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December 02, 2008

More on how the financial crisis could benefit IT firms

Mastek CEO Sudhakar Ram has an article in ET on how the current financial crisis could be a boon for "second and third wave" of IT Services companies.
When we dig into the reasons for the crisis, while we can blame blind optimism and greed, at a more fundamental level it is a failure of systems. The quality of underwriting at the point of loan origination had failed. Systemic controls that ensure uniform and consistent application of underwriting rules could have done much to avoid bad loans. Better controls and risk management systems governing individual firms as well as the entire financial system would have helped to track the quantum of leverage and the risks associated with it — both from the perspective of board governance and regulatory oversight. All these point to a desperate need for a massive overhaul of systems — and a substantial investment in new IT initiatives. For too long, large institutions have been trying to get away with spending 80% of IT dollars just on maintenance — keeping the lights on — and only 20% on new initiatives.

...To top it all, the financial crisis is forcing mergers of huge, complex institutions that were individually ungovernable in the first place. The only possible way these institutions can be managed is with substantial investments in new IT applications that can keep track of all the nuances of the underlying operations and provide online, real-time controls that are meaningful. Clearly the need in future is to reduce maintenance budgets and increase transformation budgets. Reduction in maintenance budgets will force more work going offshore — which is good news for the Wave 2 services players in India. However, customers will force the vendors to bring new efficiencies — which would mean that the current ‘Lift and Shift’ model of moving headcount to India will no longer work. They will also expect aggressive cost improvements year on year.

New initiatives will throw up tremendous opportunities for Wave 3 companies that have the depth of expertise as well as the intellectual property assets to bring better governability and manageability to these large enterprises. Indian companies will probably have to partner with local firms that bring this expertise or hire these experts in-house (easier now). This is the time for these companies to make the investment — so that they will be able to reap the benefits in the years to come. These are interesting times and hence throw up lots of challenges and opportunities. It is up to the courageous to go beyond the known and explore new horizons.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in