Tag: IT services

How COVID-19 Will Impact IT Services in the Banking and Financial Services (BFS) Industry | Blog

The BFS industry started 2020 in a cautiously optimistic mood, hoping for a rebound in global economic growth. But then the COVID-19 outbreak swept the world into a state of emergency. The current challenge is far greater for BFS firms than was the Great Recession, as they need to crack the code of how to deal swiftly with both demand- and supply-side shocks. In this scenario, banks face a dual mandate of:

  1. Playing a central role in stabilizing the economy
  2. Ensuring business continuity to maintain normal operations

Breaking down the impact of COVID-19 on the BFS IT services market

To illustrate the variation in pandemic impact across different BFS lines of business (LoBs), we analyzed the severity of impact and speed of recovery for each line. Our assessment of severity of impact involved modeling factors such as the COVID-19 revenue and profitability impact from both a near-term (3-6 months) and a medium-term (6-12 months) perspective. We gave more weight to the medium-term impact as the near-term uncertainty makes the modeling of impact very difficult.

And we mapped impact severity against the speed of recovery by gauging the time it will take for these LoBs to bounce back to the pre-crisis state; this is a function of the health of these business segments before the crisis, as well as expected changes in customer sentiment and buying behavior once the crisis is over.

Our analysis found that BFS LoBs cluster in four zones, each of which exhibits unique characteristics and will face a distinct set of technology and IT services implications. Taking it counterclockwise from the bottom right quadrant:

  1. Aggressive cost take out – Lying on the bottom right, the LoBs in this zone will face the highest degree of impact; we also expect their pace of recovery to be painfully slow. To aid in their recovery, these LoBs should rethink their operating models and get back to basic principles: focus on the core business of provisioning financial services, think of delivering more value to customers, and move away from non-core elements like engineering or IT services innovation.We expect to see heightened asset-heavy deal activity in this segment, as these LoBs will need cash to invest and rejuvenate growth in select focus segments. And they’ll be looking for financial engineering support through activities such as takeover of legacy assets, shared services carve-outs, and even signing of long-term integrated technology plus operations support engagements that are centered around specific business outcomes.
  2. Modernization –This zone at the top right comprises LoBs that we expect to rebound faster to pre-crisis growth levels. From an IT services standpoint, we expect these LoBs to focus on cost savings in the near-term by seeking price cuts on rate cards and pausing some change initiatives. However, soon enough, these segments will get back to modernization initiatives. Hybrid cloud will play a critical role, as these LoBs will place significant emphasis on digital enablement to fuel their long-term growth.
  3. Growth – Odd as this may sound, we expect these business segments to benefit from the crisis in the near term. For example, as governments across multiple geographies have announced relief packages for small businesses that are facing unprecedented economic disruption, banks are needed to facilitate these SBA loans. Financial services firms that have proactively invested in creating a scalable infrastructure and stronger business continuity plans are better positioned to take advantage of this opportunity by generating significant fee income. Enterprises with large LoBs in this zone will also be on the lookout for inorganic expansion and take advantage of the reduced evaluations. Enhancing customer experience, driving product innovation, and improving agility to quickly respond to market demands will be the key investment themes.
  4. Transformation – This zone comprises LoBs that will recover most slowly from this crisis. Hence, these business segments need to rethink their business models and diversify their revenue mix to sustain themselves in the long term. For instance, retail/consumer transaction banking will face profitability challenges due to reliance on interest-based income, and some of the fee-based commoditized businesses, like retail wealth management, have been under stress due to downward fee pressures. As a result, enterprises with large LoBs in this zone will look to transform themselves and invest from a long-term growth perspective.

 

COVID 19 impact vs. response matrix across BFS lines of businesses

Implications for BFS enterprises

At an industry level, we expect BFS firms to completely focus on running the business initiatives in the near term. Our research suggests that banks have put nearly 60 percent of change projects on hold. Most of these suspensions are temporary and will restart once the crisis abates; however, we believe that the prioritization and nature of these change projects will mutate due to a shift in business priorities and budgets.

As an immediate response to the current situation, designing and executing customer assistance programs should be the top priority for BFS firms. In the medium term, the firms’ focus should gradually shift to modernization of legacy systems that slowed down banks’ agility and ability to respond to this crisis. Post COVID-19, BFS firms will need to reimagine their products, pricing, and channel strategies to fulfill evolved customers’ expectations.

Our recommendation for BFS enterprises is to cautiously evaluate their exposure across each of their LoBs and carve out a holistic IT strategy that takes into account not only the near-term implications, but also their long-term business philosophy.

Please share your views on the impact of COVID-19 on the BFS industry segments with us at [email protected] and [email protected].

Are IT Buyers Pushing for Discounts Due to the Pandemic?

Not surprisingly, we’ve been flooded with questions about the implications of COVID-19 on the IT services industry over the past two months.

Let’s take a look at the two most prevalent questions.

How are IT contracts being impacted?

Financial distress – such as a dip in revenue generation and restricted cash flow – is forcing enterprise IT to review their IT contracts. Clients are exploring three options:

  • Putting non-critical projects on hold
  • Deferring payments to keep critical projects running
  • Seeking discounts

Their preferred option is putting non-critical projects on hold. Clients are triaging to keep their business-critical functions – like transactions systems, call centers, datacenters, and supply chain systems – running. However, they’re putting non-critical engagements, such as new application development and feature upgrades, on the back burner.

Second in order of priority is deferring payments. We’re seeing deferral requests increase in frequency, especially in distressed industries such as travel, transportation, hospitality, and medical devices. And we’ve seen payment terms going up to 180 days in a few situations. However, an early trend that will soon establish itself as the IT industry norm is balance sheet (or cash pile) financing; vendor balance sheets have started to play a role in enabling billing deferrals and “deploy now pay later” models. For example, Cisco has set up a US $2.5 billion war chest leveraging its balance sheet to help some of its clients defer payments until 2021.

Our analysis shows that vendor balance sheets, both tech products and IT, are healthy. For example:

  • IT vendors’ (HCL, Infosys, TCS, Wipro, etc.) balance sheet assets over liabilities ratio ranges from 1.3x to 3.5x
  • Tech vendors’ (Adobe, Amazon, Microsoft, Oracle, etc.) balance sheet assets over liabilities ratio ranges from 1.1x to 3.4x.

And there is evidence that they may dip into them to help their clients out.

The third in priority is seeking discounts. We’re seeing anecdotal evidence of clients seeking discounts on contract value and in a few cases extending up to 50 percent of the annual contract value. But to clarify and qualify this:

  • The discount discussions are largely focused on time and materials (T&M) projects. Few are around fixed price and managed service engagements, which form a larger share of revenue profile for large IT vendors
  • And this means that smaller IT and staffing vendors – for which T&M constitutes larger share of the revenue profile – are going to be impacted more than the large IT vendors

Most importantly, we’ve seen enterprises being very flexible and collaborative with their vendors – working closely with them to keep initiatives running.

How will enterprises prioritize and fund IT initiatives during this crisis?

Enterprises are currently preparing their playbooks to navigate the ongoing recession. It’s important to note that recession does not mean that IT initiatives will be broadly deprioritized. Depending on the impact they see on their overall business and their anticipation of recovery, enterprise executives will triage their resources (cash, talent, vendors) to keep critical initiatives running.

Here’s a look at the framework we’re using to help buy-side clients prioritize their decisions:

  • Rescue business critical initiatives most severely impacted by the recession through financial engineering and aggressive cost takeout
  • Revitalize revenue-generating business functions that can gain from automation usage and cloud-driven agility
  • Reinforce the lowest impact portions of the revenue profile through M&A and product launches
  • Restructure those portions of the portfolio – such as vendors, locations, and talent – that already had redundancy and concentration risk issues

Portfolio approach by enterprises

In the coming weeks, enterprises will be using this framework to:

  • Triage between critical and non-critical IT spends
  • Build their blueprints for how they will reallocate budgets and engage with vendors
  • Identify new scope and financial models on which they’ll engage their vendors

Watch this space to see how this playbook evolves. If you have any questions or ideas on other approaches, please write to me at [email protected].

Impact Of Coronavirus Threat To The IT Services Industry | Blog

Clearly, the coronavirus (COVID-19) already has an impact on the global economy and broader market. Companies are cancelling conferences and events. They are closing their campuses to outsiders. Travel is restricted. And in some instances, companies impose a work-from-home policy. In the IT and BPO services industry, decision-making is stalled, and we already see clients cancelling planned contracts.

How bad is the disruption to the services industry? It will have a negative impact on revenue growth in the next quarter (ending in June 2020) and potentially in several quarters to come. New projects will be postponed or cancelled. This is because, first, companies simply cannot buy complicated services without some form of travel. Second, any large initiatives require executive support and energy, and they won’t have time to push contracts forward during the next few months.

Read more in my blog on Forbes

Visit our COVID-19 resource center to access all our COVD-19 related insights.

Task Cut Out For Rishad Premji: Match Wipro’s Growth With Industry’s | In the News

Wipro, under chairmandesignate Rishad Premji, faces a key challenge of matching industry level growth, after the IT services company struggled with client bankruptcies, bad market bets and acquisitions over the past few years.

Although Wipro hived off its cloud business, restructured its India operations and bet on businesses that leveraged the gig economy workforce to deliver services, the effort is still work in progress. “Challenges for Wipro remain, it must continue to address portions of its business which are underperforming, while moving quickly to build the new digital business which is its future,” said Peter Bendor-Samuel, chief executive, Everest Group, a global IT advisory firm. Rishad has been “carefully groomed to take his father’s place,” he said.

Read more in The Economic Times

Cognizant’s Head of Industries & Consulting Prasad Chintamaneni Resigns | In the News

Global IT services and consulting firm Cognizant has seen its fourth executive resignation this month, with the President of the firm’s global Industries & Consulting vertical Prasad Chintamaneni leaving the firm. He was recently tasked with provisionally managing the Banking & Financial Services vertical as well.

CEO at market research firm Everest Group Peter Bendor-Samuel added, “With a new Chairman of the board and CEO, Cognizant is changing out its senior management team as it puts distance from the ill-advised Elliot influenced commitments of the last two years. Furthermore, the senior Cognizant team has had a great run and accumulated significant wealth in stock which can best be sold while they are no longer insiders.”

Read more in Consultancy India

What Does the Recent TCS Lawsuit Mean for the Company and IT Sector | In the News

India’s largest IT firm TCS was recently in the news for a trade secret theft case filed by US-based tech firm CSC.

Yugal Joshi, Vice President, Everest Group, a consulting firm, agrees that IP charges are not uncommon. However, Joshi pointed out that most service providers do deliver platform-based services and therefore need to further enhance their governance mechanism. In addition, they need to further educate their workforce on enforcing such a mechanism.

Read more in Money Control

‘IT Firms’ Margin Stress To Continue | In the News

The Indian IT business is getting more commoditised, resulting in stiff competition and lower margins in legacy business, according to industry experts.

Peter Bendor-Samuel, CEO and founder of Dallas-based research and management consulting firm Everest Group, says, “We expect margins of big Indian (IT) service providers to continue to erode. We believe that digital is less profitable than the traditional labour arbitrage model.”

Read more in The Hindu

Indian IT Services Firms Are Strengthening Consulting Practice | In the News

As new technology services emerge as the area of focus for global IT (information technology) industry, with clients increasingly demanding customized solutions, Indian IT services firms are strengthening their consulting practice.

“The recent acquisitions that Infosys has made in this (consulting) area are proof of the commitment that the IT firm is making to build a successful consulting business,” said Peter Bendor-Samuel, founder and CEO of global research firm, Everest Group.

 

How Tech Mahindra Missed the Growth Bus After Satyam Acquisition | In the News

In 2009, before things fell apart, Satyam Computer Services was more than twice the size of Tech Mahindra. Then among India’s top five IT firms, its strength lay in the enterprise segment. Tech Mahindra, being a niche player, derived its revenues almost entirely from the telecom sector. There was almost no overlap and no synergies. An important development, however, would pitchfork Tech Mahindra into the limelight.

Other technology firms, though, scaled up faster during this period (see box), with analysts saying Tech Mahindra had the potential to overtake HCL to the fourth spot if revenue growth had not slowed. In 2011, HCL bought Axon, a British consulting company, aggressively pursuing clients and focusing on growth at the cost of margins. The results paid off, with FY18 revenues of about $8 billion. “They (Tech Mahindra) could have scaled the enterprise business better,” says Pareekh Jain, founder, Pareekh Consulting. Even in its traditional telecom business, loss making contracts in its unit Lightbridge Communications Corp (LCC) hit Tech Mahindra, while the company also rejigged its legacy contracts in other verticals. The firm had to also face public wrath when an audio recording of a person who was being sacked went viral, forcing chairman Anand Mahindra to intervene. “Tech Mahindra was a little late to investing in and building digital capabilities, but they are trying to move faster now,” says Chirajeet Sengupta, partner, Everest Group. “Most companies are moving to a mix of a services plus IP-led business model. The company is experimenting with this approach…”

Read more in Economic Times

Long-drawn battle with L&T may hurt Mindtree: Analysts | In the News

The major risk in L&T’s battle to take control of Mindtree is the process dragging on and hurting the Bengaluru-headquartered IT firm’s business, analysts said, even as they opined that cultural issues could be managed.

“In this case, it will be important that this process does not drag on but is brought to conclusion quickly. If the process drags on and generates substantial bad press, it can affect future growth,” Peter Bendor-Samuel, CEO of IT consultancy Everest Research, told ET. “Having said that, we have found that clients are quite sticky and will normally give new management time to prove itself.”

Read more in The Economic Times

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