Is poor growth forcing analytics firms to cash out?

BANGALORE: On 9 March, Nasdaq-listed BPO company WNS signed a letter of intent to acquire Marketics Technologies, an offshore analytics service firm for $65 million. It’s a handsome valuation for a startup that is barely four years old, has eight customers, 230 employees and estimated revenues of $5-6 million (the company will not disclose figures).

Last year EXL Services acquired the $15 million Inductis, an analytics firm in an all-stock deal. In 2004 ICICI One Source picked up a 51% stake in Pipal Research and the same year Irevna sold out to CRISIL for Rs 43 cr. These deals are making the industry wonder whether the Indian analytics companies are facing challenges in growing the business.

Sreenivasan Ramakrishnan, CEO, Marketics denies there was any pressure to sell. “We are extremely profitable and were doubling the turnover every year,” he says. Dittos Neeraj Bhargava, CEO, WNS, “It’s a very sound company with good clients.”

According to K Ganesh, non-executive chairman of Marketics, there is a much simpler explanation. “Smart entrepreneurs unlock the value of what they have created, it benefits everybody – the founders, investors and employees.” Not everyone agrees.

“Indian analytics companies are facing a significant challenge in scaling up. It is easy to get to $4-6 million but extremely difficult to get to $40 million,” says Jaswinder S Chadha, CEO, marketRx, a New Jersey based analytics and market research firm.

Is IT a scalable model?
The analytics business in India is relatively new and has a handful of players like Marketics, Fractal, Pharmac and Kandor. Industry experts say that barring a few companies like Evalueserve (estimated revenues $30-40 million) and marketRx ($40 million), the rest are still small.

According to a study by Evalueserve (EVS) the entire KPO industry, of which analytics is a part will be worth $12 billion in 2010. In contrast the BPO industry will touch $40 billion by then. “Can an analytics firm grow to $100 million? Yes. Can it grow to a billion dollars?

The answer is no,” says Ganesh. He says analytics unlike the BPO or IT services is not inherently scalable. “We started both businesses in CustomerAsset at the same time, in the second year the analytics business was doing only $10,000 a month but our call centre business had gone up to $700,000 per month,” says Ganesh.

The analytics business may be small but it is highly profitable. It is the high profitability of the business, which has attracted companies like WNS to it. Analytics gets billing rates of $20-120 per hour compared to BPO business, which has rates of $8-13 per hour.

Choose your own model
According to Chadha many analytics companies lack domain knowledge and end up being lots of things to lots of people. Instead he says marketRx has only focused on the pharma and biotech domain.

“Some of our clients have scaled up to $5-8 million each,” says Chadha. “Scaling up is a challenge for pure play data analytics companies,” agrees Ashish Gupta, COO, Evalueserve (EVS).

Gupta too endorses the point that companies need to specialise, if not in one domain than around a cluster of high value services such as data analytics, market research, business research, investment research and intellectual property. This approach has enabled EVS grow to 1600 people and 1,000 clients.

Selling high-end services like analytics requires investment in a good front end. marketRx has 150 people in US. All this costs money; marketRx has raised $12 million in funding so far from VCs like Sequoia Capital. EVS, which has grown through internal accruals is mulling over an IPO in the future.

Looking for an answer
But so far most analytics firms have built a services model, which relies too much on people. If analytics is done manually, it slows down the process and the companies end up doing less. To solve that Bangalore-based Kandor is creating applications that automate the logical and thinking process.

Kandor has created simple templates for the retail industry that can calculate the stock holding patterns across the company’s stores, find the sell through ratio (sales to stock ratio) as well as predict how well a new fashion style will do within minutes. It plans to build similar applications for telecom, pharma, and insurance and so on going forward.

It isn’t clear what the scope of the market for such a product could be. SAS, the leader in business intelligence software, earned revenues of $1.9 billion in 2006. According to IDC, “There is likely going to be a long-term, continuous shift toward more packaged analytic applications."

But product companies need very heavy investment and results show up much later. “A services company can break even much faster, for products it takes longer,” says Harsh Vardhan, director, Kandor. marketRx, which too has invested in building some reusable solutions, says it has invested $20 million in R&D so far. Without funding and VC money, this could indeed be an arduous journey.

mitu.jayashankar@timesgroup.com