June 2015
2
T
ECH
K
NOW
ECH NOW
Our past editions
XaaS— Xplaining As-a-Service
Services in the digital world
The 2nd issue of Techknow explored the area of cloud computing and the huge
opportunity it provides to transform businesses digitally in the near future. We
discussed the factors that favor large-scale adoption of cloud computing among
enterprises, which will be in the form of “Everything as a Service (XaaS)” business model
where everything from technology services to key business processes can be delivered
as a service utility. We shed some more light on the same in our latest issue, which will
cover:
1. What is XaaS and role of players in the ecosystem?
2. How big is SaaS? Is it a threat to Indian IT services sector?
3. Expert Speak: Prasenjit Saha, CEO – IMS and Security business, Happiest Minds
4. What are the imperatives to flourish and not perish in the new wave of technology
services?
T
ECH
K
NOW:
CLOUD
T
ECH
K
NOW:
DIGITAL
Is it time for Moore’s law in services?
Cloud to act as the services multiplier
Gordon Moore, the co-founder of Intel, made an
observation in his 1965 paper that the number of
components in an integrated circuit will double every
year. The famous law has lasted for 50 years in
computing power and has seen various offshoots in
other segments.
With the advent of cloud, the same is not unimaginable
in services market - for the same cost, the quantum of
Moore’s law simplified!
services delivered could double every 2-4 years. Fueling
this belief is the savings obtained from moving
infrastructure to cloud, along with ever-reducing prices
charged for per unit of services. This gets compounded
by the increasing acceptability of Robotic Process
Automation. All this feeds into the flexibility in the way
customers chose to consume storage and computing
capabilities.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com) +91 22 3982 5424
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

TECHKNOW
What is XaaS/SaaS?
Remote delivery of solutions online
XaaS offerings across the technology stack
XaaS refers to the increasing number of services that are
delivered over the internet rather than traditional
classification of services provided locally or on-site. The
customer does not take ownership, but instead rents a total
solution that is delivered remotely.
Subscription-based business model is the driving force
behind XaaS offerings. As enterprises’ need to turn
“Capex to Opex increases”, upfront capital expenditures
for business applications, utility software or data centers
are increasingly being replaced by cloud and XaaS
subscription-based offerings. This allows customers to
fund IT investments as operational expenditures with no
upfront capital spend. Also, as a consequence, an
important shift in the applications, which is of
significance for Indian IT Services, is from customized to
standardized.
Key characteristics of a XaaS-based offering are largely
similar to that of cloud, including:
Term-based billing or Pay-as-you-go models
High scalability and flexibility
Multi-tenancy
Device independence that may also enable users to
access software across multiple platforms
Location independence
Try and buy
Transformations of cloud on Enterprise IT
Rigid and Vast
On Premise IT Environment
•
Design, Build, Run
•
Purchase
•
Complex
implementation
•
Hard coded
•
Weighted toward
maintenance
•
Long-term planning
•
Gate keeping
•
Deep IT skills required
•
Concentration of large
mega apps
Flexible and Agile
Cloud Driven IT Environment
•
•
•
•
•
•
•
•
•
Consume
Rent
Complex integration
Configurable
Focused on new
applications
Upfront analysis
Collaborative
Deep vertical expertise
required
Proliferation of small
discrete apps
Source: Optimizing XaaS by Cognizant
How big is As-A-Service?
There are as many estimates around the size of As-a-
service market. Among the broad categories of Xaas,
software-as-a-service (SaaS) is the biggest followed by
Infrastructure (IaaS) and Platforms (PaaS). On the whole,
this is a USD100b+ market and growing much faster
than the overall as well as the Indian IT services sector.
According to Forrestor, the global XaaS market is expected
to reach USD160b by 2020.
BPaaS (USD b)
160.0
120.0
80.0
40.0
-
SaaS (USD b)
PaaS (USD b)
IaaS (USD b)
Source: Forrester Research inc.
As per CISCO, 59% of the total cloud workloads will be SaaS
workloads—up from 41% in 2013.
Source: Cisco Global Cloud Index, 2013-2018
Source: The Cloud’s Impact on IT Service Providers—HfS Research,
Avendus
12 June 2015
2

TECHKNOW
Centaur Partners forecasts the SaaS market to reach USD32.8b in 2016 from $13.5b in 2011—a 19.5% CAGR.
SaaS-Based Business applications market (2011-2006)
50
40
30
20
10
0
2011
2012
2013
2014
2015
2016
19.5% CAGR
Worldwide SaaS and Cloud Software (2012-2017)
100
80
60
40
20
0
2012
2013
2014
2015
2016
2017
Source: The Cloud’s Impact on IT Service Providers—HfS Research, Avendus
22% CAGR
Forrester forecasts global SaaS software revenues to reach USD106b in 2016, increasing 21% over 2015 estimated spending
Enterprise process apps
Desktop apps
2016E
2015E
2014E
2013
2012
26
21
3
33
4
5
6
4 1
41
5
8
6 11 2
9
Source: Forrester Research, Inc.
BI & Info. Mgmt
Storage mgmt
8
6
9
9
11
11 2
10
10
11 3
12
1
14
14
22 3
1
Enterprise vertical apps
Database mgmt sys.
16
2
50
IDC predicts that by 2016, there will be an 11% shift of IT
budget from traditional in-house IT delivery toward
various versions of cloud computing as a new delivery
model.
By 2017, 35% of new applications will use cloud-
enabled, continuous delivery and faster DevOps life
cycles to streamline the rollout of new features and
business innovation.
As increasing number of enterprise applications migrate
to the SaaS model (as seen in the rapid adoption of
Salesforce.com Workday, and now even SAP and
Oracle), it is natural to question the market opportunity
Growth in overall IT spend
4
3.5
2.5
for IT outsourcing industry in the future.
So is it a threat to IT services?
XaaS-based offerings enable enterprises to convert large
upfront capital expenditures into operational expenses.
Consequently, large component of enterprise spend can
now be procured at a much lower cost. Besides, SaaS
implementations need lower third-party customizations.
Thus, the market opportunity for IT outsourcers will
begin to shrink in the years to come.
The mainstay of Indian outsourcing players is the
traditional business of building custom application and
maintenance, on-premise ERP implementation of
Expected growth YoY %
5%
3.60%
Overall Tech spend grows slowly but shows steady improvements Consulting and app services grow fast
IT
Outsourcing
& HW
services, 55%
Consulting &
SI, 45%
2%
2013
2014
2015
Overall IT Consulting &
IT
services
SI
outsourcing
growth
and HW
services
Source: Offshore Insights Dec 2014/Jan 2015 Study
12 June 2015
3

TECHKNOW
platforms like Oracle and SAP; this will be directly
impacted by SaaS adoption.
Selling XaaS services is a different premise
The on-premise way:
Traditionally, CIOs of enterprises
allocate their IT budgets to various vendors for a
particular service at an agreed price. Upfront
investments are made in hardware and software
licenses, and applications are developed in collaboration
with the client looking at the processes. The businesses
live with the IT systems as long as they are functional
and satisfy the objective, as switching provider’s entails
huge costs. Normally, the sales cycle is complete with
the deal being finalized and then the account manager
incrementally mines the client with additional services
and maintains the relationship.
The As-a-service shift:
The advent of XaaS has lowered
the cost of switching to another vendor owing to low
upfront cost. Consequently, customer satisfaction is
higher, quality of engagement better and servicing
assumes higher importance.
The vendor imperatives’ bridge:
In the backdrop of the
As-a-service shift, vendors will have to increasingly be
proactive to maintain client relationships by providing
creative solutions that can be added on a “plug and
play” mode in the cloud; this requires them to
demonstrate superior domain knowledge about client
industry, business and processes. Cloud enables
businesses to adopt higher level of automation,
analytics and platform-based services, which can be
priced on the basis of business outcome and not effort
and labor.
2.5% in 2013. The steady uptick in growth is likely to
continue in 2015 was well and is predicted at 4%.
However, the dynamics of this spending distribution are
changing. The trend of cutting run-the-business
spending to fund ‘change-the-business’ is evident in the
market for a while now. As a result, it is driving higher
growth in SaaS platforms compared with out-of-the-box
on-premise software.
Large share of incremental growth anticipated from shared
Growth in spending
11%
Out of
box,
20%
7%
5%
SaaS,
75%
Software Out of box
SaaS,
software Platforms
Source: Offshore Insights Dec 2014/Jan 2015 Study
XAAS: Gaining share in clients’ IT spend
Enterprise spend on IT has roughly been 5% of sales for
quite some time now, and the spending can be broadly
split under hardware, software and IT services. As per
Offshore Insights, the spending grew 3.5% in 2014 v/s
That said, the same budget shift activity also suggests
that businesses are in a need to spend more on their
technology needs but the current IT budgets are
insufficient with respect to the requirement of
enterprises. With so much to be done with the help of
IT, enterprise spends are not going to deflate anytime
soon. The challenge for Indian IT players lies in their
transformation toward XaaS offerings and participating
in the corresponding evolution of enterprises in the
cloud-enabled XaaS world.
The share of IT budgets has the potential to change
dramatically in the long term as upfront capital intensive
and software license based expenses will change to a
subscription-based model. While the requirement for IT
hardware tends to be inelastic to price, the consumption
of IT services can increase rapidly if there are savings in
the IT budgets as these savings can be effectively
redeployed in areas of digital business transformation.
12 June 2015
4

TECHKNOW
Eight Ideals of the As-a-Service Economy
Legacy Outsourcing
As-a-Service Economy
Resolve problems by looking first at the process
Complex, often painful technology and process
transitions to reach steady states
Fragmented processes requiring manual
Interventions, multiple technologies
Operations staff doing mostly transactional tasks
Ad-hoc analysis on unstructured data with little
business context
Legacy technology investments drain budgets to
remain functional
Governance staff manage contracts and service
levels
Pricing and relationships based on cost, effort,
and labor
1. Design Thinking
2. Business Cloud
3. Intelligent automation
4. Proactive intelligence
5. Intelligent data
6. Write off legacy
7. Brokers of capability
8. Intelligent engagement
Generate creative solutions by understanding
the business context
“Plug and Play” business services
Blending of automation, analytics and talent
Operations focused on interpreting data,
seeding new ideas
Real-time applied analytics models, techniques,
and Insights from big data
Use of platform-based services makes many tech
investments redundant
Governance staff manage towards business-
driven outcomes
Pricing and relationships based on expertise,
outcomes and subscriptions
Source: HfS Research
Vendors have the opportunity, clients the readiness
and flexibility
An advantage of low upfront cost and pricing based on
business outcomes is now business heads participate in
discussions regarding IT spending. With models such as
“Try Before You Buy” and “Pay Per Use”, decisions no
longer need to be taken only by the CIOs of an
enterprise. New products, platforms and innovations by
vendors and which will benefit the business may well be
readily adopted by clients. Essentially, more than
Empowered by cloud, vendors can now experiment with
various revenue models to push new offerings to the
clients. Vendors who have domain expertise can utilize
the same to make offerings that can impact client
revenues. Revenue model innovations such “Try Before
You Buy” and Freemium Model are a compelling
proposition for clients to try features unlike previously
where changes would require upfront investment,
system changes and accord of the IT department for
such push initiatives of the vendors; not only is the cost
Disadvantages
Fixed fee as per unit (month, users,
transactions) which can get
underutilized.
More complexity in implementation
and monitoring.
More complexity in implementation
and monitoring.
Conversions of free users to paying
customers is a challenge.
Network of other consumer for the
customers' personal details needs to
be built.
Source: Optimizing XaaS by Cognizant
The new revenue models will encourage clients to adopt new services faster
Revenue Model
Pricing Strategy
Advantages
1
Recurring Revenue
Model
Subscriptions per
user, per month,
per transaction.
Metered services
(pay-per-use).
Pay as you go.
Try before you buy
"Freemium"
Model
Free to cusomers.
Brand loyalty, since a one-time sale can become
a recurring sale. Lower cost than purchasing the
product.
Customer has access to potentially unlimited
resources but only pays for what it actually uses.
More beneficial than subscription as payments
are more usage-based.
Free versions for evaluation which will attract
more customers for upsell later.
Give away service for free in return for
customer's personal details, and convert them
into paying customers later.
2
3
4
5
variabilizing the costs, one of the major reasons for
investing in XaaS transformation is the ability to do a lot
more with the data at the management’s disposal.
12 June 2015
of such investments lower, time-to-market is faster,
making the RoI known for advancement of projects.
5

TECHKNOW
Expert Speak: Prasenjit Saha,
CEO – IMS and Security business, Happiest Minds
About Happiest Minds
Happiest Minds is a next generation digital
transformation, infrastructure, security and product
engineering services company with 1450+ people, 16
locations and serving over 100 customers. The company
is headquartered in Bangalore has operations in the US,
UK, Singapore, Australia and has secured $ 52.5 million
Series-A funding. Its investors are JPMorgan Private
Equity Group, Intel Capital and Ashok Soota.
Happiest Minds’ SaaS presence
~12% of Happiest Minds’ current revenues come
from SaaS platforms The revenues from SaaS
platforms does not include pure play consulting and
SI services revenue .SaaS revenues are accounted
from its home grown IPs and accelerators.
The platforms which are already in the market and
source of revenues are Security-as-a-Service and Big
Data Platform-as-a-service.
The next in line is a platform for migration of on
premise applications to clouds hosted by the likes of
Microsoft and Amazon – provided through the
company’s
Cloud Technology Management
Services.
And
the fourth key platform is Unified
Communications-as-a-service. Rapidly evolving
technologies, consumerization of IT, proliferation of
smart phones and the increasing adoption of Bring-
Your-Own-Device (BYOD) are simultaneously
creating a host of new opportunities and challenges
at workplaces. Enterprises are looking at unification
of various communication tools and integration of
new architecture through sophisticated and secure
technological solutions over virtualized platforms.
Unified Communications is Happiest Minds’ solution
towards addressing the same
The company’s long term aim is to be a key player in
the entire spectrum of cloud-based offerings. The
segment should grow to 30% of business in 3-4
years time from current ~12%.
Economics of As-a-service model
Typically, a business case is well and truly made
when the RoI to the customer is 30% over a period
of time. This is assuming that the offshore
12 June 2015
proposition has been leveraged optimally. The
economics of taking to SaaS / cloud platforms will
depend upon the usage and the RoIs usually grow in
non-linear fashion. Enterprises start with small
migration and then transfer more workloads and
realize a better RoI over 2-3 years.
Cost is not the only factor behind choosing SaaS. In
fact, the biggest factor behind the increasing usage
of cloud-enabled SaaS platforms is speed / agility.
Time-to-market is significantly important in the
Digital era and the combination of faster-better-
cheaper is what will align the IT Services
consumption trends of the future with such models.
Monetization strategy
Happiest Minds charges its customers currently purely
on a subscription based model (monthly / annually). This
is in contrast to the typical charging of License fees,
followed by implementation and then annuity-based
maintenance and support services.
The talent and structure of the team
Given the novelty of platforms and nature of the
job, the structure of team is very top-heavy. 5% of
the members are in top management roles such as
program managers. As much as 75-80% of the team
comprises of senior personnel such as architects,
technology leaders and Subject Matter Experts.
~15% of the team is at the junior level. Here too,
freshers do not suffice. Happiest Minds has
employees with 2-3 years experience in the
industry.
The company currently has E-learning and
knowledge management programs where a lot of
senior management gets trained. These programs
will get more rigorous as the size increases and
more and more fresh talent starts to get trained.
Competition and potential cannibalization for Indian IT
Almost every company in the IT Services industry is
trying to create such disruptive solutions, so
effectively they are competition at some level.
However, while such technology solutions are only
2-3% for others, it is bread-n-butter for companies
like Happiest Minds, who strive to bring deep
expertise as a result.
Overall, 10-12% of clients’ IT budgets are towards
disruption while the remainder is still lights on
6

TECHKNOW
traditional business. So that business is not
vanishing for the larger players. However, this
proportion will gradually keep shifting towards more
new work around Digital, and that poses a challenge
of cross training and re-training at a massive scale
for larger companies with huge base in traditional
offerings.
True SaaS masters will emerge gradually..
XaaS and cloud offering for clients is driving an
incremental opportunity around system integration and
transformation of on-premise applications. It includes
both [1] communication between on-premise
application and cloud environment, and [2] transitioning
Moving an Application to Saas
duration and in six figures, and not seven as they have
been traditionally. The maintenance component of a
deal will shrink and the onus will be on the vendor to
bring on more innovation in delivering business-relevant
information as cloud will allow vendors to impact
business more efficiently than they could have by using
traditional services.
Thus, vendors will increasingly need vertical expertise,
increased speed to market, reusable IP and overall client
engagement. Services in the cloud will have a low
switching cost, sale of service will no longer be enough
and vendors will have to concentrate on increasing
client usage. It remains to be seen who can master the
Discover
Select application that satisfy the
below criteria
Legacy application unable to handle
business
&
non-functional
requirements.
Packaged products that need
upgrades
Applications nearing end of life
Applications
requiring
costly
hardware upgrades
Non-core or Non-critical application
Product requirements for new
business areas or regions
Analyze
Filter selected applications for
fitment within the organization for a
Saas implementation
Check for business fitment
Long term goals
Customization
Costs
Check for technology fitment
Technology landscape
Security & Confidentiality
Integration
Check for IT operations
Fitment
SLA Management
Data Security & Backups
Vendor Selection & Plan
Select Vendor & prepare
implementation plan
List critical requirements for
Cost
Functionality
Technology & IT
Select Vendor
Create Fitment matrix
Sign legal agreements & SLAs
Plan
Customization
Business processes workflows
Data Security & rights
Integration
Testing
Optimized & re-use
List Best practices and prepare SaaS
Implementation best methods
Baseline SaaS implementation for
Cost
Functionality
Technology & IT
Build reuse library
Selection Methodology
SLA & Legal rules
Integration methodologies
Implement
Execute Plan
Setup Business rules
Customization
Integration
Testing
User & IT training
Data Management
IT operation setup
Tracking & Monitoring
Source: FINsights, Infosys
of on-premise application to cloud environment.
While the intermittent transition opportunity will be
short-lived, there will be fundamental changes to
industry dynamics. Deals may well be of shorter
12 June 2015
art quickly. Companies that are out of the blocks faster
clearly stand to gain—positive surprises in performances
at Accenture and Cognizant bear testimony to this fact;
both attributed the traction to their Digital readiness.
We await the same for Indian top-tier peers.
7

TECHKNOW
Gartner Case Study: Olympus implements SaaS-based
ERP system provided by NetSuite
Olympus has successfully established its management
foundation within a short span of six months by
implementing a SaaS-based ERP system in its newly
established subsidiary in India, while maintaining a low
initial investment. The new ERP system was launched to
provide business application features that were good
enough for operations in the new office, and to
reinforce the IT governance driven by its headquarters.
Key Findings
If an organization needs a management foundation that
supports ERP functions (such as finance and purchasing)
in a situation where time and resources are extremely
limited and if basic features for small or midsize
businesses (SMBs) are sufficient, then a SaaS-based ERP
could prove effective.
Since multi-tenant SaaS-based ERP is based on a single
global system accessed through the Internet, it can be
used to strengthen an organization's IT governance if
planning, implementation and management at each
location are driven by the organization's headquarters.
Comparative valuation
Company
TCS
Infosys
Wipro
HCL Tech
Tech Mahindra
Cognizant
Tier-I Aggregate
Mphasis
Mindtree
KPIT Tech
Hexaware
NIIT Tech
Persistent Sys.
Tier-II Aggregate
Rating
Neutral
Buy
Neutral
Buy
Buy
Not Rated
Neutral
Neutral
Neutral
Sell
Neutral
Buy
FY15E
110.1
108.3
34.8
107.5
134.5
2.3
32.4
66.8
13.6
11.1
31.0
77.0
EPS (INR)
FY16E
129.8
123.2
39.8
117.5
180.7
2.6
37.5
82.7
18.4
14.6
36.7
97.3
FY17E
151.3
140.0
45.2
131.6
212.3
3.1
43.0
97.3
21.9
16.5
44.2
116.0
FY15E
22.2
17.9
15.4
14.3
18.6
22.2
18.4
10.6
17.7
14.0
18.0
11.1
19.4
15.5
P/E (x)
FY16E
18.8
15.8
13.5
13.1
13.8
19.5
15.7
9.1
14.3
10.4
13.7
9.3
15.4
12.4
FY17E
16.2
13.9
11.9
11.7
11.8
16.5
13.6
8.0
12.2
8.7
12.1
7.7
12.9
10.7
FY15E
35.6
26.0
23.3
33.3
28.2
20.4
27.8
13.0
30.4
20.9
26.7
13.6
23.5
23.8
RoE (%)
FY16E
34.5
25.1
22.9
29.9
29.6
18.9
26.8
14.4
30.3
24.3
31.8
14.7
25.2
25.5
FY17E
32.8
24.4
22.0
27.0
27.7
18.5
25.4
15.6
28.9
22.8
31.7
18.0
25.0
27.3
FY14-17E CAGR (%)
USD rev.
EPS
15.6
15.7
10.8
14.5
10.6
12.6
13.7
13.4
21.8
20.6
17.3
15.6
3.2
17.6
13.1
13.0
10.8
16.1
6.8
21.8
20.3
9.4
5.0
23.0
12 June 2015
8

TECHKNOW
NOTES
12 June 2015
9

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