment is only likely to increase in the year ahead. Investment capital that would have traditionally gone towards investment opportunities in the US markets is seeking better returns overseas, in the emerging markets, as the signs of the credit-crunch induced slowdown in the market there are becoming more visible. Investment capital is, of course, largely agnostic to geographic boundaries and will seek returns wherever they're to be found.

South Korea as the open source evangelist

An article in the Enquirer.net relates the attendance of South Korean delegates to the forthcoming CEBU conference in Cebu, Philippines (see http://tinyurl.com/55k4qo). What it demonstrates is the growing importance of South Korea as a source of open source evangelism in the Asian region. It also demonstrates the links between the two countries - with many thousands of Koreans living in Cebu.

From the government perspective the Korea IT Industry Promotion Agency (KIPA) has been encouraging open source domestically within the Korean market. I've commented before about Linux-based projects in the country (see http://tinyurl.com/5tfoya) and there are further projects like the Buyeo and Asianux that are at play. Indeed KIPA is often cited as having set a target of 40% of servers in country running Linux. Clearly, open source and the avoidance of some of the commercial and proprietary systems is a strong factor here. When I've discussed the Korea zeal for open source with Korean friends there is a common thread to their arguments - building a strong local IT economy requires the commercial and technical freedoms that are associated with open source. It's almost as though using open source is a patriotic duty.

Korea has been able to create commercially strong and sustainable businesses, in part driven by open source products and services. It is now acting to spread that expertise into other parts of Asia, through a combination of its government agencies and its commercial companies - like Hansoft. This combination of expertise is interesting but only time will tell whether other countries in the region have the same appetite for open source.

China and Vietnam link up

Kingsoft is one the more mature software development organizations in the Chinese market. It has recently entered into a joint venture to expand its reach into the Vietnamese market. Called Kim Quang Software and Technology Joint Stock Company, the joint venture is a collaboration between Kingsoft and two Vietnamese partners - Quang Minh DEC Communications and Technology Joint Stock Company and Mr. Phan Dang Khoas.

The link between Vietnam and China has a number of different angles. First, Vietnam is one of the emerging markets in the Asian region. Although not as large as the tier-1 giants of India and China, Vietnam is a tier-2 market and a growing one. The joint venture thus therefore represents a distribution channel for the products that Kingsoft builds. Second, there are specialisms in the Vietnamese markets that could help Kingsoft in its product development processes. Software testing is especially strong in the Vietnamese markets.

If Kingsoft and the joint venture are able to distribute the software development and testing process across Vietnam and China effectively, then there are benefits to be driven out of the relationship. It is this facet of the joint venture that is strategically important, when compared to the simple distribution effect that is at play. It'll take some time for Kingsoft's real intentions to be made clear, beyond the generalities that are in their press releases.

Future needs for Indian state support for ICT

Indian software and IT services industry growth has been focused on the so-called tier-1 cities, with lesser but still significant growth emerging more recently in the tier-2 and tier-3 cities. This has put considerable stress on various elements of the physical infrastructure, from telecoms, power, transportation, water, housing, education, etc…

There have, of course, been tax-related incentives that have encouraged these software and IT services businesses to grow. These have also been recently extended because of the potential damage that their cessation would have caused to the Indian IT economy, with businesses threatening to relocate into other low-cost economies that were also willing to offer tax incentives (see http://tinyurl.com/4w9hh5). However, I’ve also had a long-term problem with the nature of some of the tax breaks.

Economic policy for IT needs to be closely related to all other economic development policies. For example, there is little point in encouraging the growth of IT services in parts of the country where the labour force does not have the required skills, or the telecoms infrastructure is not robust enough. However, this disconnected policy thinking is typical of many parts of the world.

So, I’m encouraged that side-lobbying around NASSCOM sessions is looking for a much more integrated set of policy, involving STPIs (software technology parks of India) or special export zones (see http://tinyurl.com/59aw7l). Policy needs to join up physical environment, telecoms, skills development, taxation, and a plethora of other policies.

I’d love to think that all these areas will be connected together in a coherent framework, but the history government intervention in the technology markets across the world (not just India) tells me that this is a pipedream.

Korea doesn't Wii like everyone else

I often look to South Korean and Japan to get an indication of the next technologies that are likely to be considered for consumer adoption in the UK and other parts of Europe. However, I've not really looked to South Korea before to get an idea of what is not going to be popular, or to see what might drop out of fashion.

So... it was interesting to read (see http://tinyurl.com/6lr4us) in South Korea's JoongAng Daily today that the Wii has not taken off since its consumer launch into that market in April. Now it could just be that the initial South Korean figures are a glitch, or that it will take longer for the Wii to establish itself and accelerate shipments. However, there are two alternative scenarios. First, is that alternative gaming consoles, such as the XBox and PS3 are regaining the ground that they lost to the Wii during last year - with the motion sensitive controls of the Wii being a good novelty for game-play but with inferior graphics. However, it could be that the discretionary spend on technology gadgets in the South Korean market is going to slow down, and that would have much wider consequences.

However, there really isn't enough data available at the moment to tell if it's a glitch, a recovery of the competition, or something deeper. What is has done though is to put yet another "thing to watch" on my daily checklist - trying to get signals from the different geographic market on how the global technology industry is changing.

TCS and the wider HR services opportunities

The scale of the skills issue in the Indian IT services market struck me full force when I read about the recent recruitment drive by TCS at VIT University (see http://tinyurl.com/69funy). TCS is recruiting 1,075 students, the largest recruitment by any single company from a single institution.

The India market is expected to enter a period of relative rather than slowdown, with growth dropping into the 22-25% range, rather than the 29% growth that NASSCOM cited during 2007/2008 (see http://tinyurl.com/5qxyxk). For most markets 22-25% growth is still stellar growth, and one that will still require recruitment at scale. Beyond recruitment the efficiency of the on-boarding processes and the retention processes are further keys to the growth cupboard.

Many in the software market rely on "eating their own dogfood" to create references that help them generate initial growth in their product categories. The same has not been true to the same extent in the IT services market i.e. the likes of TCS do not, generally, use their own HR services capabilities as references. This is a lost opportunity.

TCS, and the rest of the Indian SWITCH, have all created substantial HR services capabilities, as part of their own rapid growth. They now have the opportunity to take these services to market. Some will focus on Recruitment Process Outsourcing (RPO), others will focus on learning and talent development (LTD), and further companies will focus on incentive compensation arrangements. The lessons of the more general HR outsourcing market globally will still hold true though - specialization in specific HR processes is important.

Another SAP thread in India - venture capital

I've written before about the growth of SAP in India, with the mid-market playing host to a large part of that growth. SAP has also talked about investments across all of its operations in India of over a billion dollars in the run up to 2010. Business ByDesign is likely to be another locus of growth in the future, when it is rolled out to the country - probably in 2009 or 2010.

The other interesting part of the SAP strategy is the use of the SAP venture capital arm - SAP Ventures (see http://tinyurl.com/5wqhqq). They're looking to close three transactions in the next two months and are working on a much wider pipeline of deals over the next year and a half. This would be a substantial deal volume, making the SAP M&A strategy look much closer to their key competitor - Oracle - and contradicting those who say that SAP has not used its investment resources as effectively at its American competitor.

However, I'm viewing the SAP Ventures activity in India as a much more integral part of the R&D activity. Of the 5,000 or so SAP employees in India around 80% of these are associated with SAP Labs - the research and development organization. M&A can be a highly effective use of capital, with some studies citing 3 or more times the investment effectiveness from acquisition related investments compared with investment in native product development.

If SAP can truly leverage their India acquisitions and get 3-5 times the leverage of their traditional R&D then they the potential to bring a whole new series of products to mind, to augment and diversify revenues away from their traditional heartland. This would benefit SAP greatly and help better position them for an economic downturn, using counter-cyclical product revenues.

TechTeam, the Philippines and the cost of globalization

I picked up from various sources that the US-headquartered provider of global helpdesk services had made a small acquisition. They bought Onvaio, largely for their Manila, Philippines subsidiary Onvaio Asia Services Inc.

Onvaio is very small in comparison with TechTeam, having had revenues of $1.7 million last fiscal in comparison with TechTeam's annual revenue in 2007 of $222 million. So... this is definitely not an acquisition driven by revenue scaling. This is further demonstrated by the move that TechTeam made in late May 2008 to shed 60 jobs, as part of a change form being a local to a globally structured firm. It's an acquisition driven by the drive towards globalization of IT services - not to mention many other services sectors.

This transition is, in a microcosm, exactly the same transition that the major system integration, outsourcing and consulting firms are doing. TechTeam expected to incur a restructuring charge of $3-3.5 million in Q2 2008, to help make that local to global transition. If we just scale this cost figure upwards to see how much the largest firms will incur or have already incurred when pushing for full globalization. At the same ratios, and I admit that this is a beer-mat calculation, there would be nearly $1.5 billion to pay in the like of the $100 billion revenue firms like IBM and HP.

Across the industry as a whole the restructuring costs associated with globalization are likely to run into the high tens of billions, if not substantially more. Like all times in the world's economic history there is major price to pay while the new order is established.

PaaS SaaS to India?

(This first appeared in Ovum Straight Talk - thought it would be interesting here too)

Many software companies in the Western markets, most frequently the US, have set out to transition their traditional software products into software as a service (SaaS) offerings. However, this has not been an easy path and many have struggled to bring products to market on time or have not been able to tackle the architectural and scalability issues that are needed to produce an effective offering - whether it is based on multi-tenancy, or not.

The technical challenges in migrating legacy to SaaS are potentially enormous, and the simple implication from those challenges is that this is also a costly exercise for the Western-market software company. This is coupled with a desire to tackle those challenges and bring SaaS products to market in the fastest time possible, as the window of opportunity for accelerated SaaS growth is in the 2008-11 window. If SaaS offerings are late in that window then the opportunity for revenue growth is greatly diminished. Of course, few companies can prudently afford to throw money at the problem either, and so need to find cost-effective ways of tackling the difficult problems. This is further amplified by the current investment climate that is seeing many investments delayed or suspended. Enter R&D outsourcing and outsourced product development.

India and other offshore outsourcing locations have a chance to really profit from the opportunity, through R&D outsourcing. R&D outsourcing and outsourced product development are not a new phenomenon. The largest names in the software market, like Microsoft and Oracle, already make strategic use of outsourced product development in the desire to control development costs, and have access to an extended resource pool - without necessarily having to grow the fixed cost base associated with a larger labour force. Many companies have emerged that are benefiting from the opportunity, such as Aspire Systems, Aditi Technologies, e-Zest Solutions, ISHIR, and Sierra Atlantic. Some centres are even being established to focus on SaaS development, such as Morph Labs in The Philippines. The companies in India, and elsewhere in the developing markets, have developed strong expertise in tackling the engineering challenges that the SaaS transition brings, both through experience and through developing intellectual property based tools and processes that make the SaaS transition more predictable. They bring repeatable engineering practices to mature standards - CMMI Level 5 et al - as table stakes, but their capabilities are rich as well as repeatable. Indian companies that can productise their SaaS re-engineering efforts will be at a definite advantage here, as they'll be able to scale their business more quickly, offer more predictable outcomes and offer keener prices.

Advice - software vendors should strongly consider outsourced product development as a way to transition their products to SaaS.

Rather than simply, or not so simply, re-engineering software on either a fixed-price, time-and-material or another common contracting route, there is the opportunity for R&D outsourcing companies to play for the long game - and aim for gain-share, where they share in the rewards when the re-built SaaS offerings are taken to market. There is even potential for the braver firms to negotiate for shared ownership and control of the SaaS assets that have been developed. The niche where the outsourced product development company is able to co-invest in the SaaS development transition, in return for shared rewards, shows very exciting potential and we expect there to be some market action in this area.

Advice - outsourced product development services firms should focus on commercial innovation and co-development models, as a way to get a share of the long-term action.

Of course, there are alternatives to the R&D outsourcing that are also potentially complementary to it. Platform as a service (PaaS) is the most frequently cited SaaS development accelerator. The thinking is simple and reminiscent of traditional ISV thinking: ISV applications should use as many elements of an infrastructure based on open standards as possible, avoiding building infrastructure components like databases, application servers and other middleware that are unique to that ISV application. That way the maximum development cost leverage is obtained and there is maximum focus on the application functionality that customers actually use. Lots of PaaS plays have begun to be placed, beyond the Salesforce.com example that most cite. Here companies like Bungee Labs, Coghead, Rollbase, and NetSuite are also PaaS players. Initial customer references such as CODA2go sound promising. However, there is a real danger of lock-in from the ISV perspective. Just like no self-respecting ISV would have targeted only a single database vendor, so no sensible ISV should tie itself to one PaaS provider - being able to switch providers is the whole point of SaaS models. Therefore standard and interoperability developments are going to be needed, otherwise PaaS will become the next proprietary lock-in of the future and one set of market concentration will be replaced by another. Net result: the market is no freer and customers don't have the wider set of choices that they hoped SaaS would provide.

Advice - although PaaS looks attractive, ISVs need to consider the lock-in implications before they commit, and carefully evaluate alternative strategies.

Is SaaS more attractive in Asian markets ?

Steve Russell from the Salesforce.com Asia team claimed in an interview with the Inquirer.net recently (http://tinyurl.com/667utm) that the rate of growth for his region was double that of other Salesforce.com territories.

Is this a reflection of a greater attractiveness for SaaS in the Asia markets of not ? This is not an easy piece of analysis. Firstly, in many of the Asian countries there is a greater proportion of SME companies in the total mix, when compared with economies like the US or the UK. Given that SaaS is more attractive to SMBs at present there is an amount of auto correlation that needs to be untangled here. Second, there is a different point in the adoption curve at play. Very early in any adoption cycle it is much easier to achieve stellar growth rates than in later stages. Simply, it easier to go from 1 user to 2 users than from 100 users to 200 users - even the percentage growth is identical.

Since SaaS is so early in the cycle in the Asian markets and there is a greater density of SMB in the economy I am convinced that much of its growth can be attributed to those factors rather than anything deeper.

The interview with Russell also includes quotes from a local Salesforce.com consulting partner - Rene Huergas of IPC. It's this angle that still doesn't gel with me (see http://tinyurl.com/5qt9wj for an earlier set of arguments around this). Either there this is enough work on business change consulting and customization to feed a partner or there isn't. If there is enough work to change and extend the basic Salesforce.com application to sustain a partner then the TCO advantages claimed for SaaS, over traditional software, are much less clear. If there isn't enough work to sustain and grow a partner then there is a nett flow of revenue out of the country.

For me it's a Catch-22 that SaaS really needs to tackle, showing how the potential TCO advantages can be sustained while still allowing profitable growth for partners in the local economies. It must be both rather than an either or situation.

Intel fined in Korea

The European Union and the US Department of Justice are the regulators on the global stage that usually gain most publicity when it comes to the technology industry. However, the Korean Fair Trade Commission (KFTC) has been equally active over the past years. As my colleagues at Computer Business Review explained in a recent piece (see http://tinyurl.com/5oetry) KFTC are the economic competition regulator in South Korea.

The most recent intervention was with Intel. They were fined KRW 26bn or about $25 million for offering rebates to manufacturers such Samsung Electronics, in return for exclusively purchasing their chips rather than AMD. Of course, Intel has the ability to appeal against the fine and early indications seem to point to it doing just that. In the past Microsoft have also been rebuked by the KFTC, in a similar way to the EU intervention around the bundling of Windows Media player. That resulted in a $34 million fine in Korea in 2005 and the ruling that a version of Windows without Windows Media Player pre-installed must be available in the Korean market.

Now, I've been critical of regulators such as the EU in the past – very critical. I've simply not understood what they're trying to achieve. In the EU, for example, I would have expected an economic regulator to want to create a more competitive market, with downwards price pressure and low barriers to entry for new market entrants. That would have been my goal if the assumption is that an EU regulator is intervening on behalf of EU citizens. Self evidently, some of the EU regulation has not generated significant benefits like this as there is still market concentration and still little change to the volume and success of market entrants. I think the same is probably also true in Korea, and that Korean consumers have not benefited from the economic intervention of the KFTC to any great extent.

So… I've probably misunderstood what a national regulator such as the KFTC or a regional regular such as the EU thinks it is for. Since they're not having a local effect they must think that their remit is global, not local. Hmm… if that is the case then I am even more uncomfortable. None of the regulatory bodies have a global mandate, nor should they. Regulators must focus on having demonstrable economic benefits to their local markets and economies, and avoid what is often interpreted as irrelevant and meaningless regulation.

Who regulates the regulators though ? Nobody it seems. Only the electorate should and it needs to make its voice heard more loudly.