Author: JimitArora

What the Supreme Court Ruling Means for Global Sourcing in Healthcare | Sherpas in Blue Shirts

On June 28, 2012, the United States Supreme Court provided its much awaited ruling on the Patient Protection and Affordable Care Act. In what is considered a surprise judgment by many quarters, the Court upheld almost all provisions of the law passed in 2010.

Here is how the court ruled on the two key provisions that generated the most debate – the “individual mandate” and the challenge by the states for the expansion of Medicaid program:

  • Treating the provisions of the individual mandate as a tax versus a penalty, the Court confirmed the validity under Congress’ constitutional authority
  • Regarding the expansion of Medicaid, the court ruled that the federal government cannot place sanctions on the states’ existing Medicaid funding if the states decline to go along with the Medicaid expansion

So, what impact will the Supreme Court ruling have on the outsourcing / global sourcing activity in the healthcare vertical? Will we see a surge in demand and see activity accelerate now that the uncertainty surrounding the law is now over? Three reasons why we believe that the Supreme Court ruling does not suggest any short-term (i.e., in 2012) acceleration in outsourcing activity in the healthcare vertical:

  1. Obama versus Romney: GOP candidate Mitt Romney’s assertion – “What the court did not do on its last day in session, I will do on my first day if elected president of the United States. And that is I will act to repeal ObamaCare” – makes it clear that until the outcome of the Presidential election is known, uncertainty will continue to shroud the healthcare law
  2. Next major milestone – 2014: A number of new milestones under the law, including the establishments of health insurance exchanges and the individual mandate, do not come into effect until 2014. Healthcare companies are likely to wait until the outcome of the elections is known before making deep investments in these areas
  3. Big payers adhering – come what may: Select large payers such as UHG, Aetna, and Humana have pledged to adhere to certain provisions of the reform irrespective of the future. These payers have already implemented some of these changes (e.g., MLR mandates) and thus the technology impact of some of these changes is likely limited in the short term.

The above is not to suggest that outsourcing / technology innovation activity in the healthcare vertical has reached its peak. If President Obama wins the election, we are likely to see a surge of activity as companies prepare for the 2014 initiatives. Even a number of current bystanders will jump in the fray to ensure compliance with regulatory reform. On the other hand, a repeal could significantly alter outsourcing activity and potentially even jeopardize existing initiatives if Mitt Romney is successful!

As it pertains to uncertainty in the healthcare markets, is this the beginning of the end, or the end of the beginning? Only time, and the results of the presidential election will tell….

Which WITCH? Switches in the Indian IT Majors’ Rankings Line-up | Sherpas in Blue Shirts

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.

WITCH Leaderboard FY 2012

Financial Performance

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.

Geographic Performance

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.

Sneak “PEAK” into the Banking Applications Outsourcing Service Provider Landscape | Sherpas in Blue Shirts

Per our observations of the evolution of the service provider landscape before and after the recession, the single most important factor we have seen for creating differentiation in the IT applications outsourcing (AO) market is significant strengthening of vertical/domain expertise. And recognizing the need for “vertical-specificity” in the AO market, earlier this year we launched an annual research initiative focused on assessing market trends and service provider capabilities for AO in the banking, financial services, and insurance (BFSI) vertical.

One of the first results that emerged from this research initiative was the Everest Group PEAK Matrix for large banking AO contracts. In a research study released earlier this week, we analyzed the landscape of AO service providers specific to the banking sub-vertical. In a world in which everyone and their uncle delivers AO services to financial services clients, this report examines 22 service providers and establishes the Leaders, Major Contenders, and Emerging Players in the banking AO market.

PEAK Matrix

As we congratulate the five Leaders (Accenture, Cognizant, IBM, Infosys, and TCS), and acknowledge the capabilities and achievements of the Major Contenders and Emerging Players, we also want to highlight three inter-related market themes that suggest the PEAK Matrix in 2012 for large banking AO relationships may look significantly different:

Buyer-driven portfolio consolidation: Most banks currently use a complex collection of service providers for their applications portfolio. Decentralized decision-making, global expansion, and large-scale M&A introduced further complexity into their portfolios. Rationalizing the portfolio creates a less complex sourcing environment, enables strategic partnerships with service providers, and also delivers meaningful financial benefit (our analysis indicates that the financial benefits of utilizing fewer service providers can be as much as 22-28 percent on an annualized basis). As more buyers join the portfolio consolidation bandwagon, the larger/more established service providers are winning at the expense of their smaller competitors.

The Matthew effect: Buyer-driven portfolio consolidation is giving rise to the Matthew effect which (in sociology) states that, “the rich get richer and the poor get poorer.” In the context of the banking AO landscape, the Matthew effect translates to “the big get bigger.” Banking AO buyers are placing disproportionate emphasis on domain expertise as a key decision-making criteria for selecting their service providers. Scale influences a company’s appetite to invest in developing vertical/micro-vertical-specific domain expertise, which in turn determines market success, which ultimately impacts growth and scale. This vicious circle of scale fueling scale is increasing the polarization in the marketplace, and could further widen the gap between the Leaders and the Major Contenders and Emerging Players.

Accelerating M&A: In response to the Matthew effect, as the Major Contenders and Emerging Players seek to achieve the next level of growth, mergers, acquisitions, and alliances will accelerate. M&A will play a significant role in service providers looking to achieve quantum leaps in capability and performance. The M&A activity is likely to significantly alter the landscape in the coming months to create a new set of Leaders and Major Contenders, In fact, since we finalized the Banking PEAK, Emerging Player  Ness Technologies  has already changed ownership.

Given the above three market forces, how much will the landscape of service providers you bank on (pun intended) change in the months to come? Only time and we can tell. Keep watching this space for more!

Related Reports:

The Risky Side of Offshore Growth: Operational Challenges with Indian Majors? | Sherpas in Blue Shirts

In my May 3 blog entitled “Size Does Matter – The Real Pecking Order of Indian IT Service Providers” – I commented on the rapid growth achieved by the Top 5 Indian IT majors or WITCH (Wipro, Infosys, TCS, Cognizant, and HCL) in the last few quarters. Last week as we were rounding up our latest service provider risk assessments, I couldn’t but help notice that this very growth has taken its toll on some of these providers, with buyers increasingly highlighting service delivery concerns especially as it relates to the quality (or lack thereof) of resources deployed on their engagements.

Since the Satyam crisis in early 2009, Everest Group has been tracking global and offshore majors across a number of dimensions to analyze patterns that indicate deviation from “ideal” behavior, and thereby highlight risks to service delivery. Based on analysis of 1Q 2011, our risk dashboard for the WITCH majors required a change in operational parameters from “No Risk” to “Marginal Risk.” While individual, provider-specific rating changes are common, this is the first occurrence of a collective group rating change since we started our assessment over two years ago.

WITCH Risk Dashboard

At the core of these operational challenges is the strain on the labor model of the offshore majors that are “blessed” with an environment of hyper growth. With attrition levels at a three-year high, service providers are being forced to meet the commitments for new logos/projects by rotating employees out of existing accounts, especially smaller ones. This practice of robbing Peter to pay Paul is eroding service quality and creating concerns for clients. Further, the hiring freezes and cutbacks at the peak of the economic crisis in late 2008 and most of 2009 created an imbalance in the labor model. Service providers are now having to back-fill for attrition through relatively junior and less-experienced resources than those to which clients were typically accustomed.

Attrition Trend for WITCH

WITCH Attrition Trend

To clarify, this is not a “WITCH hunt” and should not be read as propaganda against offshoring, India, or the WITCH majors. I firmly believe in the fundamentals of offshore growth, India’s delivery competitiveness, and the capabilities of WITCH majors’ management to navigate what we hope are merely short-term hiccups. The issue, however, reinforces the need for a more robust approach to global sourcing risk management in which being proactive is key to staying ahead of the game. While a proactive approach does not guarantee prediction of the next major crisis (e.g., Satyam), our experience suggests that a focused and consistent approach can deliver early warning signals to buyers, who can then use them to potentially undertake mitigation or course correction strategies. After all, as the old saying goes forewarned is forearmed!

In a complimentary Breaking Viewpoint released earlier this week, I shared additional information on this topic, and provide perspectives to better manage the current set of offshore delivery challenges. Download the complimentary Breaking Viewpoint.

Size Does Matter – The Real Pecking Order of Indian IT Service Providers | Sherpas in Blue Shirts

Earlier today, Cognizant reported its financial results for the first quarter of 2011, bringing to an end the earnings season for the Big-5 Indian IT providers – affectionately referred to as WITCH (Wipro, Infosys, TCS, Cognizant, and HCL). Cognizant’s results were yet again distinctive: US$1.37 billion in revenues in 1Q11, which represents QoQ growth of 4.6 percent and YoY growth of 42.9 percent. The latest financial results reaffirmed – yet again – Cognizant’s growth leadership compared to its peers and are a testament to Cognizant’s superb client engagement model.

Q1 2011 financial highlights for WITCH:

WITCH Q1-2011 Financial Highlights

In a recent blog post, my colleague Vikash Jain commented on the changes in the IT services leaderboard, and especially the questions and speculation on the relative positions of Wipro and Cognizant in the Indian IT services landscape. Cognizant’s 1Q11 revenues are now just US$29 million below Wipro’s IT services revenues, and based on current momentum, Cognizant could overtake Wipro as early as 2Q11, making it the third largest Indian IT major in quarterly revenue terms. The guidance provided by the two companies for the next quarter – Cognizant (US$1.45 billion) and Wipro (US$1.39-1.42 billion) – provides further credence to the projected timelines.

How important is this upcoming change in the relatively static rank order of the Indian IT industry (the last change happened in January 2009 post the Satyam scandal)? Not very, in our opinion. As and when this happens, the event will indeed create news headlines and the occasional blog entry, but the change in rankings does not imply a meaningful change to the overall IT landscape. Further, other than providing Wipro with even more conviction to make the changes required to recapture a faster growth trajectory, the new rank order does not suggest any changes in the delivery capabilities of either of these organizations.

As we advise our clients on selecting service providers, we believe that it is more important to understand the service provider’s depth of capability and experiences in the buyer organization’s specific vertical industry. While total revenues and financial stability are important enterprise-level criteria, performance in the vertical industry bears greater relevance and significance as buyers evaluate service providers. In our 1Q11 Market Vista report, we examine the CY 2010 revenues of the WITCH group to determine the pecking order in three of the largest verticals from a global sourcing adoption perspective – banking, financial services and insurance (BFSI); healthcare and life sciences; and energy and utilities (E&U).

As we recognize there are differences in the way these providers segment results, for simplicity we are relying on reported segmentation (which we believe does not meaningfully alter the results). The exhibit below summarizes the results of our assessment:

Industry leaderboard for WITCH:

WITCH Industry Leaders1

Our five key takeaways:

  1. The ranking of WITCH based on enterprise revenues has limited correlation to industry vertical rankings. The leader in each of the three examined industries is different.
  2. In BFSI, while TCS is the clear leader, Cognizant is rapidly closing in on Infosys for the second spot. (Note: Wipro is already #4 in this vertical).
  3. In Healthcare and Life Sciences, Cognizant emerges as the clear leader with 2010 revenues greater than those of Wipro, TCS, and HCL combined. (Note: Infosys does not report segment revenues for Healthcare).
  4. In E&U, Wipro leads the pack and is expected to widen the gap through its acquisition of SAIC’s oil and gas business. TCS achieved the highest growth in 2010 to move to third position ahead of HCL (TCS was #4 in 2009) and narrow the gap with Infosys (Note: Cognizant does not report E&U revenues).
  5. Finally, the above ranks are going to change quickly. Based on the results announced for the first calendar quarter of 2011 alone, we anticipate a change in the second position for each of the three examined verticals:
    • Cognizant’s Q1 BFSI revenue of US$570 million is nearly identical to that of Infosys’ US$572 million
    • TCS’ Q1 Healthcare and Life Sciences revenue at US$ 119 million is higher than Wipro’s US$111 million (which also includes services)
    • TCS reported Q1 E&U revenues of US$103 million, versus Infosys’ US$93 million

While it will be interesting to see the impact on a full year basis, the above changes in momentum already indicate further changes in the industry leaderboard before the end of the year.

On an unrelated note, by the time we revisit the Wipro versus Cognizant debate when the Indian majors announce their Q2 results starting mid-July, WITCH will assume an additional meaning – the last installment of the Harry Potter movies is due for release on July 15, 2011!

A Thumbs Up for Wipro’s Acquisition of SAIC’s Oil & Gas IT Services Business | Sherpas in Blue Shirts

Despite the fact that Wipro announced its acquisition of SAIC’s oil and gas IT services business on April Fool’s Day, the deal will be far from prankish silliness if the integration of two fundamentally different cultures and business models is managed correctly. Here are three key reasons we give this acquisition a thumbs up:

Stronger appeal to clients in the energy industry, and separation from its Indian provider peers

Wipro is already the largest offshore Tier 1 provider in the energy and utilities sector in revenue terms, and the acquisition will provide it with broader and deeper consulting, technology, and outsourcing capabilities in the upstream business, and enhanced service capabilities in areas including digital oilfields, exploration, and production data management. The deal brings into Wipro’s capabilities a pool of onshore domain experts — nearly 1,500 — with presence in major oil and gas markets in North America, Europe and the Middle East. The acquisition should also help Wipro upshift current offshore-based ADM service delivery clients, enable up-sell and cross-sell to higher value/high margin services, and allow penetration of the SAIC client base to drive growth per an offshore-centric delivery model. The bottom line is that the acquisition will enable Wipro to demonstrate a strong, differentiated play for oil and gas clients across the entire value chain.

An affirmation of its intent to further differentiate in areas of existing strength

Let’s face it . . . 2010 was not a great year for Wipro. With financial fraud and the sub-par financial and operating performance that resulted in the ouster of its joint CEOs, there was significant conjecture on whether or not Wipro could remain competitive and regain a place among the Tier 1 Indian providers. The acquisition not only demonstrates Wipro’s commitment to investments in growth, but also should help quell concerns about the company’s future, especially for energy industry clients. Perhaps most importantly, the acquisition gives Wipro the deep domain expertise differentiation play that is becoming increasingly important for offshore providers. This should enable Wipro to both win new business and increase the size and scope of its work within existing Wipro and SAIC accounts.

Enhanced revenue growth via its earlier inorganic strategy

Major acquisitions and inorganic growth — including its purchase of acquisition of Infocrossing in 2007 and Citibank’s IT captive in late 2008 — have been a large part of Wipro’s revenue growth strategy. Lacking any large acquisition in the last couple of years has negatively impacted its comparative peer performance. But the SAIC acquisition will enable a revenue upside of at least US$150 million — assuming a revenue multiple of 1 — which will reflect in Wipro’s next financial year which ends on March 31, 2012.

Assuming this all plays out the way we think it can, we do believe the SAIC acquisition can significantly widen the gap between Wipro and the other Tier 1 offshore majors in the energy vertical.

Everest Group just released a Breaking View point on this acquisition. If you’re interested in more drill-down insights on this deal, please go to: Wipro’s Fool’s Day Acquisition of SAIC’s Oil & Gas IT Business – The Energy Pill Wipro Needed?

NASSCOM India Leadership Forum 2011 – Proof that the global offshore market’s recovery is in the bag! | Sherpas in Blue Shirts

Attending the NASSCOM India Leadership Forum (ILF) in Mumbai for the fourth year in a row has reinforced in my mind that the event is not just about India any more. For starters, the six hour flight from Delhi to Mumbai this morning felt like intercontinental travel courtesy of the Delhi fog and an overzealous airline staff who remained determined to meet on-time performance SLAs. Second, the representation from countries beyond India continues to increase – participation statistics suggest 1,600 delegates from 30+ countries are attending the 19th edition of the ILF. Further, the number of country/regional associations showcasing their capabilities at NASSCOM is at an all time high – Bhutan, Colombia, Jordan, Nova Scotia, Northern Ireland, Scotland, South Africa, UK, to name a few!

In fact, the “masala chai” is one of the only things that keeps ILF firmly Indian amid the international ambience. (Tip: if you are looking to get the flavored tea all day long, try the NASSCOM Connect Lounge).

Finally, in the last few years, I have been gauging the health of the global offshore IT/BPO services market not by the numbers shared in the annual Strategic Review report but by the delegate bag in which you find the report. At the peak of the recession, we saw the less-expensive jute bag make an appearance. However, this year we are back to the more deluxe leather version, confirming that all is well with the global offshore IT/BPO services market. The recovery is in the bag.

Atos’ Acquisition of Siemens IT – Everest Research Institute Gives it a “Thumbs Up,” But… | Sherpas in Blue Shirts

Atos Origin’s just announced acquisition of Siemens IT Solutions & Services (SIS) will create a new giant in the European IT services marketplace when it closes pending regulatory approvals. And per Everest Research Institute’s (ERI) assessment, the acquisition will be a boom for the two companies. ERI gives the transaction a “thumbs up” for five reasons:

Enhanced scale to compete in mega deals – The combination of Atos’ €5.0 billion revenues and SIS’ €3.7 billion revenues will result in a much more formidable competitor in the European IT marketplace. The increased operating scale, large deal experience and the enabling infrastructure should enable Atos to better compete in larger deals that may earlier have been out of its reach.

Pan-European footprint – Atos’ and SIS’ geographic market focuses are complementary, and will give the combined entity a strong pan-European footprint. Atos’ leading position in France and Benelux will be bolstered by SIS’ position in Germany, Central Europe and the Nordics.

Formidable IT consulting and systems integration capability – The combined entity will attain approximately 33 percent of its revenues, or roughly € 2.9 billion, from symjstems integration and consulting. Boosted by Siemens’ legacy strength in systems integration, the new organization will have 30,000 professionals – including 7,000 SAP specialists – making it one of the largest consulting and systems integration providers in Europe.

Cross-sell opportunities given limited customer overlap – Analysis of the companies’ client portfolios indicates limited overlap, thereby enabling cross-sell and up-sell opportunities. The enhanced European footprint should also give Atos the ability to increase its business with existing European clients.

Credible global delivery capability – SIS will provide Atos with additional offshore delivery scale in India, and will improve the firm’s ability to provide global delivery to its clients. This should be particularly helpful in Europe, as the economic crisis is expected to accelerate global sourcing. After the acquisition closes, Atos will have 7,900 employees in India (approximately 10 percent of its total headcount.)

All this said, although we view the improved capabilities of the combined entity as optimistic, the projected financials are disappointing and lack ambition. The company is guiding growth in the one-to-four percent range annually for the next three years. The target operating margins of seven-to-eight percent by 2013 are higher than the current margins of the two companies and peer European companies, (e.g., Capgemini and T-Systems), but meaningfully lag those of global providers (e.g., IBM, Accenture.) Even achieving these targets will be a challenge, and future success hinges on Atos’ ability to smoothly drive the complex integration, ensure a quality transition for its largest client (Siemens) and, most importantly, maintain relentless focus on existing clients and new business development.

Will this acquisition prove advantageous? Only time will tell.

ERI has just completed a Breaking View Point paper on Atos’ acquisition of SIS. Those interested in learning more about the deal, the geographic market focus, the scale, the business mix and the global delivery footprint can gain access to the paper here.

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