Tag: Syntel

Goldilocks-Sized Service Providers | Sherpas in Blue Shirts

Businesses today actively seek — and happily find — a different kind of service provider. Like the fairy tale Goldilocks sizing choices among the three bears, they find some providers are too large, some are too small, but others are just right. The just right players are growing spectacularly. But I believe it’s mainly due to shared characteristics beyond their size. It’s important to understand their value proposition, as they are a competitive threat to other service providers — even large ones that are currently doing quite well against the market.

So let’s start with the size of these high-growth just-right companies. They are tier-two, mid-sized firms ranging from $500 million to $2 billion. Often their growth is in the high 20s.

We’re seeing this segment outperform large providers across both IT and BPO. For example, EXL and WNS are growing faster than the big boys in BPO — Accenture and Genpact, Likewise in IT, Syntel and Virtusa are growing faster than the industry leaders, Cognizant and TCS.

I don’t want to take anything away from the “just right” firms’ hard-won performance in terms of aggressiveness in sales. But there is an important aspect to their growth. When we see a segment like this growing better than the large, mature firms that were driving growth and profitability, there is something about the segment that is beneficial, something beyond just well-run companies that have hit a niche or an air pocket where they’re going up.

That “something” driving their high growth is the change in the buying community. For the past five or six years, buyers rationalized their portfolios. They reduced the number of service providers they used. Now we’re in a climate in which they are looking for challengers.

It’s not that buyers are backing away from large service providers, but they seek more intimacy and less churn in their service delivery. The large firms have really pushed their factory model or offshore pyramid model hard to keep their margins up. They want providers that are smaller, more committed to addressing their needs and that will give personal (even CEO) attention. They are also looking for price challenges and rare skills. And they believe they can find all of these characteristics more easily in the companies among the providers in the $500 million to $2 billion range.

At $500 million, these providers are large enough to be highly credible, have deep benches, and have vertical industry expertise. And below $2 billion they still provide that personal touch to their customers. Their size is just right.

Another growth factor for the just-right size of providers is that they are growing off a small base. This is a dramatic contrast to a large provider such as TCS trying to grow off a base of over $10 billion a year. It’s much harder to grow a large base quickly than to grow a small base quickly.

Unlike the story of Goldilocks, there are more than three “bears” — midsized providers — in the market. And that’s a good thing, as they’re challenging the market with the attributes the buyers want at the moment (more commitment, less perceived churn, and more personal attention). And big profitable buyers with large spend are looking for these challengers.

Photo credit: Daniel Rocal

Life in the Mid-Tier IT Services Log Jam | Sherpas in Blue Shirts

When Harvard Business School professor Michael Porter said, “Operational excellence may be at the heart of much of today’s business thinking, but it has little to do with what it takes to make a company truly successful,” he could easily have been speaking directly about and to the mid-tier IT service provider community.

Think about it. All 15-20 players in this US$100 million+/sub billion dollar revenue segment have gotten the basics of low costs and high productivity right. Not much differentiation there. In a space as crowded as the malls of Mumbai on a Saturday evening, the key to success lies in finding and strongly demonstrating a truly distinctive market position in terms of business mix, sales and account management capabilities, strategy and leadership. Let’s look at several examples for corroboration.

mid tier IT service provider community feb 2011

MindTree, with a three-year CAGR (2007-2010) of ~25 percent and EBITDA margins at 20 percent, has been doing well. Further, more than 50 percent of its revenues come from high margin and high growth non-ADM services such as product engineering. With recent IT infrastructure management service deal wins amounting to over US$70 million, MindTree is in the news for all the right reasons. Its strategic focus on building an engineering and R&D services business, and a leadership team that has largely remained consistent and reputed, have ensured it is one of the front-runners making a differentiating mark in this space.

In the same cluster, it is clear that Syntel is the biggie among the small guys. It is also one of the few companies to have seen steady growth through the turbulent 2008 – 2009 time period. It has had a three-year CAGR of 16 percent and EBITDA margins ranging between 25 and 30 percent. More than 60 percent of its revenue is in the BFSI sector, and ~25 percent comes from non-ADM segments; its successful joint venture with State Street Bank accounts for more than 20 percent of its revenue; and it has a consistent contribution at ~20 percent from American Express…these are only a few of the factors going right for Syntel. With a strategic focus on BFSI and healthcare, both high-growth, high opportunity verticals, it seems to be attacking the market in the right direction.

On the lower end of the spectrum is Headstrong, a privately held company, small even in size as compared to US$0.5 billion+ players like Syntel. A cursory skim through the company’s financials does not reveal anything incredible – growth bordering around 17 percent, and EBITDA margins in the range of 15-17 percent. However, the company does have some distinctive strengths. An active provider of IT services in the sell-side capital markets, it garners more than 70 percent of its revenue from this space. It is also foraying into business consulting, where most of its activity comes from Japan. With a capable leadership, Headstrong is a great example of a niche-focused company driving success.

The last one we’ll look at here is Hexaware, a company whose current financials are not very impressive. BFSI exposure of over 50 percent of revenue battered it during the chaotic times of 2008-2009. Yet that focus is likely to help it rebound as the markets recover driven by BFSI. Further, Hexaware’s considerable presence in enterprise services (~28 percent of revenue) and sizeable European focus (almost 30 percent of revenue) does make it a differentiated play in this market. However, its focus on eight areas may not be a very prudent strategy given its sub-US$300 million revenue base.

Clearly, these companies demonstrate the key ingredients of success through differentiation — a focus on high growth business segments like BFSI, healthcare and product engineering, consistent leadership, account management and mining capabilities, and delivery competence in terms of tools and domain knowledge.

However, given their sizes and the cluttered nature of the IT services sector, the industry is eagerly awaiting a game-changing move. Against the backdrop of the Patni-iGate merger, the market is abuzz with the big question, “What’s next in this space?” Is it a consolidation of complements following closely on the heels of Patni-iGate? Is it an acquisition of one or more of these companies by an Indian Tier-1 player? Revival of the markets, and the presence of maturing private equity investments in several of these firms, continue to fuel to these questions.

The rumor mills are making the rounds with news of assets in play on the deal street. This industry definitely seems to be heading toward some very interesting times.

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