The Resilience Factor – Innovative Business Models to Variabilize Technology Development Costs

Pari: Hi everyone. Welcome to another episode of the Zinnov Podcast. I am Pari Natarajan, CEO of Zinnov and your host for today.

The past few months have tested the leadership capabilities of organizations across the world. Businesses had to plan for short term liquidity, defend their existing businesses, plan the recovery, and act on opportunities that will allow them to orchestrate growth and gain market share. This is not over yet. In the US, the uncertainty in the health, economic, and social climate could continue for several more months. How can organizations plan for an uncertain future? What are the tools and playbooks they can use to increase the resilience of the business and teams? How can they variabilize the technology cost? To answer these questions, I have with me today, Sandeep Kalra, President of Technology Services at Persistent Systems.

Sandeep has more than two decades of experience in the software industry, and has held roles which include setting the strategic direction for the company, managing sales as well as the delivery functions, running global P&L for digital transformation, etc., to name a few. Thank you, Sandeep, for being with us to share your perspective on Innovative Business Models to Variabilize Technology Development Costs.

Sandeep: Thank you, Pari.

Pari: In the last few months, COVID has impacted every possible industry vertical and businesses around us. While it is one of the biggest and most unprecedented crises in recent history, do you believe that certain Software, Software-led businesses are better equipped or more resilient than others at handling it?

Sandeep: So, COVID has been an unprecedented crisis for most of us. This time, it’s very different than any other crisis that we’ve seen in the past, whether it was 9/11, or the financial crisis in 2008, or any other crisis. This is a global crisis that is impacting all of us, no matter where we are from, no matter which industry we operate in. In my mind, there are two aspects that we are all dealing with. One is the short-term business impact, how do we cope up and remain resilient and survive this short-term impact? And then, as we have a treatment and/or a vaccine, and we will start seeing recovery, how do we make the most of that recovery, for our businesses? Looking at the shorter term, COVID has impacted literally every one of us – be it badly hit sectors such as travel, transportation, hospitality, or positively impacted segments such as healthcare, enterprise software companies that address aspects such as communication, collaboration, cybersecurity, cloud infrastructure, DevOps, etc. So, we will have to find out our own playbooks accordingly, to be able to survive, and then thrive as we move along.

Pari: Your 25-year-long technology journey has seen you captain many transformations and help the companies that you have worked with, be both resilient and agile. What in your experience, would you recommend software companies and large enterprises heavily dependent on software to do, to build resiliency in times like these?

Sandeep: So Pari, in any crisis, we see some people emerge as winners, and some not very successful. The outcome is dependent on their choice of decisions. And if you look at it, in the shorter term, we believe that the companies in order to make themselves much more resilient, should prepare for a revenue decline depending on which segment they are in – whether it is a 5-10 percent decline, or a 30-40% decline like in the case of sectors such as travel, transportation, and so on. It’s about building the muscle to take on the opportunities as the crisis subsides. But the first thing is resilience.

I would recommend that the software companies and enterprises should look at this as a series of phases. The first is to sustain yourself, and then evolve through the crisis. And as you know, when things get better as we have the vaccine come in, and we see recovery, we will have to be able to prosper in that phase. So, if you look at yourself in the first phase, which is sustenance, one has to make a decision based on the industry the company is in, and the kind of revenue impact that the company is seeing. Some critical questions to be asked are, How do you bring your costs in alignment? How do you make your costs more variable, so that if your revenue goes down, you can control your cost and you can survive profit? And that will depend on the actions that the teams take at this point.

Pari: It is interesting that you mention cost containment or variabilization of R&D cost or IT budgets. What does that mean? How should companies think about these for better outcomes and better flexibility?

Sandeep: So Pari, I would like to divide these into different strategies for the software companies and software-driven enterprises. If we look at traditional software companies, especially in the world of SaaS, companies track the rule of 40, which is across the growth and profitability, which, in the current scenario, is going to be difficult to achieve; because, growth is going to be hard to come by. In fact, we are looking at a kind of degrowth, depending on which segment the companies are in. So, the emphasis on Profitability and Cost Management is even bigger.

If one has to think like a software company that is looking at managing cost, it is about containing the cost on legacy products that have lesser potential in the short to medium run. The focus should be on redirecting the spend to products which have far more revenue implications in the shorter term, reducing the overall spend, maybe looking at even divesting products which have a lower margin contribution, and getting money to fund other alternatives.

We have increasingly seen even for PE organizations, where the portfolio companies are being nudged to package mid to late-stage products, look at partners to give them the sustaining engineering and the product lifecycle management in return for significant year-on-year cost reduction, or to consider different business models such as revenue shares, making R&D a variable cost and not a fixed cost. Similarly, when we talk to our enterprise customers, depending on the performance of their businesses, they are looking at absolutely bringing down the spend on running the business to the bare minimum, so that they can redirect the spend. They consider embarking on a digital transformation journey given the increasing number of businesses moving online, operate at the best operational efficiency, and liberate the revenue-enhancing initiatives.

The last category of enterprises is the ones that were doing well but had a high amount of debt. Now, since their revenues and profitability have come under pressure, they are looking at monetizing latent assets such as captive centers and leveraging that, along with a partner network in order to have monetization and to have next-generation data transformation being accelerated.

Pari: Interestingly, you talk about companies monetizing their global technology centers and operational centers – we call it Global Centers of Excellence (GCoE). For years, companies have looked at these as strategic investments – so how does this pan out in the COVID scenario differently?

Sandeep: GCoEs or the Global Centers of Excellence, have always been integral to a number of companies’ strategies, and they will continue to be so. But we see a likely change in their role going ahead in the future. If I may give you an example from a very different perspective – if we look at mobility in countries like the US, a car, which aids daily commute, is a very important part of someone’s personal life. But with the advent of Uber, Lyft, etc., the entire concept of mobility is changing. It’s also changing how people look at car ownership; it doesn’t mean that everyone will stop owning cars, but it is about the perspective of asset ownership versus mobility as a utility. Similarly, in the GCoE landscape, depending on the GCoE’s size, maturity, the needs of the parent organization, there are going to be different kinds of monetization.

So, if we look at it in three different layers, the GCoEs with less than 300 to 400 employees are the ones that struggle to attract and retain the talent over time. Hence, there is a discussion on if that is the best way to run a GCoE, or should they be looking at partnering with someone like a Persistent in terms of divestiture, but a longer-term contract, and achieve monetization. The second layer is around GCoEs that are looking to build resilience – where the parent organization has a high amount of debt and where this is a latent asset that could potentially give a good amount of monetization, and at the same time, refresh the talent by bringing in latest talent from a partner, thereby accelerating their digital transformation journey in the short to medium term. Last but not the least, are the larger GCoEs, which have been in existence for long, and need to accelerate their efforts. These GCoEs, instead of looking at partners, and asking them, “Can we bring in resources?”, are looking at giving parts of their GCoEs to a partner and saying, “Let’s monetize a part, and work on the latest technologies, accelerating our digital transformation journeys together.” These are the different flavors that we are seeing in the GCoE landscape.

In essence, if you were to look at it, these are unconventional times that call for unconventional thinking. The crisis calls for forging partnerships with a different perspective – Leveraging the assets, whether to monetize or to accelerate and looking at the broader ecosystem as a bigger play with a different lens. The entire idea is to build muscle, come out much stronger, much prepared, and win in the same environment where some others may not. That’s in essence, what we are seeing in the market.

Pari: Thanks, Sandeep, for sharing those insights with us.

Sandeep: Thanks, Pari.