Who’s rising above the W-I-T-C-H hunt?

Have you been observing the fascinating scramble going on over in India for supremacy in the IT services space?  By the time this year is out, it’s highly likely that Cognizant will have leapfrogged both Infosys and Wipro to take the number two spot behind TCS:

So what’s driving this shifting landscape?

Let’s take a look at the key market-makers to understand who is breaking out of the pack…

Cognizant

Cognizant’s revenues are being fuelled by organic growth and its ability to penetrate the middle-market. For new business acquisition, we are even seeing it frequently under-pricing Tier 2 providers.  Bottom-line, Cognizant targets the business it wants and sacrifices its margins, when necessary, to win the business.  It has always operated this way and continues to do so, despite its rapidly-expanding size. And it currently has the best sales engine of all the India-centric providers… which kinda helps a lot.

Moreover, having its leadership stationed in the US keeps it closer to the clients, when it comes to marketing, selling and pricing services, in addition to structuring and organizing its operations.  While there are some super-talented leaders based India-side, being so far away from the clients is clearly hurting Cognizant’s competitors in today’s hyper-competitive market. I can’t tell you how much talent has left Cognizant’s competitors, because they weren’t allowed to take on leadership roles in the US.

That being said, Cognizant’s growth is still (by and large) directly proportional to FTEs, and it still hasn’t quite unbundled this link, which will likely hamper future growth.  In needs to “change the wheels of the car while driving” and figure out how to delineate butts-on-seats from client pricing, if it wants to continue this rapid growth story into 2013.  Having said that, we do believe Cognizant is figuring out the connections for the business side with IT solutions quicker than its competitors which are still slow to the game.

TCS

Conversely to Cognizant, market leader TCS probably has the least effective sales forces in the big-ticket outsourcing market. However, once you get past the shaky front-end, the firm has one of the strongest service delivery infrastructure of any of these providers – if something blows up, its teams will be all over it, and will leave no stone unturned to bring it back on track. However, if the client doesn’t ask, TCS doesn’t react.  Of the five, it is frequently the the most flexible on pricing and terms, and can probably win any deal anywhere in the world at any price, if it really wants: it depends on what its leadership thinks is important, what its perception of the market is, and what it needs to tell its stock-holders.  TCS is perceived by many today as an alternative provider to the Western Tier 1s, that can come in and fix messy contracts and implementations ; they will pick up a lot of the low margin, low value work that seemingly every Western Tier 1 wants out of.

Not only that, TCS is having much more success de-linking the direct correlation of revenues from FTEs: the firm has a laser-sharp focus on managed services, fixed price projects and has successfully monetized its product group. The sheer size of its referenceable client base and the executive connections of its leadership, is a huge strength.  In addition, its tunnel-vision on developing its platform-based solutions is really helping the firm move gradually away from the FTE-pricing model.

Wipro and Infosys

Wipro and Infosys, on the other hand, seem to have just lost their mojo over the last couple of years, which is directly linked to the changes at their top, and the time needed to development its new leadership talent to take them forward.   In addition, many new customers are saying “Why do we need the Cadillac when a regular Chevy will do just fine?”.  A lot of client requirements are straightforward and easy-to-service with low-cost resources.

In short, both have struggled to articulate a renewed vision for the future of IT services to encourage clients to choose them over some very, very aggressive competitors.  However, we at HfS have noticed marked attempts by both firms to bolster their fortunes with a much more assertive series of communications to market. There is a clear determination to roll out new platform solutions, and a more consultative client approach that can move them up that value pyramid, which comes in so many nice new colors and 3D views, in the new version of PowerPoint.  I would also point out that these providers are not doing badly – they are simply being outpaced by the Cognizant and TCS machines, in a commoditizing market that is slowly losing steam.

HCL

HCL is the proverbial odd one out in all of this – it had lost its focus on outsourcing until about 3-5 years when it hired in some new leaders to refocus the company. Its clear strength is in infrastructure services – borne from its past relationship with HP. Today, the firm is growing largely due to the sheer number of unconventional deals it is contracting, in addition to its aggressive pricing which is becoming a popular topic of discussion between sourcing heads. Plus, the firm has a very aggressive sales engine.  It kinda reminds me somewhat of Cognizant five years’ ago in terms if its size, thin management layer, and incredibly personal approach to client service – from the CEO and his immediate team.

HCL is another example of an Indian-HQed firm that will pick up on the poor quality provided by  WesternTier 1s.  However, the firm does need focus, polish and business development leadership to get to the table. Its operations and infrastructure team resonates well with clients, but tends to get way too far in the weeds during initial sales pitches. It needs to avoid trying to solve all the client’s problems within the first 30 seconds of meeting them.

The Final Word:  The IT services industry has reached a bifurcation point and not everyone will stay the pace

Ask an analyst to write about what differentiates IT services providers in today’s market and you have to get right into the weeds to come up with the answers.  My conclusion is simple:  both Cognizant and TCS are outpacing the Indian-centric IT services market.  And both are very different firms – Cog very sales and pricing focused, TCS very solution focused.  They’ve left Wipro and Infy a little stunned, to be honest, and they are having to go though some major changes internally to try and keep pace.  However, the market at the low-end is very commodity driven these days, and there simply isn’t the room for all these providers, let alone the dozen other major providers, HQ-ed outside of India.

Everyone wants to grow exponentially at 20%+ a year without having to make radical changes to their business models.  I predict the future is going to be less about selling the low-end work, but the more complex IT-enabled business processes that are specific to industries.  Hence, the investments the providers need to make are going to be in more consultative talent and specific technology IP.  And you can’t find all of that for cheap rates in a third-tier Indian city… these guys are going to have to look at more inorganic growth in onshore providers, clients and technology firms.  The bifurcation point has now been reached, it’s time for  these providers to make the necessary investments to continue their growth journey, or they can start look at some rather interesting case studies of providers in the Western world who failed to keep up with the times.

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18 Comments

  1. Jay
    Posted October 16, 2012 at 10:18 pm | Permalink

    Astute and insightful as always :-)

  2. Al Freeman
    Posted October 16, 2012 at 11:27 pm | Permalink

    Fantastic – and bold – analysis, Phil.

    Anyone reading this should take note – your experience and views are spot-on,

    Al.

  3. A chan
    Posted October 17, 2012 at 6:02 am | Permalink

    Great analysis.

  4. R Bagby
    Posted October 17, 2012 at 12:29 pm | Permalink

    This is a great update! It captures my experience with these suppliers perfectly. Would be interested to see this analysis extended to include the existing Tier 1 domestic providers (e.g., HP/EDS, IBM, Xerox, etc.) to see where you think the whole thing shakes out.

  5. Shuchita
    Posted October 17, 2012 at 3:39 pm | Permalink

    Resonates so well with my experience and W-I-T-C-H acronym is brilliant!

  6. BF
    Posted October 17, 2012 at 4:18 pm | Permalink

    I’m not sure your graph is correct. Cognizant passed Wipro in 2Q11, and Infosys has higher revenues than Wipro. Are you just including the non-IT Services revenue in the Wipro line? If so, that is not an apples to apples comparison.

  7. Robbie
    Posted October 17, 2012 at 4:20 pm | Permalink

    This is clearly a very realistic representation of the players and their current state. In the world where IT department is being disintermediated through solutions directly being sold to the business, the sales model and competencies needed to engage with the business also needs to be developed.

  8. Phil Fersht
    Posted October 17, 2012 at 6:29 pm | Permalink

    @BF – well-spotted and corrected!

  9. Warren McDonald
    Posted October 18, 2012 at 6:08 am | Permalink

    Phil,

    It’s so refreshing to have someone go “beyond the powerpoint” to share some of the truisms with these firms. My experiences with a couple of these I have worked with recently are very close to yours,

    Warren McDonald

  10. Anonymous
    Posted October 18, 2012 at 6:20 am | Permalink

    this is a great review, i have been in this market working for both a tier 1 india supplier and a tier 1 MNC….and seen all these players in competitive situations…..your article captures the essence of the firms very well

    very keen on your views of IBM/Accenture/HP in similar context

  11. Chris
    Posted October 18, 2012 at 8:33 am | Permalink

    You went a bit easy on Infosys, Phil. They talk a big game with their infrastructure and cloud offerings, but still yet to see much beyond the rhetoric,

    C.

  12. Gaurav
    Posted October 18, 2012 at 12:34 pm | Permalink

    Wipro has completely lost focus. Agree on Cognizant and and TCS – those two are definitely driving the market.

  13. Anonymous
    Posted October 19, 2012 at 4:59 am | Permalink

    Right culture and Governance are key elements in the race ahead, one cannot keep growing without these 2 elements after they reach a particular size, without these they stand to loose a lot…

  14. Posted October 19, 2012 at 10:26 am | Permalink

    This article is very good and insightful. This article gives an insight of how an org strategy is currently in Sales and Delivery Domain are & how they hold a competitive edge to earn their revenues. Organizations have to build domain expertise to create value addition to be able to wing more and big customers. Investment in Technology in back office rooms is another key driver to achieve effeciency gains on base FTE revenue / low end work and then look at domain expertise to creat the value addition to the customer which is not inexpensive. The org that strikes this balance and gets that kind of Domain investment from customers are most likely to win in the long run.

  15. Don K
    Posted October 19, 2012 at 7:19 pm | Permalink

    I work for one of the five companies referred here and I can say the writer is almost 100% right in his assessment.

  16. Posted October 21, 2012 at 5:00 am | Permalink

    Fantastic article Phil! IT service providers will need to find their niche and focus on developing their capabilities in that direction…there is a growing need for expertise as organizations strive towards asset-lightness and outsource a large part of their operations to specialists outside their internal environment!

  17. Anonymous
    Posted October 26, 2012 at 9:36 pm | Permalink

    So far, these five bigwigs were betting on more or less the same old labor arbitrage model and some of them still think the model is non-negotiate come what-may.

    As you rightly said, if the necessary course correction is not done RIGHT NOW, next 5 years will be a proof of how many will stay in the game.

    ACT NOW W-I-T-C-H !!

  18. harpreet
    Posted November 4, 2012 at 10:51 am | Permalink

    Hi Phil….What do you make of the Infosys stated goal of moving towards Products & consulting….what they call Infy 3 or whatever

    They are doing some high end research which is getting commercialized ..attempting to move away from FTEs correlated business …etc

    so they are trying to move away from commoditised pack…do their efforts count for nothing…?? or you think its just a statement …akin for show.. reality not much diff say b/w Infy & Tcs even in the long run..

    look forward to your comments

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