Information Technology Industry: Business Drivers, Strategies, Risks, Money-Making & Future Outlook

ITWell, before we talk about the money-making process, let’s try and understand the key business drivers of the technology industry. And by technology, I’m referring to Computer Software and Hardware (excluding mobile handsets/cellular phones) industry. I’ll combine the money-making process along with the business drivers.

Key business drivers of technology industry

(1) Cost of sales

For a technology company, the cost of sales is fairly low. The Cost of Sales include

  • Cost of technology upgrades (including cost of development). Usually the upgrades are released every year.
  • Cost of hardware refresh: Usually, most of the technology companies have an enterprise wide agreement for their server and storage upgrade [like IBM (NYSE: IBM), HP (NYSE: HP), Dell and Oracle (NYSE: ORCL)] and networking equipments upgrade like Cisco (NASDAQ: CSCO). The refresh period is usually 3-5 years.
  • Cost of documentation, duplicating software, training, packaging (if media is supplied) and cost of maintenance (predominantly data center maintenance other than what has been specified in ‘Point b’ above): Now-a-days, most of the companies enable software download feature to avoid costs associated with documentation and media.

These three costs account for 15-20% of the sales revenue, leaving 85% for Selling, General and Administrative Expenses (SG&A), Marketing and Research & Development (R&D). Hence, it’s not surprising to see Technology companies investing handsome amounts in Marketing and R&D. To give you a perspective, in FY11, Oracle invested $ 4.5 billion in R&D. With $ 35.6 billion in total revenues, that’s 12%, a good investment for Oracle.

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Key metrics that reflect Technology industry’s fundamentals

ITTechnology companies form an idea, commercialize it through various resources (including Sales & Marketing) and then engage in R&D for further enhancement and innovation. They follow various compliance standards and government regulations across countries. India harbors one of the largest technology hubs in the world and supplies its technology offerings to the developed nations like US and Europe and emerging markets including herself. So, its fundamentals will be reflected by (not necessarily in this order of precedence):

  • Supply and demand of experienced and talented human resources in India
  • Cost of resources in India
  • Supply and demand of technology across borders
  • Political stability across borders
  • Cost of production in India (including proprietary technology)
  • Cost of distribution from India (including mobile technology)
  • Cost of R&D in India
  • Cost of data processing in India
  • Access to capital in India
  • Valuation of highly cyclical technology companies like semi-conductor
  • Access to high-speed, uninterrupted internet connectivity across borders
  • Sales of hardware equipments and accessories in India
  • Resource utilization
  • Other metrics like utility cost, real estate sales, etc.

You may also want to read my article on Information Technology Industry here.

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