InvestorQ : What is the big advantage of shifting to digital for IT companies from valuation point of view? Does it give them better valuations in the market?
prachi Patwardhan made post

What is the big advantage of shifting to digital for IT companies from valuation point of view? Does it give them better valuations in the market?

2 years ago

It is not just about better valuations but being where the future of the global IT industry is going. Today, globally, most of the large companies want digital strategies that are futuristic. The days of focusing on just operational software of banks, insurance companies etc are gone. That has matured and stabilized. Let us look at some key takeaways.

· SMAC (Social, Mobility, Analytics, Cloud) helps the IT company to own the customer much more effectively compared to the traditionally BFSI approach. The old approach in IT was more of a vendor-based approach which had its limitations. SMAC enables IT companies to offer a holistic solution to the customer rather than just outsource parts of their operation.

· This is an extension of the previous point and entails a more consultancy approach to the customer. By effectively applying the four pillars of SMAC the IT Company is able to identify business needs for the client that are not otherwise articulated. This broadens the goal post when the IT Company approaches the customer with a value proposition.

· The big difference between the traditional outsourcing model and the Digital model is that the former is linear, while the latter is horizontal in nature. What does that mean? In a linear model, you need to add manpower resources to expand your service offering to the client and hence does not facilitate ROI and margin expansion. On the other hand, the SMAC is about leveraging the existing platform more effectively and hence is ROI accretive.

· SMAC helps Indian IT companies to get greater insights into the customer and helps them scale up the value proposition. In the outsourcing business, the IT Company rarely gets a full 360 degree view of the client and that restricts the proposition that can be offered. SMAC will, therefore, help position the IT Company to behave more like a participative consultant.

· The truth is that most of the fresh investments in IT the world over are happening in the areas of social media, analytics, mobility and cloud. If Indian IT companies need to have a secure future they need to be present in a big way in the major growth areas. Also, the margins and the scope for lateral expansion is much higher in SMAC compared to the traditional outsourcing model.

A greater shift to SMAC is not just an option, but the only option for Indian IT companies. But the shift must be meaningful. If Indian continues to only provide support services in areas like cloud and analytics, the real alpha will never accrue to Indian IT companies. That could be the big challenge for Indian IT in the months ahead.