Multi-Process HRO Market Share | Market Insights™
September 18, 2015
The top 5 providers hold 55% of the market, but Indian-heritage providers are coming on strong
The top 5 providers hold 55% of the market, but Indian-heritage providers are coming on strong
In the last 10 days, analysts tracking digital services across the world woke up to highly savvy India-heritage service providers lapping up marquee digital deals in the world of sports. These new partnerships include HCL and Manchester United (soccer), Wipro and Chelsea (also soccer), and Infosys and the ATP World Tour (this one in tennis.)
These deals are prized because of the impact they create.
As an industry analyst, I am used to analyzing deals for their profitability and total contract value, i.e., the impact they create on the books in upcoming quarters. Looking at the above deals through this lens, I immediately saw that these are not traditional services deals. In fact, something tells me they will not figure similarly on the accounts as other services deals do. Indeed, Infosys candidly called out that it will be a “Global Technology Services Partner and Platinum Sponsor” of the ATP World Tour. Hence, it does not take a Sherlock Holmes to deduce that these three deals are essentially sponsorship arrangements (with an inbuilt services component) that the service providers have entered into under the garb of a services construct. A very easy way to decipher this is to compare the positioning of HCL’s and Wipro’s logos on the Manchester United and Chelsea websites, respectively. It makes it very clear which provider “spent” more on their “sponsorship.”
Take a look at the Manchester United website and you’ll see HCL’s logo is at the top of the page, right on top of ManU’s.
But when you check Chelsea’s website, you have to scroll all the way down to discover Wipro’s logo sitting in a corner sulking with Singha Beer for company.
Am I contemptuous of this sponsorship-deals-under-the-garb-of-services construct? Not at all! In fact, I am pleasantly surprised by the gumption shown by HCL, Infosys, and Wipro in taking this leap of faith to build a strong brand connect and pedigree. It shows they are willing to challenge the traditional constructs and meet the digital market head on. In a highly consumer-oriented world, new business will not come by just being efficient nerds. India-heritage companies are up against the likes of VC-funded start-ups, reforming technology majors (Google, IBM, Microsoft) and niche enterprise software firms (NetSuite, Workday, etc.,) all of which have stronger credentials in digital constructs. Given the buzz these deals have created, there is enough market validation for the tactical approach taken by these service providers. What is even better is that these are not typical paid sponsorship deals – these service providers will actually be providing services that will be touch and feel for millions of fans of these sporting giants. If they successfully manage it, this will create an exponentially stronger brand recall compared to what they have achieved in decades – being efficient service providers to enterprises, working in black boxes.
Hence, do not be surprised if TCS, which sponsors the New York Marathon (and many other races), turns around tomorrow and says that it is sponsoring managing all IoT (health sensors, speed sensors), platforms, and analytics of the race.
Keep watching this space for more on these developments!
Photo credit: Flickr
On 19 May, Wipro signed a US$400 million+, multi-year strategic alliance deal with Japan’s largest pharmaceutical firm, Takeda Pharmaceutical. Wipro will provide infrastructure management services across Takeda’s global operations, thereby creating a unified platform across the company. Less than a week earlier, HCL announced a landmark infrastructure deal with pharmaceutical major Novartis. Per the terms of the deal, HCL will provide remote infrastructure management services for Novartis across its entire data center landscape, covering more than 70 countries across six continents.
The Life Sciences Infrastructure Bandwagon
These deals are indicative of a sharp inflection point for IT infrastructure services in the life sciences industry. Until now, service providers have been largely focused on delivering application outsourcing services such as ADM, testing, ERP, and package implementation. Demand for infrastructure services was largely linear and predictable. However, the winds of change sweeping the overall healthcare landscape have brought about strong momentum to infrastructure uptake.
These winds include regulatory reform, consumerization, market consolidation, and the emergence of next-generation digital avenues. The volume, variety, and velocity of incoming data are fundamentally impacting how life sciences organizations view their infrastructure needs. Exponential growth in data, coupled with evolving engagement and drug development models, has resulted in a significant need for analytics. Dimensions such as real-time reporting, proliferation of mobile devices, and automation are providing additional impetus.
The Opportunity At Hand
Among the various sub-segments of life sciences IT outsourcing, we see infrastructure poised to assume the lion’s share of growth in the coming years. While applications and SI/consulting are likely to grow at a healthy rate, the infrastructure opportunity in life sciences could triple in value over 2014-2020. This is likely to be fueled by increasing traction in cloud delivery and storage models, data warehousing efforts, consolidation of information systems, and the move to obtain a unified view of customer data to enable actionable business outcomes.
Life sciences has traditionally been a mature IT market. Across medical device manufacturers, pharmaceutical firms, biotech companies, life science firms spend more on IT than typical buyers. Life science companies have innovative R&D efforts at the core of their operating model. Given the rise in personalized medicines, there will be a surge in data storage/processing requirements and, consequently, infrastructure needs. These themes impact life sciences IT infrastructure requirements to give rise to various technology imperatives across the ecosystem.
Buyers in the life sciences space need to evaluate their infrastructure services roadmap on a business impact versus investment paradigm. They need to establish meaningful relationships with strategic partners in order to enable the true synergistic benefits of a comprehensive and relevant infrastructure services roadmap.
At the same time, services providers need to expand their infrastructure footprint to partner with enterprises in this transformative journey. They need to adopt a holistic mix of traditional tenets (co-location models, data warehousing, BI, hosting, and network services) along with next-generation services such as multi-tenancy solutions, cloud delivery and storage, and BYOD.
What are you experiencing in infrastructure services? Our readers are eager to hear!
Double the fun! HCL’s stock valuation doubled in a just a little over 12 months. They’ve been on a tear, improving every month, with revenue per employee skyrocketing and the corresponding profitability rising. Sure, HCL has shifted some positions in its leadership team. But what really caused the investing community to value HCL at twice the price as before is HCL’s successful shift to transaction-based pricing.
The strategy behind the leadership shifts was to ensure future growth. Former CEO Vineet Nayer became Vice Chairman a year ago, and Anant Gupta moved from President/COO to President/CEO. Gupta has been with HCL for 19 years and built its infrastructure business — which is now the dominant marketplace for HCL.
HCL’s growth strategy is taking hold, and it successfully transitioned its infrastructure offerings from an FTE-based pricing model to per/service transactional pricing.
Previously I blogged about payment companies outperforming their BPO brethren: it was because they implemented platforms for transaction pricing. As I explained then, there are few examples of transitioning successfully to transaction pricing models outside the payments space. It’s almost as rare as catching lightning in a bottle.
Spectacular and Rare
But HCL is one of those rare instances and succeeded in the infrastructure space.
Where success happens in rolling out and implementing transaction pricing, a service provider can reap tremendous benefits because it captures productivity gains from automating. When a provider can scale this strategy, as HCL is doing, the financial and competitive benefits are spectacular.
CSC and HCL announced an alliance a few weeks ago, which is more of a go-to-market than structural change. But what if the twosome were to agree to a follow-on alliance to do something really big — something with huge industry and market consequences? It would be extremely brave and very risky. But it would address the inevitable whopping market threat for CSC and position both companies for future growth. Let me paint a picture of what that speculative alliance would look like.
The alliance would address the elephant in the room: CSC losing half its client work
Such an alliance would first enable CSC to grasp the mantle and really address its big problem — its current huge commitment to an asset-heavy outsourcing model. CSC has invested at least $12+ billion in this model.
Our research and insights reveal that over 50 percent of the workloads currently in an asset-heavy model are able to migrate to the cloud over the next three to five years— and are incented to do so. With half of its work exiting the asset-heavy model, this mass exit would leave CSC with a huge revenue hole.
And that’s only part of the problem. The situation is doubly threatening in that the exit from the asset-heavy model will leave CSC with huge stranded costs on facilities, equipment and people along with the revenue hole.
A really brave alliance with HCL would deal with this situation.
Alliance step one. Step one is to deal with the people. CSC could move its people servicing clients in the asset-heavy model over to HCL, taking costs down and removing the stranded costs. CSC already has a vehicle in its offer set to catch the cloud work but would be replacing this revenue at 50 cents on the dollar. It’s much cheaper to do the work in the cloud than in the asset-heavy model.
Step two. Step two would move CSC’s data centers into an industry REIT to deal with the data center overhang. It would leave CSC with a much smaller set of stranded assets in overhead and equipment to deal with. In this way CSC would be able to navigate the inevitable shrinkage of its asset-heavy business and deal with those stranded assets.
The emerging CSC
A brave alliance between CSC and HCL would also make CSC “all in” on the cannibalization of its own footprint. Although CSC is attempting to drive this strategy now, it has conflicting incentives as it fights to maintain revenue in its existing asset-heavy model while standing up new revenue. The speculative alliance I’m describing would send a message internally to the CSC organization and to its external market that CSC is “all in” on the cloud transformation issue.
What would emerge from this alliance strategy would be a cloud-based CSC — a smaller, more profitable, more nimble CSC without the huge write-downs that it likely will incur as the cloud transformation happens naturally over the next few years.
The picture for HCL also makes a lot of sense
Such an alliance would create big growth in HCL’s infrastructure because of gaining significant advantages in economies of scale, market credibility and greater profits to invest.
HCL would pick up CSC as a huge client and capture probably 15 percent of the entire RIMO (Remote Infrastructure Management Outsourcing) market in one fell swoop. It would cement HCL into the undisputed RIMO leadership position with a wide margin between HCL and TCS, its nearest competitor.
What do you think? Will the twosome be brave and take the risk of a market-changing follow-on alliance?
On January 15, rival IT service providers CSC and HCL made an announcement that they were joining hands to deliver application modernization services. The partnership entails modernizing legacy applications (the HCL angle) and hosting them on cloud platforms (the CSC slant). CSC and HCL will open delivery centers in Bangalore and Chennai as part of this alliance, with a CoE for banking, and will share equally all revenues and costs of these operations.
The announcement sounds a lot like the one from Accenture and Dell a month ago where the two companies teamed up along similar lines. Read the release here. So what makes the CSC and HCL announcement more interesting? For starters, the simple fact that it is not the announcement we were anticipating (or were made to believe). The anticipation was for a broader alliance for infrastructure services, which would have had far significant implications on the supply landscape.
In reality, the announcement is not that big of a deal.
In our opinion this is more of a sales and marketing alliance versus a strategic re-alignment. But since it did catch our attention, here’s a brief analysis:
So why is this important?
Our research on cloud services shows that buyers place a high value on application modernization. While clients acknowledge the value of cloud adoption in order to transform their operating models and save costs, cloud-incompatible legacy applications limit the ability to harness this value. But oftentimes they are reluctant to make significant monetary investments for this pursuit and are looking for self-funding mechanisms. CSC and HCL, exploring mutual synergies, will theoretically be able to lower the risks and costs for clients transitioning to the cloud.
How does it benefit CSC and HCL?
CSC will get an additional channel for its cloud platform (BizCloud, a private cloud offering for the enterprise) and gain access to HCL’s offshore delivery capabilities in applications services. Also, this alliance will enable CSC to offer Proof of Concept (PoC) for its cloud platform to its clients at a lower price, something not feasible earlier with its U.S.-centric workforce.
For HCL, the alliance promises to:
Interestingly, CSC and HCL have been rivals traditionally with HCL being highly vocal about being a “replacement” for the likes of CSC. Like shrewd warring factions, CSC may have just married its enemy, turning it into an ally. The alliance likely enables CSC to not only protect its market share but also offer a compelling alternate proposition, to existing and new clients.
Key questions that this alliance raises
It is still too early to answer any of these questions. But one thing is clear – cloud and next-gen IT certainly create some strange bedfellows.
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?
The ultimate questions are:
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.
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.
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:
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.
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.
©2023 Everest Global, Inc. Privacy Notice Terms of Use Do Not Sell My Information
"*" indicates required fields