Competitive analysis of it service firms

Competitive Analysis of IT Service Firms

By Sayan Maiti DATE : 6th June, 2013

Competitive Analysis of IT Service Firms Page 1

IT Services Industry Overview

Source : Gartner IT Spending Forecast Mar’13

Globally IT industry is going to grow steadily despite a weakening global economy.

“The Nexus of Forces — social, mobile, cloud

and information — are reshaping spending patterns across all of the IT sectors” – Gartner.

Consumers and enterprises will continue to purchase a mix of IT products and services – however the mix is going to change radically in the future e.g. transitions from PC’s to mobile or licensed software to cloud.

1.50%

4.50%

4.90%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

820

840

860

880

900

920

940

960

980

2012 2013 2014

Val

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s in

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Bil

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oll

ars

Global IT Services Spend IT Services Spending

Growth %

The top five Indian providers grew 13.3% exceeding the worldwide IT services industry growth of 2%. Revenue contribution from project-based and staff

augmentation deals has continued to decline for the top five Indian-based providers, and the outsourcing service line component has steadily increased.

Cognizant displaced Infosys to become the second-largest Indian IT services provider in 2012-13.

Source : Gartner IT Spending Forecast May’13

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2000

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12000

14000

TCS Cognizant Infosys Wipro HCL

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Projected Worldwide revenues- Indian IT services

2011

2012

2013

20.10%

6.60% 7.60%

Growth Rates over 2 years

18.10%

15.2%


Key Business Drivers and their linkages Ability to get repeat business

from existing clients

Ability to bid and win new contracts

Ability to grow inorganically

REVENUES Total Hours Billed Billing Rates

No of Employees

Utilization Rates

Hours per employee per year

Onsite/ Offshore mix

Competition Position in value chain

No of billable employees

Total no of employees

MARGINS Ability to control employee costs

Attrition Rates

CASH FLOWS Timely management of

receivables and payables Ability to manage capital

and generate adequate ROI

Ability to control SG&A Expenses

Client Targeting

Business Development

Brand Building

X X

/

Key Business Drivers

Getting new/renewed projects from clients

Ability to cross sell and up sell

IT Service Firms - Worldwide

Understand the client’s problem and suggest

solution ( Business Consulting)

Take over implementation

and cross sell services

Sell technology development for

client as a proprietary

product

Additional revenues for

maintenance of products


Competitive Analysis - IBM Key Drivers Performance

Repeat Business from customers Presence in IT & ITES, H/W and Software helps them serve the customer in many ways

Inorganic Growth 60+ acquisitions since 2001 and over 2-3 acquisitions in 2012-2013

Bid and win new contracts Presence in all IT segments gives them the flexibility to bid for complete projects starting from consulting to implementation.

Billing Rates Very high billing rates to the order of $56 per hour

Employee Costs High attrition rates ~15% ( Overall IBM )

SG&A Expenses Around 22-25% of Revenues which is high

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Competitive Analysis - IBM STRENGTHS

Technology firm with a century-long history and operations across the globe.

Strong presence in high-growth emerging markets such as BRICs.

Diversified portfolio of products and services across computer hardware, computer software, IT services and IT consulting.

Has end-to-end provision capability and additional strength of higher margin software and services.

WEAKNESS Large number of

employees and high level of R&D spending limits flexibility.

Communication across different countries is challenging in view of the size of the company.

OPPORTUNITIES

Possible acquisitions and merger opportunities that the company can seize and increase its market share greatly.

Can benefit from emerging market demand growth via presence in BRICs and frontier markets as enterprises modernize and governments invest in infrastructure.

Strong brand aids acquisition and retention of high-value customers.

Investments in cloud, big data, security and analytics offers medium-term growth prospects in high margin activities.

THREATS Increasing competition

in services market from major players including Dell,

Accenture, HP and Oracle.

Heavy dependence on Microsoft in computer services division could be a weakness should Microsoft's strategy change

SWOT

Started with Mainframes and then into PC’s, Copiers, telephone’s, satellites and now they are into mostly software and services. More than 80% of the companies revenues comes from software and services (50% +)

“Technology companies must pursue constant market expansion and diversity to stay alive and relevant” – Steve Ballmer

THE NEXT-GENERATION IBM IBM acquired Softlayer Technologies for around $2 billion. This will make IBM one of the biggest players in the cloud computing industry. The bottom line is that they have recognized that almost everything in the future will be delivered through cloud and they gain early expertise through this acquisition.

IT Service Firms - India

Focused on volume growth using cost as a leverage and has the largest workforce among IT service companies.

TCS has adopted a model of going into new geographies and new service lines. ( Risk appetite is high )

In the year 2008 it made big acquisition to the tune of $512 million all by cash to buy out Citi Global Services. This helped TCS to become number 1 in BPO service. Recently TCS acquired CRL which would allow it to offer more differentiated services to its global clients.

Growth was led by markets like the UK and Europe, growth markets like India, Asia-Pacific, Latin America and the Middle East performed well.

While financial services vertical’s relative performance is not as expected, retail, manufacturing and telecom have performed well.


Competitive Analysis - TCS Key Drivers Performance

Repeat Business from customers More than 95% of TCS revenues comes from repeat business

Inorganic Growth 16 Acquisitions since 2001 and 2 recent acquisitions

Bid and win new contracts $200 M contract from India Posts ( Automation ) , $43 M from Norway Posts, 350 M Pound Network Rail Contract ( IT Transformation ) – Have won big contracts recently

Billing Rates $33 per hour ( FY 2012) on the lower side

Employee Costs 11.4% Attrition Rate, Employee cost as a % of Revenue is 38% and among the lowest among peers

SG&A Expenses SG&A cost is 18.7% and is on the higher side among peers

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43%

13% 14%

16%

4% 5% 5%

TCS Verticals Breakdown

BFSI

Telecom

Manufacturing

Retail

Utilities

Healthcare

Others

Strategy for long term growth

Customer Centricity – For repeat business

Full Service Capability – Present in all segments and geographies

Global Network Delivery Model – Facilitate cost arbitrage across geographies

Strategic Acquisitions – For quick growth across segments and geographies

Non Linear Business Models – Strategies to ensure growth without increasing the head count.


Competitive Analysis - TCS

STRENGTHS One of the world's largest IT

services companies. Increasingly viewed by customers in the same league as IBM and HP.

Large international workforce. Driving BPO services in India. Diversified revenues across

regions, services and verticals.

WEAKNESS Derives large proportion of

revenues from developed markets, especially the US, that are facing economic difficulties.

Lags some peers and multinational rivals in high-end consulting offerings.

• Heavy exposure to banking, financial services and insurance vertical.

OPPORTUNITIES

Product portfolio expansion enables TCS to move into end-to-end services market, benefiting revenues and margins.

Positioned among all Indian vendors to disrupt the global league of IBM-HP-Accenture.

Geographical expansion into relatively untapped regions.

Potential for strong revenue growth from home market in India.

THREATS Lower outsourcing costs in

neighboring South Asian markets could see contracts move away from TCS.

People-led linear growth means Cognizant can beat it.

There are no visible leaders beyond N Chandrasekaran

Vulnerable to global economic climate, with demand from developed market financial institutions still a key part of its revenue mix.

SWOT

Growth Strategy followed by Cognizant is as follows

1. Gets into new areas, and putting the full force of organization behind it.

2. Acquisitions in key spaces to achieve scale or to access customers faster.

3. Aggressive strategy for acquiring market share.

Cognizant has been constantly adding more businesses to its portfolio – in terms of new industry verticals, in terms of new solutions and new markets, and has been pulling all punches to scale them up fast.

Cognizant has promised the market a lower margin compared to its peers, in return for higher growth.


Competitive Analysis - Cognizant Key Drivers Performance

Repeat Business from customers 90% of business comes from existing clients

Inorganic Growth 17 Acquisitions since 2002 and 1 in 2012. Cognizant is aggressive in inorganic growth.

Bid and win new contracts $330 M ING US, Network Rail $350 M ( shared among 5 companies), Philips ( Business Transformation )

Billing Rates Around $35 an hour

Employee Costs Attrition rate of 11% and lowest among peers

SG&A Expenses SG&A expense of 21% is highest among peers

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42%

20%

25%

13%

Cognizant Verticals Breakdown

BFSI

Manufacturing,Logistics and Retail

Healthcare

Media,Entertainment andTechnology

BIG 5 STRATEGIES Closer to the clients – Spends heavily on sales and marketing which has helped win more deals. Lobbying – Spent 1.95 M USD last year the highest and more than the sum total spent by all IT companies. ( Wipro - $.29 M, Nasscom - $ .115 M, Infosys < $5000 ) Two in a box Strategy – A relationship management team and deep industry expertise are assigned to every client. Consulting Practice - CBC, the consulting practice, has over 3,300 consultants responsible for business, strategy and operations consulting. This investment has helped increase its mindshare with clients, thereby driving market share, and also win and execute large-scale transformation deals. Investment in SMAC (Social, mobile, analytics and cloud) - Delivering SMAC stack related work for over 60 per cent of the top 100 customers.


Competitive Analysis - Cognizant STRENGTHS

One of the fastest growing companies in the business of outsourcing.

Concentration in 4 key verticals helps focus investments.

Price competitiveness US-centric model helps in

positioning. High wallet share of fewer large

customers ensures growth even during crisis.

Blends IBM's depth with Accenture's front-ending capabilities in its model.

WEAKNESS Nearly 75% of business from

the US could turn risky. A laggard in BPO business Lags peers in infrastructure

management business.

OPPORTUNITIES

Has beaten Wipro and more recently Infosys to be the second biggest player in IT Services Industry in India. TCS could be next.

Growing Europe business to mitigate US risks.


THREATS Profit Margins among the

lowest in the top 5 players. Shows that they have sacrificed their margins for growth.

Pace of growth could cause fatigue among leaders.

Will make for a good acquisition target for an IBM or Accenture in future.

Over-dependency on US could affect prospects during recession.

SWOT


Competitive Analysis - Infosys Key Drivers Performance

Repeat Business from customers Repeat business percentage dropped from 98% in 2012 to 95% in Q4’13

Inorganic Growth 3 Acquisitions since 2000. Acquisition of Lodestone Management Consulting in September’12

Bid and win new contracts BMW Infrastructure Management, India posts rural integration ($20 M), Rwest ( IT Transformation )

Billing Rates $43 per hour ( FY 2012 ), On the higher side

Employee Costs 15-16% Attrition Rate, Among the highest as compared to peers, Employee cost as % of revenue is 49% and highest among its peers

SG&A Expenses SG&A expenses is 11.6% and lowest among its peers

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35%

10%

21%

18%

6% 6% 4%

Infosys Verticals Breakdown

BFSI

Telecom

Manufacturing

Retail

Utilities

Healthcare

Others

Infosys' strategy of charging a premium for its services (as compared to its peers) is putting strain on its clients who are pressured to cut costs in the backdrop of a slowdown. ( e.g. Infosys doesn’t favor reverse auction processes )

Infosys has always focused on the high margin business. For this, it has concentrated on the business from the developed markets such as the North America and the Europe. However it has ended up ignoring emerging markets like India and its revenue % from the domestic markets ( 2.1 % from India in 2012) is among the lowest.

Infosys also gets a higher share of revenues from Consulting which has helped it maintain its margins.

Infosys has better distribution of verticals and it has started focusing on healthcare which is an emerging sector.


Competitive Analysis - Infosys

STRENGTHS One of the world's renowned

IT services companies. Early positioning as a high end

differentiated player. Diversified revenues across

regions, services and verticals.

WEAKNESS Large proportion of revenues

from developed markets, especially the US, that are facing economic difficulties.

Lagging peers in making strategic, 'game-changing' acquisitions

Consulting business has not delivered the results as expected.

OPPORTUNITIES

Best positioned to replicate the Accenture model from offshore

A game-changing acquisition in a new geography could help the company raise its profile.

Profit Margins among the best in the industry which offers cushion for further growth.


Potential for strong revenue growth from home market in India.

THREATS Ongoing visa abuse case and

federal investigations in the US could affect brand and business.

Management transition from founders to professionals will bring uncertainty.

Vulnerable to global economic climate, with demand from developed market financial institutions still a key part of its revenue mix.

SWOT

Infosys 3.0 Strategy 1. Identification of seven game-

changing trends that form the innovation framework.

1. Digital Consumers 2. Emerging Economies 3. Healthcare Economy 4. New Commerce 5. Pervasive Computing 6. Smarter Organizations 7. Sustainable Tomorrow

2. Products, platforms and

solutions was set up as a dedicated organization to focus on innovation-led business growth for our clients.

3. Infosys manages the portfolio of software assets and creates offerings around them

A very futuristic looking strategy but Infosys needs to make sure that it implements it faithfully.

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2009 2010 2011 2012 2013

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Comparison of ROE for 5 years

Infosys

TCS

Wipro

HCL


Indian IT Services Industry Ratio’s Comparison

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2009 2010 2011 2012 2013

P/E

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Comparison of P/E Ratio for 5 years

Infosys

TCS

Wipro

HCL

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Comparison of Profit Margins across 5 years

Infosys

TCS

Wipro

HCL

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Comparison of Net Working Capital as % of Sales

Infosys

TCS

Wipro

HCL


Indian IT Services Industry Overview

Market Penetration Product Development

Market Development Diversification

Old PRODUCT New

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Despite the global downturn most the Indian IT service companies have continues to register good growth.

Companies like HCL and Cognizant are able to grow faster because of their aggressive diversification strategies along with acquisitions. In this process they have sacrificed their profit margins for growth.

Companies like Infosys have focused on growing around core areas through an inorganic route.

Companies like TCS and Wipro have taken the inorganic route for growth through mergers and acquisitions looking to expand their customer base.

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30%

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2010 2011 2012 2013

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Revenue Growth for IT Service Firms

Infosys

TCS

Wipro

HCL

-10%

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50%

2010 2011 2012 2013

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PAT Growth for IT Service Firms

Infosys

TCS

Wipro

HCL


Future Growth Engines for IT Service Companies

Ability to manage the 6 key risks will be important for growth

1. Exchange Rate Risk – Using Derivatives and other hedging instruments

2. Political Risk – Increase use of lobbying as an instrument to prevent such risks

3. Geographical Risk - Pushing for growth in new geographies like Japan, Australia & Middle East

4. Competition – Acquisition of companies in competing countries like Philippines and China

5. Vertical – Increase presence in verticals with expectations of high growth e.g. healthcare

6. Service Line Risk – Have a presence in both high margin areas like consulting and package implementation as well as low margin areas such as custom application development

Improvement in utilization rates from current levels of 70% to 80% or more by pooling of employee base for different tasks. However to do this two things need to be done –

Training in diverse skills for the high performers i.e. consulting + programming and will necessitate higher training costs.

Prevention of attrition among this group of high performers ( and or middle management ) and utilizing them to maximum effect.

Inorganic growth through M&A needs to be done both for gaining expertise and gaining entry into the European and Emerging Markets. However proper diligence needs to be done to prevent integration issues as seen in most cases.

Combination of fixed price contracts and time and material contracts is needed to grow revenues by attracting customers.

THANK YOU

Sayan Maiti Mail : [email protected] Phone : +91 - 7389464800