Software Product Companies and Globalization Opportunities

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Software Product Companies and Globalization Opportunities

Sunnyvale Beijing Bangalore Hyderabad GurgaonPune

R&D Globalization Council

Many companies still have significant room for growth to achieve their optimal globalization levels

1

0% 100%10% 20% 30% 40% 50% 60% 70% 80% 90%

Optimal Propensity to Offshore R&D (at one location)

Small (Less than USD 200 Million Revenue)

Medium(Less than USD 1 Billion Revenue)

Big(More than USD 1 Billion Revenue)

Optimal Level = 35 percent

Characteristics: Multiple product l ines, significant revenues from developed markets, and renewed focus on emerging market opportunitiesRisks: Reduced innovation capabilities across multiple products, business continuity, time-to-market, and lack of proximity to customers

Optimal Level = 55 percent

Optimal Level= 80 percent

Characteristics: Monolithic product, fresh focus on emerging markets, and significant pressure on bottom line due to steady growth of revenuesRisks: Productivity, quality and innovation, lack of good understanding of product architecture and technologies

Characteristics: VC funded, pressure to keep burn-rate low, single product offering, sales and marketing office in HQ, sr. executives in remote location

Note: Source: Zinnov Analysis based on historic trends for the last 7 years and primary interviews with key stakeholder of MNC R&D subsidiaries

ILLUSTRATIVE

R&D Optimization


Our recent research shows that companies are not yet leveraging the full potential of globalization

Global Software Product MarketUSD 300-320 Billion

Total R&D Spend (15%)USD 45-48 Billion

Others (85%)USD 272-285 Billion

Concept (8%)USD 3.6 – 3.8 Billion

Development (37%)USD 16.7 – 17.8 Billion

Total In-House (95%)USD 42.8 – 45.6 Billion

Total Outsourced (5%)USD 2.3 – 2.4 Billion

QA/ Testing (31%)USD 14.0 – 14.9 Billion

Support/ Sustenance (23%)USD 10.4 – 11.0 Billion

United States (73%)USD 32.9 – 35.0 Billion

*Other Developed (12%)USD 5.4 – 5.8 Billion

Mature Products (75%)USD 33.8 – 36.0 Billion

New Products (25%)USD 11.3 – 12.0 Billion

**Emerging Geo (15%)USD 6.8 – 7.2 Billion

A B C D

India = USD 3.8 - 4.2 Bill ionChina = USD 2.0 - 2.4 Bil l ion

Note:

1. In-house includes offshoring to captive centers

2. Outsourced is only to thi rd party

service providers

Note:*Western European countries and Canada; **India, China, South East Asia, Central and Eastern European Countries (Ukraine, Poland, Bulgaria etc.), Russia and othersSource: Interviews with key executives (of software product companies) in the US, India, China, Ukraine and Russia; Qualitative insights from company annual reports; Zinnov Analysis 2

R&D Optimization


Increasing talent pool and stabilizing costs are making emerging countries such as India, China and Eastern Europe attractive for growth

3

Ind

ia R

&D

MN

C T

ale

nt

Po

ol (

in T

ho

usa

nd

s) Ind

ia MN

C R

&D

Talen

t P

oo

l Gro

wth

Rate

Growth of MNC R&D Talent Pool in India (Current and Projected)

19%

YOY Growth

14%

19%-6% -5%

India R&D* Center Operating Cost –Relative Comparison

1%

1%

6%

13%

36%

44%

1%

3%

7%

13%

34%

42%

Engineering QA

Team Structure/ Size

Senior Level(8+ Yr)

Middle Level(3-8 Yr)

Junior Level(0-3 Yr)

Organization Pyramid for MNC R&D Subsidiaries in India, 2009*

Note: *For all verticals including softwareSource: Zinnov annual survey on R&D operations cost, 2008

R&D Optimization


Increase in focus and investments into global centers of industry leaders has added significant value to their bottom and top lines

4Note: Source: Zinnov Analysis

Operational Support

Operational Independence

Strategic Independence

Global Strategic Partnership

Cen

ters

’ Val

ue P

rep

osit

ion

Centers’ Capability and Initiatives

Company BCompany A

Company C

Company G

Company I

Company D

Company F

Company E

Company H

R&D Optimization


As R&D activities mature, product companies are looking at shared services globalization for optimizing their internal operations

5

Sales & Marketing

Human Resources

Customer Support

F&AProfessional Services

Inside Sales

Maturity

Emerging Rapidly Growing Mature

Off

sho

rin

g R

ate

Globalization Adoption Curve for Technology Product Companies

LOW

HIGHProduct Development

Note: Adoption curve is the representation of majority of the companies. Exceptions of companies which grow by acquisitions as excludedSource: Zinnov Analysis

Internal IT Services

SG &A Optimization


IMS and F&A related activities are fast gaining momentum in emerging geographies (1/2)

0

10,000

20,000

30,000

40,000

50,000

60,000

25 40 55 70 85 100

Indian Vendor

US Vendor

Number of employees

Cum

ulat

ive

Cost

(U

SD ‘0

00)

Savings Potential USD

27 MM

Cost of Outsourcing IMS to a Indian Vendor Vs. US Vendor

0% 20% 40% 60% 80%

End User Support

Internal Help desk

AMS

Mainframe

Servers

Network Services

Minimum Potential

Additional Potential

Percentage of FTEs that can be Outsourced for IMS

Ha

rdw

are

su

pp

ort

Se

rvic

es

IT H

elp

Des

k

Level-I Level-II Level-III Level-IV

IT Desk Services

• IT Help Desk

• Scheduled Tasks

• Password/ID creation/Reset

• System Administration

• OS Upgrade and Patch Roll outs

• Security Administration

• Data backup and Recovery

• Higher-end technical Support such as High Availability Clustering and Fail-over Setups

• System performance & Capacity Planning

• Defect Break/Fix, Application Patch Mgmt

• IT Security Compliance

• Onsite Selective Staffing

Application

Management Services (AMS)

• End User Support

• Scheduled Batch Support

• Asset Management

• Scheduled Tasks

• Application Support

• OS Upgrade and Patch Roll outs

• Work/Job Scheduling

• Application Administration

• Application Monitoring

• Application Management

• Packaged Application Implementations

• Application Migrations

• Defect Break/Fix, Application Patch Mgmt

• IT Audits



Hardware Support

Services

• End-User Support

• Asset Management

• Scheduled Tasks

• Server Management

• Work/Job Scheduling

• Data back up and Recovery

• Incident Management

• Higher-end technical Support such as High Availability Clustering and Fail-over Setups

• Storage Optimization

• System performance & Capacity Planning

• Architecture/Design



High Capability Moderate Capability Low Capability 6

SG &A Optimization


IMS and F&A related activities are fast gaining momentum in emerging geographies (2/2)

Propensity to Offshore

Low High

Requisition

Material

Purchasing /

Procurement

T&E Accounting

Invoice Data Capture

Dispute Resolution

Payment Processing

AP Helpdesk

Procure to Pay

Order to CashGeneral

AccountingClosing & Reporting

Treasury & Tax

Financial Planning/ Analysis

Compliance

Account Reconciliation

Vendor Management

Escheatment / 1099

Credit & Order

Management

Bi l ling/Invoice

Management

Deduction/

Dispute Mgmt

Cash Appls. & Col lections

Reporting & Reconciliation

Portfol io Analysis

Revenue, Expense Accruals

Fixed Assets

Accounting

Account Reconciliation

Inter Company Accounting

Accruals and Reserves

Journal Entries

Inventory

Accounting

Close

Management

Statutory/GAAP

Adjustments

Tria l Balance Analysis

Internal Reporting

Financial Statements Analysis

External Reporting

Consolidation

Banking

Operations

Capital Planning

& Al location

Accounting and

Reporting

Risk Management

Tax Accounting

Tax Returns

Transfer Pricing

Transaction Tax

Planning and

Support

Base Cost

Reporting

Cash Flow

Analysis

Bus iness/Sales Analysis

Internal Audit

SOX Project

Management

Regulatory

Compl iance

Control Self Assessment

Increasing Order of ComplexityNote: The list is not exhaustive

Source: Primary interviews with key stakeholders among the leading F&A outsourcing service providers ; Zinnov Ananalysis

F&A Outsourcing to India

7

SG &A Optimization


Increase in customer awareness on GDM and competition from Indian service providers will force companies to grow services teams in emerging locations

Revenue Structure of Leading Software Product Companies

8

Oracle

Q1’09 Q1’08 % Change

New License $1,513 $1,612 -6.1%

License Updates and Support $2,968 $2,647 12.1%

Consulting $754 $837 -9.9%

Training $78 $101 -22.8%

On Demand $191 $174 9.8%

Symantec


Content, Subscription & Maintenance $1,209 $1,291 -6.4%

License $223 $359 -37.9%

Adobe


Product $660 $841 -21.5%

Services and Support $45 $46 -2.2%

SAP


Software License € 543 € 898 -39.5%

Support € 1,337 € 1,099 21.7%

Consulting € 517 € 628 -17.7%

Training € 70 € 114 -38.6%

Professional Services € 610 € 768 -20.6%

Sage

H1’09 H1’08 % Change

License, Training, Professional Services, Business Forms, Hardware

€ 271 € 309 -12.3%

Combined Software/ Support Contracts, Maintenance and Support, Transaction Revenues, Hosted Products

€ 477 € 462 3.2%

Competition

• Local players are growing their capabilities across product lines thus eating into products firms’ services business

Demands For Lower Price

• Product customers demand lower prices knowing the Indian vendors’ price points thus forcing product firms to adopt a global services model

Focus on Services

• Product firms are consciously focusing on services business in order increase customer wallet share and to smoothen revenue flows

Technology Advancement

• Remote client application environment data gathering and analysis is now possible

• Bulk of the application configuration and customization can now be done remotely

Mature Partner Ecosystem

• Indian vendors have product specific COEs and groups

• Local SI capability in training resources quickly on different hardware and software products

• Partners for providing low cost support on routine implementation tasks

New license revenues continue to decrease for most of the companies

Companies are forced to adopt a global delivery

model for services

Revenue Structure of Leading Software Product Companies

Deal Structure (Illustrative)

Increased Margins

Additional Deals

Note:Source: Company annual reports ; Zinnov Analysis

Cost of Service Optimization


We are already starting to see this happen at a global level with many MNCs acquiring services businesses

9

MNC Acquired Company Acquisition Objective

Dell Perot Systems

Deal Size – 3.9 USD Billion

Dell, which has slowly been building its services business over the past few years, saw Perot Systems as a way to rapidly increase its services capabilities

Xerox ACS


For Xerox, ACS offers important BPO capabilities that will enable Xerox's growing services business to compete with the likes of HP and Dell

Hewlett-Packard EDS


HP, with the EDS acquisition, is looking to create a services unit that can rival that of IBM. Earlier in 2006 EDS acquired MphasiS for USD 380 million to further expand its services portfolio

Major Acquisitions by Global Companies

Note:Source: Company websites and press releases



Technical support including premium support will be delivered out of the India center due to proximity with both services and R&D organizations

0%

25%

50%

75%

100%

Average Company A

Company B

Company C

Technical Support Premium Support

Headcount for Technical Support (Including Premium Support) in India

Talent pool for product support on multiple Asian & European languages is available in the industry

Low cost per head (CPH) in India average:

Premium Support Engineer: USD 37,000 –

USD 40,000

• Problem resolution support• Support assistance• Information services• Prevention and resolution services

• Workshops• Support account management

Company A

• Global support infrastructure

• Proactive, automated support• Li fetime support• Ecosystem support

• Product enhancements and updates

Company B

• Mission cri tical partnership

• Cri tica l services• Proactive 24 services

Company C

Clients: Lehman

Bros, Citigroup

Clients: GSI, KPMG

Clients: British

Telecom, HSBC

10


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Date post:	31-Oct-2014
Category:	Business
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