INDIA SMB MARKET. Monetising Emerging Opportunities. billion

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1 INDIA SMB MARKET Monetising Emerging Opportunities USD18 billion

2 INDIA SMB MARKET Monetising emerging opportunities USD18 billion International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi , India Phone: , Fax: , research@nasscom.in Website:

3 Copyright 2014 International Youth Centre, Teen Murti Marg, Chanakyapuri New Delhi , India Phone: , Fax: research@nasscom.in ASV HANSA No.53, Greams Road, Thousand Lights Chennai , India Tel: / , Fax: Website: 2 Published by NASSCOM, New Delhi Designed & Produced by CREATIVE INC. Phone: Printed at P.S. Press Services Disclaimer The information contained herein has been obtained from sources believed to be reliable. NASSCOM and Frost & Sullivan disclaim all warranties as to the accuracy, completeness or adequacy of such information. NASSCOM and Frost & Sullivan shall have no liability for errors, omissions, or inadequacies, in the information contained herein, or for interpretations thereof. No entity of Frost & Sullivan and NASSCOM shall be responsible for any loss whatsoever sustained by any person who relies on this material. The material in this publication is copyrighted. No part of this report can be reproduced either on paper or electronic media without permission in writing from NASSCOM. Request for permission to reproduce any part of the report may be sent to research@nasscom.in. Usage of Information Forwarding/copy/using in publications without approval from NASSCOM will be considered as infringement of intellectual property rights.

4 Foreword The concept of targeting Indian SMB as a segment might not be new for IT firms, but the confluence of several business and technology factors is leading to a more concerted and cohesive SMB focus by ICT players. IT organisations have been dedicating resources and investing significant amount of time and money in developing products and service offerings from ground-up. Collective awareness creation efforts by ICT ecosystem, altering business dynamics and changing outlook of SMB leadership towards technology has resulted in greater appreciation of the need and significance of IT for businesses survival in the global environment. Several monetary and non-monetary challenges have traditionally deterred SMBs from technology adoption. Limited in-house IT expertise, need for greater flexibility and easy access to technical support are only some of them. The maturity of cloud models has been one of the strongest forces in disrupting the traditional IT consumption model eliminating the need for customers to buy, deploy and maintain IT infrastructure. With vendors taking greater responsibility for all of the infrastructure required to run the solution, bottom of the pyramid is definetely more receptive to solutions that can help accelerate business growth. The need of the hour is thus for cost-effective technological solutions backed by scalable business models that can easily help SMBs understand the impact of solutions on day to day business operations, measure Return on Investment and gain access to support through the selection, implementation and can help SMBs easily understand post-implementation stages. While there are differing views on addressable opportunity that the SMB segment offers, it is important for the IT industry to re-align themselves to the new age SMB customer and provider value chain. Domestic SMB also offers an opportunity for Indian SMEs to offer domain centric innovative packaged software products and services. Growth in the SMB market will demand ICT players to comprehensively evaluate their commitment to business and devise an SMB-specific growth strategy. Developing a long term vision, defining measurable business metrics, aligning value proposition to market needs and forming an alliances led go-to-market approach will be critical. India SMB market: Monetising emerging opportunities report jointly developed by NASSCOM and Frost & Sullivan highlights the changing ICT ecosystem catering to the Indian SMBs, highlights emerging opportunities as well as the challenges faced while operating in this space. This report also puts forth the critical success factors to ensure sustainable growth and includes case studies of large and emerging players that have devised successful growth strategies. We trust you will find this report useful, and we welcome your feedback and comments (research@nasscom.in). 3 R Chandrashekhar President NASSCOM

5 Executive Summary Indian SMBs are rapidly re-innovating to enhance competitiveness in the dynamic global and domestic business environment. Traditional people-oriented and manual process driven styles of business are clearly witnessing a transformation towards a technology enabled process centric working environment. Although the extent of business and IT maturity varies significantly between the larger enterprises and fragmented micro scale businesses, there are common underlying characteristics that define the SMB outlook towards technology. Cumulative IT spend from the millions of units spread across the nation have definitely lured technology providers for a while now. However, the high geographic distribution, small deal sizes, long sales cycles and high cost of customised solutions have proven this to be an unprofitable business for many. Several factors led by the maturity of cloud models have once again created optimism amongst the ICT players. They are exploring and devising business models to drive profitable growth while addressing the bottom of the pyramid. This is definitely a challenging task and will depend on the technology provider s capability to gain economies of scale through a packaged product and services oriented market approach coupled with leveraging strategic partnership and alliances. SMB: Growth engine of Indian economy India s SMB segment is playing a significant role in India s economy - employs ~40 per cent of India s workforce, contributes >17 per cent to national GDP, has ~45 per cent share in manufacturing output and accounts for about 40 per cent of India s total exports. Despite its size, the SMB segment is beset with many problems: highly unorganised and fragmented, supply chain inefficiencies, scalability and funding issues, etc. Further, SMBs have been facing stiff competition both in the domestic and global markets. This segment has therefore, a compelling need to streamline their operations, standardise processes, improve productivity/efficiencies, adopt best practices and ensure quality products and services. These business needs are thus driving increased investments in IT solutions that can enable meet business objectives. Domestic SMB gains strategic importance for ICT providers For the IT industry in turn, India s SMB market has been rapidly evolving as a key focus segment. Various factors have been responsible for this: increasing global competition and a fairly saturated enterprise market have made them seek new growth avenues; along with this, the development of cloud/as-a-service models and SMAC technologies have provided the channel to reach SMB customers and monetise IT opportunities. Simultaneously, the next-gen leadership within SMB segment is more amenable to IT. IT firms are continuously evolving their strategic roadmap for the SMB market with products designed specifically for this segment, having dedicated business units with relevant business metrics, and focused go-to-market (GTM) strategies. 4

6 Cloud adoption will continue to transform ecosystem Cloud model is one of the key requirements for SMB penetration. This technology platform is enabling SMBs to adopt business applications without large capex, lower TCO and attain technology benefits without being concerned about the management and technical expertise required. As a result, SaaS adoption by SMBs in India is growing at a CAGR of >25 per cent and is expected to reach ` 20 billion (~USD 370 million) by FY2018. Corporate security concerns, initial infrastructure costs and recurring maintenance expenses are also leading to demand for Infrastructure-as-a-Service (IaaS) among SMBs, especially the managed infrastructure models. Cloud is also altering the IT provider ecosystem with increased activity by new players including telecom service providers (TSPs) and third party hosting services providers. These providers are leveraging their infrastructure and cloud models to provide SaaS, managed services, audio/video/web conferencing and datacenter services. Demystifying the SMB customer: A perspective Despite large disparities with respect to sophistication and needs within SMB segments, there are several common underlying business and technology characteristics which broadly define the new age SMB customer and help give a perspective for IT providers. The SMB segment is characterised by largely owner-driven businesses which lack maturity and standardised processes, limited awareness of IT and its benefits. However, in the face of rising competition and hence, the need to reduce operational costs, the SMB segment has begun to invest in IT to drive business growth - provided the value is directly linked to business objectives. Despite this interest, several factors continue to challenge IT adoption among SMBs - high cost of ownership, poor governance due to limited top management support, fear of lack of vendor support and adherence to SLAs attributed to smaller deal sizes, limited technology skillsets adversely impact usage of deployed applications. Significant amount of onus to drive IT adoption among SMBs thus lies with technology vendors. SMBs expect technology providers to provide insights on the relevance of technology to and impact assessment on business. Vendors also need to invest in enabling this sector to understand its needs/requirements. 5

7 Opportunity analysis In FY2013, IT spend by Indian SMBs was at ` 47,200 crores (USD 8.7 billion) 45 per cent on hardware, 40 per cent on IT services (implementation, support & training) and 15 per cent on software licensing and SaaS. Upper SMBs form the key focus area for leading global and Indian IT players and have sophisticated IT landscape and maturity and seek value from IT that is similar to enterprise accounts. These SMBs are now willing to upgrade their applications, adopt new modules in the existing deployed packaged software and invest in emerging technologies like mobility and analytics. The mid-segment is shifting from home-grown solutions and legacy application deployments to packaged software and the bottom of the pyramid comprises a major portion of SMB universe that has limited or no IT applications deployed. A significant portion of SMBs would continue to focus on business software (having a more tangible impact on the top- and bottom-lines or process automation) and enterprise applications (for an integrated business view). Priority verticals for IT providers depend on the addressability and ease of penetration. For example, highly fragmented nature of the retail sector coupled with their geographic distribution makes penetration of this segment a challenge. Retail, therefore is pushed down the priority list for several leading IT players. Manufacturing contributes to nearly 21 per cent of domestic spend of SMB on IT. Applications could range from functional (planning, project management) to end-to-end enterprise software (ERP, CRM, etc.). Education contributes ~15 per cent share - led by need for offline content management and online testing solutions. Healthcare industry has varied needs leading to significant appetite for mission critical IT. Real estate & construction (on-cloud/on-premise inventory management, sales management, ERP, etc.) and hospitality (billing, property and inventory management, etc.) are emerging as high opportunity segments. Monetising SMB opportunities: Way Forward The SMB market is seeing a CAGR of about 15 per cent Y-o-Y and this growth is expected to propel the IT spend to cross ` 100,000 crores (USD 18.5 billion) by FY2018. To fully exploit the potential of SMB market, the IT industry needs to address the following challenges: Perceiving domestic SMB as an incremental revenue opportunity over enterprise business rather than a strategic market 6

8 Lack of long term vision and commitment by the leadership teams Lack of compelling value propositions and offerings It also calls for a fundamental change in their business model and go-to-market strategy: Develop pre-configured and packaged software products/ services Develop capabilities around cloud based products/platforms/implementations Clear communication of business value and TCO to manage customer expectations Develop remote delivery models for services to reduce client site activities while implementing and monitoring activities from other domestic locations and yet provide necessary touch points and support Accelerating SMB IT adoption requires all stakeholders industry vertical bodies, state governments, associations, MSME and the industry to work jointly to incentivise IT adoption, share best practices and benchmarks, increase awareness of existing IT solutions, enable easier access to funding and create platforms and forums for greater collaboration among ecosystem participants. 7