Everest Group’s ongoing analysis of global service providers’ performance revealed some notable market shifts in the most recently reported quarter. We note especially that Wipro seems to be righting its ship. Although its growth previously had lagged its peers and the industry, the last quarter evidenced higher growth.
As the chart below displays, Wipro is now performing as one of the top global services firms.
To what can we attribute this improved performance?
Certainly we need to give some credit to the strategic maneuvers that CEO TK Kurient and Wipro’s executive council made. First of all, they have been implementing a verticalization strategy. They also are focusing on large accounts. We believe these strategies make sense and could well contribute to further growth.
In addition, taking a step further back, we believe that Wipro is reaping the benefit of its concentration in services areas that are recovering — infrastructure and Europe. The industry has seen growth in infrastructure services really picking up over 2013. Also, as Europe recovers from its economic crisis (particularly in the UK, Germany and the Nordics), Wipro’s strong position in Europe allows it to also benefit from this growth.
Considering it’s in the right place at the right time with effective strategies, where will Wipro be in next quarter’s charts?
“At times, Indian IT service providers fall behind expectations in new and exciting technology areas that extend beyond the traditional outsourcing paradigm.” – A large MNC buyer of IT outsourcing services
With traditional models of IT outsourcing facing increasing competitive pressures, Indian service providers are looking at a multitude of solutions to drive success and retain competitive advantage. Chief among these are emerging technology solutions from start-up firms. Service providers have realized that to compete and stay relevant in the changing paradigm they have to focus on developing niche and specialized products, boost efficiency, and develop IP. Primary traction themes include data analytics, big data, cloud computing, and enterprise mobility. Niche start-ups with innovative technology solutions help providers augment their existing service offerings.
This echoes the strategy often adopted by multinational technology firms including Cisco, Microsoft, Yahoo!, Intel, and SAP, which back a plethora of emerging firms. Indian providers are now looking to invest and form alliances with ventures in niche domain areas. This is a dramatic shift in the status quo, as Indian IT providers have historically paid minimal attention to start-ups due to their own lack of a proper ecosystem to facilitate such transactions and a fairly low-risk appetite. Yet, of late, they have increasingly set up funds and accelerators dedicated to tech start-up initiatives.
Notable Involvement in Start-ups
Has set up a US$100 million fund to invest in start-ups, besides spotting and funding internal innovation
OnMobile, Yantra Corp
Has established a US$50 million fund exclusively for investments in global technology start-ups
Launched an initiative – i5 Startnet – to scout for firms in cloud, mobility, networking, and vertical-specific technologies
Created a team led by the Chief Strategy Officer to look for start-ups and next generation solutions
Actively picking up stakes in cloud and big data firms
Opera Solutions, Axeda
Formed its Innovation Labs and Co-Innovation Network (COIN) to bring together academic institutions, start-ups, venture funds, strategic alliance partners, multilateral organizations, and clients
iKen Solutions, Perfecto Mobile, Computational Research Laboratories
Set up an emerging business accelerator
Incubated 20 ideas over the past 18 months
Slowly, but steadily, the ecosystem is developing to encourage such start-ups. For instance, in June 2013, NASSCOM announced a program to fund and incubate 25 start-ups to be established by young Indian entrepreneurs. Additionally, it held an event that brought together promising technology start-ups and IT service providers including Infosys, TCS, Cognizant, Wipro, and MindTree. The gathering was an effort to provide young start-ups a platform to showcase their capabilities, connect with leading service providers, and generate investor interest.
Quid Pro Quo
Increasing competitive pressures and changing market dynamics have made Indian service providers truly value innovation, viewing it not just as a buzzword but rather a core operating lever to drive growth. Partnering with start-ups is an effective method of achieving innovative solutions without the allocation of time and resources they can ill-afford. And the mutually beneficial relationship between the two segments can lead to sustainable ecosystem in the long haul.
As most in the global services industry know, the acronym WITCH stemmed from the fact that the large, India-based, offshore-centric service providers – Wipro, Infosys, TCS, Cognizant, and HCL Technologies – had quite similar delivery models, sales strategies, risk appetite, and growth trajectories, which essentially placed them in a single bucket.
However, Everest Group’s recently released annual assessment, “The Changing Pecking Order of the Indian IT Service Provider Landscape,” revealed that the relevance of the collective term WITCH is fast diminishing as market conditions are forcing differentiation among these players.
Indeed, stark divergence among this group, as evidenced by Cognizant’s capture of the number two spot away from Infosys (see chart below), is clearly emerging.
Per the latest financial results released by these offshore majors (ending March 31, 2013), TCS and Cognizant continued to outgrow their peers on a yearly basis – both in terms of size and growth – by adding revenue that was higher than, or almost at par with, the cumulative incremental revenue of Infosys, Wipro, and HCL. Their clear vision and strategic bets, as compared to the prevailing internal confusion of the other WITCH players, is paying off.
What is leading to this segregation within the WITCH group?
- TCS is continuing to excel on the back of its broad-based growth and aggressive penetration in the European market
- Cognizant’s approach of keeping margins lower via a higher investment in sales and marketing spend is fetching benefits
- HCL is capitalizing well on the ongoing churn in the industry, and is exploiting the anti-incumbency against the traditional service providers. While this makes HCL’s growth narrow and focused largely on infrastructure services, it’s paying off for a short-term strategy
- Infosys and Wipro are struggling with their internal, company-specific issues, (i.e., strategic confusion, weakening brand recognition, legal issues, and senior level exits).
The ultimate questions are:
- Will the irrelevance of the collective WITCH term become more visible in the future? Will the different strategic gambles of each service provider lead to huge variances in their success rates?
- Will the return of Infosys’ retired co-founder and former chairman Narayana Murthy help it make a comeback to the levels of TCS and Cognizant?
- To what extent will the ongoing challenges of a few of the WITCH group players create opportunities for mid-sized players – such as Genpact, one of the key players in the FAO space, and Tech Mahindra (the combined entity) which has credible enterprise applications and infrastructure management offerings – to capitalize on their niche capabilities?
We expect to witness further changes over the next few years in the pecking order in the overall industry, and the formation of new groups cannot be ruled out. This is likely to be driven by inorganic growth, key strategic investments, service provider consolidation, and aggressive sales strategies.
For drill-down data and insights into pecking order changes in the Indian IT Service Provider Landscape by size, verticals, and geographies, please see Everest Group’s newly released viewpoint, “The Changing Pecking Order of the Indian IT Service Provider Landscape.”
Although five years ago it was difficult to differentiate among the WITCH (Wipro, Infosys, TCS, Cognizant, and HCL) providers, Everest Group last year identified a variety of clearly emerging and meaningful distinctions in its May 2011 examination of the top five Indian IT providers.
Our just released second annual analysis, Report Card for the Indian IT Majors: Pecking Order Analysis of the “WITCH” Group, found that the top ranked provider in each of the dimensions we evaluated – financial performance, industry vertical performance, and geographic performance – remained the same, but the rankings among the five have shifted. While the rankings are not necessarily the most effective gauge of current capability or future success, the position shifts tell important, company-specific stories.
So which of the WITCHes is where in our 2012 (April 2011 through March 2012) analysis? Let’s take a quick look.
TCS retained the top spot in terms of total revenue, exceeding US$10 billion for the 12 months ending March 31, 2012. It also widened the enterprise revenue gap with #2 Infosys by ~ US$1 billion, as compared to last year (the total gap is now over US$3 billion). Cognizant’s 29% revenue growth is significantly higher than that of the other Indian IT majors, and the company, which overtook Wipro on enterprise revenue rankings last year, seems to be on track to overtake Infosys to become the second largest WITCH major. On a quarterly run rate basis, this may happen as soon as the coming quarter.
Infosys continues to be the most profitable. Note: We don’t believe that being the most profitable translates to being the most successful. Sustainable growth and success is rooted in a prudent balance of short-term profitability and longer-term investment priorities.
Industry Vertical Performance
In BFSI, TCS retained its #1 ranking with more than US$4 billion in revenues, Cognizant overtook Infosys’ #2 place at the table, and HCL is showing good momentum. But it’s also important to note here that the Indian IT majors stack up differently in the BFSI sub-verticals. For example, TCS and Cognizant are the leaders in the insurance applications outsourcing space, while Wipro marginally edged out Infosys on recent insurance industry wins, growth, client quality, and investments in domain solutions and intellectual property.
Cognizant again topped the leader board in the healthcare and life sciences space with a practice that is nearly three times the size of second-placed Wipro’s. And although Infosys’ healthcare practice is fourth in terms of revenue (US$385 million), it is also the fastest growing among the WITCH group, with 42% year on year growth. TCS’ rapid growth rate in healthcare indicates that there may be a rank change with Wipro in coming quarters.
In energy and utilities, Wipro not only retained its #1 position but also significantly increased the gap between itself and #2 Infosys, in large part due to its acquisition of SAIC’s oil and gas services business in early 2011. Interestingly, we see TCS inching closer to Infosys in this space.
While TCS won the top spot in both North America and Europe, it’s an interesting mixed bag among the other WITCH players in the two regions. Cognizant has overtaken Infosys in North America, rising to the ranks of #2, and now only lags TCS’ North American revenue by $325 million. In Europe, all providers except Cognizant achieved higher growth than in North America, with Wipro and Infosys coming in second and third, respectively.
To read a detailed analysis of the what’s and why’s of our WITCH group rankings, please download the complimentary report at: Report Card for the Indian IT Majors: Pecking Order Analysis of the “WITCH” Group.
As the service provider community knows all too well, differentiation in this extremely competitive landscape is very hard to create, arbitrage-led offshoring is quickly commoditizing, increased market maturity means fewer and more expensive new logos, and buyers are becoming progressively more thoughtful about which and how many (read, fewer) providers they want in their portfolio. All these challenges are forcing providers to hone their Account Development capabilities, which consist of “hunting” (sales) and “farming” (account penetration and growth) to drive market success. Indeed, although one could argue that product/delivery excellence or cost leadership can break through sloppy Account Development performance, we are increasingly observing that it is becoming a key lever to drive success.
Offshore providers’ Account Development success varies dramatically, as shown in the chart below.
Cognizant appears to be doing a stellar job at both hunting and farming, as reflected in its strong growth performance over the last several years, which has enabled it to rapidly close in the ranks with the majors and firmly establish itself at the number three spot on the offshore leader board.
Of the other providers in the Tier 1 category, TCS and Infosys seem to be pushing the farming lever well, and their overall growth and margin performance has been better than HCL’s and Wipro’s. In the Tier 2 space, it appears that iGATE and Mindtree did well in growing their accounts (of course, their average account sizes are much smaller than those of the Tier 1s) but Hexaware and Polaris are laggards.
What accounts for this wide variation in outcomes, even though there are not wide differences in their business models or the market segments in which they operate?
To gain insights, we spoke with clients of and insiders at each of these provider companies. Issues around Account Development effectiveness were voiced in a range of ways, including:
- “Client facing staff is not empowered enough to respond appropriately”
- “Client facing teams do not pre-empt the client’s concerns and are not proactive”
- “The service provider is not able to offer an integrated face to the client”
- “The service provider’s client facing staff does not look beyond immediate delivery”
All other things being equal, these concerns can seriously mar a service provider’s prospects, and are a manifestation of deeper organizational level issues that are easy to overlook. The varying performance could stem from: (a) improper structure of and investments in account development capabilities; (b) lack of capabilities within the team to effectively engage with clients; (c) misaligned incentives and culture to drive a different behavior; and (d) ineffective or absent processes core to drive the right outcome.
It does appear that Cognizant has been addressing some of the issues better than others. This is partly reflected in its investments in client facing activities and teams (read, higher SG&A).
Is Cognizant’s heavy hybrid hunting/farming model the only one that really works, or are there alternative models? As the next generation of global sourcing develops, will the same model hold true and good? For Tier 2s, is this model (that appears expensive) effective to deal with smaller relationships?
We believe Account Development will continue to be one of the key issues providers need to deal with in the increasingly mature offshoring market, and it is likely the answers will vary based on individual companies’ ability to align their organizational culture and approach to relationship building.