IT majors are adopting different strategies to tide over the global economic gloom.
In May this year, an unusual event happened in the midst of Indian IT companies reporting dismal revenues which almost went unnoticed. TCS was named amongst the ‘big four’ in IT services brand by Brand Finance, a leading brand valuation firm. What this means is TCS, with a brand value of $4.1 billion plays with the big boys like IBM, HP and Accenture. What this also means is that the erstwhile poster boys of Indian IT, Infosys and Wipro have to catch up with the likes of TCS and Cognizant.
On the one hand, erstwhile stalwarts like Infosys and Wipro had question marks against them in terms of management capabilities and profitability, and on the other they are pressurised to deliver same services at lower costs, more value and in a shorter time in the backdrop of global economic uncertainty, which their clients are facing.
Time to change
Albert Einstein once famously said that banging your head against the wall and expecting different results is foolishness. IT companies have paid heed to that and have started to make changes in the way they get their business. TCS, the first off the block on this, back in 2007, initiated something called a platform-based BPO. The then CEO, S Ramadorai felt that platform-based services can be ‘templatised’ and some processes can be leveraged across different sectors. For example, some processes in retail are similar to manufacturing and so one need not develop applications or write codes from scratch. This strategy yielded dividends and through this offering, it has bagged multi-million dollar deals in life insurance and pension policy, analytics and finance and accounts verticals.
Others are pursuing a different strategy. Wipro is now increasingly looking at a strategy that will make outsourcing companies look at it as a combination of a consultant and technology company. “We are looking to have a say at the management or board rather than being just looked at as technology providers,” says KR Sanjiv, Global Head and Senior Vice President for Analytics & Information Management Business Unit, Wipro.
Infosys meanwhile is trying to make a strong case in products and services. The CEO SD Shibulal, as a part of the 3.0 strategy, has emphasised that 30 per cent of the revenues would come from products, which currently stands at a paltry 6 per cent. In comparison, competitor Oracle Financial Solutions gets 73 per cent of its revenues from products.
The reason for change
So, why are companies are doing this at this juncture? In January, Gartner in a report pointed out that IT budgets were expected to decrease 0.6 per cent in North America this year. According to Forrester, the US market which stands at $802 billion, the largest, will also grow slower at 6.4 per cent in 2012. The need for this came post the Lehman crisis. As Indian outsourcing companies got almost 70 per cent of their revenues from application development and maintenance work, which in common lingua franca can be termed as plain vanilla services, demand for these services slowed down.
The IT services industry is rapidly staring at commoditisation and scalability in business, according to Mr Shibulal. While the global economy was chugging along, this was not an issue and IT companies during the peak would even pick and choose the kind of outsourcing projects they wanted. “In the post Lehman era, there is increasing stress on value provided by business, on top of cutting costs and shorter project timecycle,” said Mr Sanjoy Sen, senior director at Deloitte. In the fourth quarter results of Infosys, Mr Ashok Vemuri, Head of Americas and Global Head of Manufacturing and Engineering Services said that clients are reviewing their outsourcing strategy every quarter and deal cycles are getting shorter. Also, mid-sized Indian companies upped their ante and started providing services at costs that were cheaper than the biggies. “Add to specialisation in manufacturing, retail and distribution, healthcare, logistics, manufacturing and other verticals, mid-sized companies are seeing growth,” said Dr Ganesh Natarajan, Vice Chairman and CEO, Zensar Technologies. Similarly, other mid-sized companies like MindTree, iGate, KPIT Cummins, NIIT and Tech Mahindra have bagged 50+ clients in the $10 -100 million range. When it comes to revenues per employee, HCL topped with revenues of about $12,444 per employee for the September quarter in 2011 followed by Cognizant and Infosys with $12,315 and $12,311 respectively. TCS had $11,734 and Wipro’s revenue per employee was $11,174 per employee. This has gone up by 30-50 per cent over the last five years, according to analysts. However, in comparison, as on March, Accenture's revenue per employee was $110,000.
To counter slowed decision making and lack of increase in IT budgets, Infosys has zeroed in on sub verticals within the main verticals and is in the process of strengthening its product business. For example, according to Chandrasekar Kakal, Senior Vice-President and Global Head of Business IT Services, Infosys has started integrated services like Infrastructure Management, testing, BPO and applications development. “All this used to be purchased and sold individually, but vendors are now beginning to offer their clients a simpler soups to nuts proposition in which these complementary services are bundled and offered as an integrated package of managed services," says Peter Schumacher, CEO of Value Leadership Group.
Similarly, Wipro is betting on analytics, social media (for enterprises), cloud and mobility as its growth pillars going forward. The company has taken baby steps and acquired Promax, an Australian company for strengthening its analytics practice. “This acquisition gives us a headstart over competitors in a segment where the surface has just been scratched,” says Wipro's K.R Sanjiv. For TCS, it is non-linear growth that would drive it forward. “TCS is pursuing three strategic initiatives to drive non-linear growth - software products (TCS Financial Solutions), platform-based BPO, and iON,” says Ashish Chopra, analyst, Motilal Oswal. As a case in point, TCS Financial Solutions increased its client base by adding 39 new clients in FY12. iON is being marketed through a channel partner network of 109 cloud service providers and has 256 mid-market customers. Cognizant, with its focus on healthcare, acquisitions in financial services verticals and a strong onsite presence has managed to post strong growth. Meanwhile In the last two quarters, HCL Tech has won contracts of $2.5 billion and ramp-ups that would drive higher-than-industry growth in the coming quarters, according to analysts. Also, according to HSBC analysts, HCL Tech is benefiting from its strategy of targeting the restructured deal business, which according to TPI will increase by 20 per cent in 2012.
With regard to geographies, apart from the US, Indian IT companies have been seeing a gradual pick up in business in Europe, which contributes about 30 per cent at present. While investments have been made, still there is a lack of sufficient knowledge of local industries, says Schumacher. Also, Indian companies need to have a stronger case for global delivery as the US goes into election mode this year and a wave of anti-outsourcing sentiment is set to rear its head again.
While macroeconomic challenges hover around companies, will these strategies pay off? Time will tell.