Tag: TCS

Pondering TCS’s Modest Morsel | Sherpas in Blue Shirts

TCS posted industry-leading financial results in its FQ4 2013 report. But what caught my attention was its quarterly guidance to investors where management stated they believe TCS can add “a few billion dollars” from digital as a growth driver. Really? Just a few billion? We believe TCS is substantially underplaying its digital hand.

Management talked constructively about taking the digital business area seriously. But they are guiding to only modest aspirations, almost a mere morsel of the market share potential in the seismic disruption cloud and digital are creating.

Although we recognize TCS’s need for measured conservatism and modesty in investor guidance, we at Everest Group feel no such need. We believe TCS is strongly positioned to exceed the modest goal of a few billion. Here’s why: From our industry analysis, we predict that 30-50 percent of workloads will migrate from traditional infrastructure models to cloud-based models.

As this occurs, we expect that TCS will garner substantially more than a few billion dollars of revenue.

Indian IT Companies Look for Start-ups to Drive Competitiveness | Sherpas in Blue Shirts

“At times, Indian IT service providers fall behind expectations in new and exciting technology areas that extend beyond the traditional outsourcing paradigm.”A large MNC buyer of IT outsourcing services

With traditional models of IT outsourcing facing increasing competitive pressures, Indian service providers are looking at a multitude of solutions to drive success and retain competitive advantage. Chief among these are emerging technology solutions from start-up firms. Service providers have realized that to compete and stay relevant in the changing paradigm they have to focus on developing niche and specialized products, boost efficiency, and develop IP. Primary traction themes include data analytics, big data, cloud computing, and enterprise mobility. Niche start-ups with innovative technology solutions help providers augment their existing service offerings.

Increasing Traction

This echoes the strategy often adopted by multinational technology firms including Cisco, Microsoft, Yahoo!, Intel, and SAP, which back a plethora of emerging firms. Indian providers are now looking to invest and form alliances with ventures in niche domain areas. This is a dramatic shift in the status quo, as Indian IT providers have historically paid minimal attention to start-ups due to their own lack of a proper ecosystem to facilitate such transactions and a fairly low-risk appetite. Yet, of late, they have increasingly set up funds and accelerators dedicated to tech start-up initiatives.

Company

Mandate

Notable Involvement in Start-ups

Infosys

Has set up a US$100 million fund to invest in start-ups, besides spotting and funding internal innovation

OnMobile, Yantra Corp

Tech Mahindra

Has established a US$50 million fund exclusively for investments in global technology start-ups

Launched an initiative – i5 Startnet – to scout for firms in cloud, mobility, networking, and vertical-specific technologies

MindTree

Created a team led by the Chief Strategy Officer to look for start-ups and next generation solutions

7Srata

Wipro

Actively picking up stakes in cloud and big data firms

Opera Solutions, Axeda

TCS

Formed its Innovation Labs and Co-Innovation Network (COIN) to bring together academic institutions, start-ups, venture funds, strategic alliance partners, multilateral organizations, and clients

iKen Solutions, Perfecto Mobile, Computational Research Laboratories

Cognizant

Set up an emerging business accelerator

Incubated 20 ideas over the past 18 months

 

Changing Ecosystem

Slowly, but steadily, the ecosystem is developing to encourage such start-ups. For instance, in June 2013, NASSCOM announced a program to fund and incubate 25 start-ups to be established by young Indian entrepreneurs. Additionally, it held an event that brought together promising technology start-ups and IT service providers including Infosys, TCS, Cognizant, Wipro, and MindTree. The gathering was an effort to provide young start-ups a platform to showcase their capabilities, connect with leading service providers, and generate investor interest.

Quid Pro Quo

Increasing competitive pressures and changing market dynamics have made Indian service providers truly value innovation, viewing it not just as a buzzword but rather a core operating lever to drive growth. Partnering with start-ups is an effective method of achieving innovative solutions without the allocation of time and resources they can ill-afford. And the mutually beneficial relationship between the two segments can lead to sustainable ecosystem in the long haul.

What’s Differentiating about TCS and Cognizant? | Sherpas in Blue Shirts

It’s earnings season for the outsourcing industry. So far, we’re seeing mixed results: modest growth in most companies (including Accenture, IBM, Infosys and Wipro ) and strong growth in a few. Notably, Cognizant and TCS are pulling away from the pack. Or as my old running coach would say, they are showing the competition a clean pair of heels.

But it’s not just the results of the recent quarter; this is the pattern for several quarters, and we’ve come to expect strong performance from both Cognizant and TCS. This is evident in organic growth in their existing accounts as well as in new client logos. On the surface, they look the same as everyone else in the industry in that they have very similar offer sets. But there are four notably different aspects about these two providers.

1. Early industry orientation

Cognizant and TCS are out-executing other service providers, because they have a much more mature industry orientation than their competitors. They were early to build an industry focus, and this had a significant impact. Where others such as Infosys and Wipro are still refining their industry orientations today, Cognizant and TCS are harvesting the benefits of in-depth relationships and relevance from having had an industry focus for several years.

While other providers are still building out their industry capabilities, Cognizant and TCS have fully formed industry units that are already perceived as more relevant and having the capabilities to be more impactful. With this differentiation, they have a big head start that is a wide gap not easy for for others to fill quickly.

2. Industry selection

Cognizant and TCS made wise decisions to focus on the largest industry verticals: financial services and healthcare. Both of these verticals are large and have been high-growth areas, experiencing a lot of substantial disruption, which results in a wealth of opportunities for market shifts.

In addition, these two industries tend to reward providers that specialize in them and punish those that don’t. They like to think of themselves as industries apart and prefer to buy from people who are dedicated to them more so than to other industries.

3. They invest more in their clients 

Although Cognizant and TCS take different approaches to client investment, both of these high-growth firms have more people on site at their clients than their peer competitors, and these resources are often in addition to the contractually guaranteed numbers. In other words, they have more people building client relationships, uncovering new opportunities and building a deeper understanding of how their clients’ businesses work. In a virtuous cycle, greater investments in client-side resources lead to greater intimacy, which in turn leads to more work, which in turn leads to greater client understanding and greater intimacy.

4. They listen effectively

Like the rest of the industry, Cognizant and TCS are still adjusting to the new market reality where business stakeholders play an increasingly stronger role than CIOs in driving new spend on technology. But both of these providers are taking a more humble sales approach for this market; instead of pushing offerings, they are listening to and engaging with business stakeholders about their emerging needs. They are performing better than their competitors in this regard. As a result, they can identify opportunities their competitors miss and, where they are in competition, appear far more credible and relevant.

The net result of the above four aspects is a very positive differentiation in the minds of their customers, so these providers often are the first choice of a customer when thinking of new work.

Like the clean heels of a fleet-of-foot racer, Cognizant and TCS’ adaptation to the new empowered business stakeholders’ approach to buying, together with their longstanding in-depth investment in industry capabilities, enables them to run straighter and encounter fewer obstructions in their market races.

The Changing Pecking Order and Emerging Irrelevance of the WITCH Group Term | Sherpas in Blue Shirts

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.

WITCH ranking

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?

  • TCS is continuing to excel on the back of its broad-based growth and aggressive penetration in the European market
  • Cognizant’s approach of keeping margins lower via a higher investment in sales and marketing spend is fetching  benefits
  • HCL is capitalizing well on the ongoing churn in the industry, and is exploiting the anti-incumbency against the traditional service providers. While this makes HCL’s growth narrow and focused largely on infrastructure services, it’s paying off for a short-term strategy
  • Infosys and Wipro are struggling with their internal, company-specific issues, (i.e., strategic confusion, weakening brand recognition, legal issues, and senior level exits).

The ultimate questions are:

  • Will the irrelevance of the collective WITCH term become more visible in the future? Will the different strategic gambles of each service provider lead to huge variances in their success rates?
  • Will the return of Infosys’ retired co-founder and former chairman Narayana Murthy help it make a comeback to the levels of TCS and Cognizant?
  • To what extent will the ongoing challenges of a few of the WITCH group players create opportunities for mid-sized players – such as Genpact, one of the key players in the FAO space, and Tech Mahindra (the combined entity) which has credible enterprise applications and infrastructure management offerings – to capitalize on their niche capabilities?

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.”

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.

TCS’s BPO Deal with Friends Life = The $2 Billion+ Gorilla in the Insurance Industry | Sherpas in Blue Shirts

On November 9, 2011, TCS announced that its U.K. subsidiary, Diligenta, had inked with U.K.-based Friends Life a $2.2 billion outsourcing agreement, spread over 15 years, for administration of 3.2 million life and pensions insurance policies, as well as its closed books line of business and much of its corporate benefits business.

While the size of the contract itself is indeed eye popping – although that the deal came to fruition isn’t surprising to industry insiders given Friends Life’s heritage – several other factors also make it significant.

  • This is the largest deal ever in the insurance BPO segment, one of the largest in overall BPO, and the second largest ever awarded to TCS, surpassed only by its 2008 $2.5 billion acquisition of Citibank’s India captive (and its ongoing service agreement with the bank, which was part of the deal)
  • This engagement also makes TCS the second largest provider in the insurance BPO space, effectively leap-frogging it over EXL, WNS, Genpact, and Accenture. And while the deal will significantly boost TCS’s and Diligenta’s revenues, in the short term, it will likely place a drag on their bottom line
  • The deal demonstrates that Indian providers are moving away from their previous “start small and grow the business” strategy and are now pursuing and winning mega deals – and there aren’t many such deals to be found in any provider’s new business portfolio these days
  • The deal sends a clear signal that outsourcing industry-specific functions is becoming increasingly attractive to buy-side organizations
  • The deal is another example of the convergence of IT and BPO, as TCS/Diligenta will be providing not only BPO services, but also IT and infrastructure services, and moving a significant portion of Friends Life’s policies to its BaNCS technology platform

Of course, the deal also raises questions. Why did this deal come to be signed? What does this mean for the United Kingdom as a market for insurance BPO? How will this deal impact TCS and Diligenta? And finally, given the backdrop of this deal, what are the key developments to watch out for in the insurance BPO industry?

We will continue to update you on these and other issues and developments in the insurance BPO market as they happen.

For more details on the TCS/Friends Life deal, read Everest Group’s Breaking Viewpoint The Two Billion Dollar (and some more) Giant: Implications of TCS’s Insurance BPO deal with Friends Life.

Business Process as a Service (BPaaS): New Houses in Shabby Neighborhoods | Sherpas in Blue Shirts

The BPO industry has long been heralded by McKinsey & Company and NASSCOM as the next growth engine of the global services industry. And for years, McKinsey has pointed to the theoretically huge, unaddressed services space that, in theory, could be open to labor arbitrage. But the reality is that the BPO industry itself is searching for the next big growth driver, as it continues to disappoint investors, providers, and customers as a source of additional value beyond labor arbitrage. This relentless, if misplaced, faith in the segment’s value prospects reminds me of the modern proverb attributed to Yogi Berra, “In theory there is no difference between theory and practice. In practice there is.” 

However, the newly built BPaaS homes and those under construction may help spruce up the increasingly shabby BPO neighborhoods. BPaaS is attractive as it has the potential to substantially reduce a client’s TCO when compared to a traditional BPO model. It also promises a reduced capex and a utility-based opex. But perhaps the biggest benefit is the nirvana state of standardization and process harmonization that it can offer.

So, who’s building? And where?

Capgemini made a significant play in the procurement BPaaS space with its acquisition of IBX last year. And its on-demand platform already boasts several big tickets clients including Kraft, Novozymes, and Hilti.

TCS now has a dedicated platform-based BPO business division that offers clients several platforms across F&A, procurement, HR, and analytics. In fact, analytics could emerge as a major area for BPaaS solutions given the current low install base of legacy technologies in the space and organizations’ increasing yearning to utilize data for smarter decision making. And the exponential rise in unstructured data from social media, mobile users, and others is creating a space ripe for a BPaaS play.

BPaaS is also having a major impact on the HR function with platform-based HRO offerings from firms such as ADP. In fact, nearly 70 percent of all multi-process HRO contracts signed in 2010 had a platform-based solution, and propelled the adoption of HRO in the mid-market. BPaaS solutions catering exclusively to the mid-market, such as TCS’ iON, are also starting to emerge in other business areas.

On the other hand, BPaaS is not the be-all, end-all silver-bullet as most organizations are not looking for disruptive changes to their existing technology landscape. There is no big driver to a BPaaS model if the basic functionality already exists and if the installed base of such technologies is high. F&A BPO is one market in which BPaaS has not really taken off. Hence, the technology play in F&A BPO is largely around plugging gaps with point solutions or improving efficiencies with workflows.

Yes, swanky looking new BPaaS homes are being constructed in shabby BPO neighborhoods. But we still have to wait and watch how many people come and buy them.

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.

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