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

June 16, 2011

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.

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

May 25, 2011

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.

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

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

May 3, 2011

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:

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:

Our five key takeaways:

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.
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).
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).
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).
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!

How Will the IT/BPO Industry Leaderboard Change? | Sherpas in Blue Shirts

April 14, 2011

This past weekend, many people were glued to their televisions watching the 2011 Masters Golf Tournament at Augusta National. As the days rolled by, the leaderboard changed in some surprising ways – the young McIlroy slid a long way from Number 1 on Day 1; Tiger Woods finally showed his old spark and stayed steadily within the top 5 throughout the game; and Charl Schwartzel jumped into the front-runner spot to take the Green Jacket.

While we now know the Masters winner, there is significant speculation on the changes in the IT services leaderboard, both today and going forward. The market is rife with questions on where Wipro and Cognizant will end up this season. The discussion on C-level changes at Infosys made a leading Indian newspaper speculate on issues it may be facing, with TCS speeding on and Cognizant being on steroids and catching up quickly. The next day, analysts said TCS would continue to outpace the other TWITCH majors as the quarterly results season starts.

We will know the answers to these questions in the next few weeks, after all companies report their numbers. But the more important long-term question is, what else will change in that leaderboard? Will we see more M&As, new entrants, or exits? And fundamentally, what will the future structure of the IT services industry be, and who will the winners be?

In a recent meeting, a CEO of an IT services company made an interesting point about there being steps at the US$500 million, $1 billion, $5 billion, and $10 billion marks, and that it is progressively challenging to get to the next level. It was clear he was thinking that some, including those in the $2+ billion scale, will struggle to reach the next level, and some will stabilize in their current or adjacent level.

The TWITCH discussion is interesting, but then there are the mid-tier IT players. We are just past the first quarter of 2011, and already three (iGate, Patni, and Headstrong) no longer exist, at least not in their original form. From all we hear or understand, several more may go before the end of 2011.

Then there are continuous speculations about pure play BPO players being shopped about. The rumor that Cognizant will take out Genpact has been around for ages. EXL is up for some action, and the market is abuzz with other speculations. As one of my colleagues recently blogged – will the Indian pure play BPO companies survive in the same shape and form past 2011 or 2012?

Net, net, here is the big picture. Some large Tier 1 players are struggling, mid-sized IT is not necessarily the best place to be, and pure play BPO companies are a vanishing tribe.

All this raises more questions: What is the future structure of the global services industry? Will Accenture, IBM, Dell, the Japanese majors, TCS and probably a few others become the super majors by 2015 or 2020, and will the rest need to find their own places under the sun? What other categories and groups of service providers will exist, and what will their characteristics be, for example, regional specialists, vertical specialists, etc.?

Irrespective of how the industry evolves, consolidation will continue, and the M&A juggernaut will roll. This business generates cash, and doesn’t require a lot to sustain it…so companies will invest in buying capabilities, assets, businesses, and people in attempts to win top spots on the leaderboard.

We certainly are headed for some interesting months ahead. Is anyone betting on who the winners will be at the end of 2011?

Indian Heritage Providers Are Achieving Differentiation | Sherpas in Blue Shirts

April 5, 2011

One of my partners recently returned from a conference remarking that he could randomly put any service provider’s logo on any of the collateral being distributed and nobody would notice. Everyone’s message was essentially the same as their competitors. It is difficult to differentiate among the Indian heritage providers. Or at least it has been. Recently, three of the Tier 1 firms have emerged with highly divergent and (to date) successful differences at the strategic intent level.

Before we look at what these three firms are doing, let’s look at how the maturation of the global services industry is manifesting itself:

Clients are becoming progressively thoughtful about which providers they want in their portfolio, and are actively working through portfolio rationalization to achieve that mix
New logos are increasingly hard to come by and expensive to acquire; as a result, providers are focusing their efforts on growing business within existing clients – wallet share is king
The difference between ITO and BPO providers is blurring, and clients are increasingly looking for a provider that can deliver services across a wide range of areas
As client firms mature in their use of labor arbitrage, they are increasingly delegating decision making, giving rise to the purchasing function as a more influential player; this is starting to commoditize the offshore services market and is putting pressure on price
Simultaneous to the delegation of decision making, senior client firm executives are increasingly wondering and questioning what they should do next, specifically beyond arbitrage, to increase value.

These dynamics are challenging the Indian heritage Tier 1 providers to evolve their strategies and tactics in order to retain and grow their client bases, as well as secure new deals with a next generation flavor.

So how are three of the biggest addressing these issues per their strategic intent?

TCS’s strategic intent is “flawless execution.” TCS’s clients and the market are increasingly viewing TCS as a superb operator with a well-polished and effective talent management model. Many view TCS as the leading example of how to deliver consistently high quality work at attractive prices. It invests significantly in becoming its clients’ strategic delivery partner, including focused initiatives to build relevant IP. TCS has been very thoughtful in segmenting the market and organizing its business by vertical industries. The multinational provider it is most similar to is IBM. Both have a large client base, are very deliberate in their strategies, are highly intentional in their investments, are very focused on deep and broad client relationships, and work consistently to identify and nurture them.

Infosys’ strategic intent is being a “transformation partner.”Infosys has invested considerably in building a large and impactful consulting organization in order to combine consulting with delivery to achieve transformation for its clients. That objective is being bolstered by its 3.0 co-creation strategy, which is a move further down the line of transformation. It is achieving many successes, and is considered a formidable player. The ongoing transition of senior leadership at Infosys seems to be well along its path with clear succession planning underway and significant investment to develop the next generation of management. Yet, Infosys is taking a challenging strategic intent route as it is squarely emulating Accenture’s strategy. The transformation hill is steep to climb because of the difficulties involved in combining consulting with delivery. Accenture has done well, but others have struggled to succeed along this path. Infosys’ ability to resolve the key conflicts between consulting and delivery will determine its long-term success.

Cognizant’s strategic intent is superb “client engagement.”Cognizant is simply the best at working with clients on business issues. Its secret sauce is an ability to engage with clients on problems and pull through consulting and delivery services. This is different than Accenture’s and Infosys’ transformation model in that Cognizant focuses on the client relationship and client engagement by working through the suite of problems currently on the client’s plate, as compared to game-changing transformation. Cognizant invests significantly in highly empowered onsite teams, and its delivery and consulting organizations are tuned to be responsive to the client engagement team. This overall model and strategy is quite different than any other Indian or multinational firm, and is achieving significant growth and profitability returns.

Each of these strategic intent approaches appear successful to date, and has moved each of these three firms to a superior level of performance. Indeed, as clients increasingly recognize the clear difference among these players, and other providers follow their lead to secure true differentiation, we will see a new Tier 1 emerge in the Indian heritage provider space.

Announcing our inaugural conference: Everest Group Engage, The Pragmatic Edge: Designing Your Future. Learn more.

Tag: Cognizant

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

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

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

How Will the IT/BPO Industry Leaderboard Change? | Sherpas in Blue Shirts

Indian Heritage Providers Are Achieving Differentiation | Sherpas in Blue Shirts

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