TBR assessment

HCL Technologies’ (HCLT) Mode 1-2-3 strategy remains a core pillar in the company’s efforts to navigate the dynamics of the ever-evolving IT services market, and positions it to transition its portfolio and address client needs now and post-pandemic. At the 2020 Analyst and Advisor Day, HCLT President and CEO C Vijayakumar noted, “The strategy is applicable to any business or enterprise.” Executing successfully on the strategy requires equal commitment from leadership and employees.

HCLT’s leadership is “strong and stable,” according to C Vijayakumar, with 30 top executives with an average of 26 years of experience with HCLT — a striking contrast to some of the company’s peers that have experienced a slew of executive departures and changes at the helm in recent years, such as Wipro’s (NYSE: WIT) May appointment of former Capgemini executive Thierry Delaporte as CEO. As such, HCLT is able to stay the course of its strategy — to utilize engineering and infrastructure services as a core enabler to drive digital transformation engagements and profitable growth — without deviating too far into unchartered domains. Its leadership also acts as a talent magnet, as a charismatic and consistent vision often trumps micromanagement tactics.

Services remains a people business, and HCLT knows it. While the company continues to embed automation to augment services, it relies heavily on its greatest asset, its employees, to extract the most value from its investments. With engineering services at its core, HCLT can execute on what the client wants — provided the client knows what they want — and the company is not shy about challenging its clients as it seeks to not simply solicit new business but to introduce innovative ideas. All of this would not be possible if HCLT did not stay true to its talent strategy.

Just like with its portfolio offerings, HCLT relies on staff with core capabilities. Consulting engineers, not consultants, are what differentiates HCLT from many of its peers, which often lose sight and aspire to be something for which they are not known. Just as talent carries a significant weight in HCLT’s differentiation, the way the company manages its partner network also has an impact on value proposition. As services and software relationships evolve to account for changing buyer expectations, HCLT must remain vigilant in not just how it partners but also with whom it partners. With COVID-19 shifting buyers’ digital transformation priorities and forcing clients to consolidate budgets, maintaining trusted relationships with business leaders will be key, compelling HCLT to forge exclusive relationships with technology-inclined business consultancies to ensure long-term success.

“A simple strategy and relentless focus on execution” fueled HCLT’s ability to accelerate revenue growth while maintaining margin performance over the past two years. During the HCL Analyst and Advisory Day, company executives, along with regional and segment leaders including the CEO, walked through HCLT’s business performance and growth areas, identifying bright spots within industry and service segments that align with the company’s business investments. While HCLT’s areas of investment, such as security, cloud, IoT and digital, do not vary significantly from those of its peers, the company has differentiated itself with its Mode 3-specific investments and leans on its talent and culture, ongoing innovation, and business outcomes achieved for clients to capture new opportunities around these growth areas.

COVID-19 impacts and assumptions

COVID-19 has undoubtedly created financial pain for businesses across all verticals. Business operations have been disrupted and revenue streams have declined in many industries across the globe. At the same time, the pandemic has required additional investment to support remote work and adjust business processes to align with public health guidance from the Centers for Disease Control and Prevention, including social distancing. However, even amid these financial challenges, businesses have spent and plan to continue spending more of their IT resources on cloud-delivered services. Cloud’s benefits of agility, innovation and a high degree of automation have been reinforced during the pandemic and have prepared adopters for the next unknown disruption to their business.

Given these circumstances, TBR’s market forecasts for cloud professional services and hosted private cloud have been adjusted to reflect the impact of COVID-19 over the five-year forecast period. In the next two years, we anticipate growth will slow slightly due to the impacts social restrictions are having on supply and demand. Particularly given the uncertain environment, business spending will likely take longer to rebound than in previous economic downturns. This holds true across IT departments, as many businesses that have on-premises IT infrastructures will postpone cloud deployments until after the pandemic abates.

As such, workload activity including legacy SAP, VMware and Oracle migrations to bare metal IaaS and the associated services opportunity will be affected. While these impacts will reduce market growth by a few percentage points through the remainder of 2020 and into early 2021, the flexible nature of cloud-based transactions make the cloud professional services and hosted private cloud markets less susceptible to the virus’s near-term effects than other markets within the IT industry. COVID-19 is testing many companies’ IT preparedness, and as a result, a notable increase in cloud usage will occur once the virus subsidies and IT spending returns to normal, driving accelerated growth from 2022 to 2024.

TBR’s Cloud Professional Services Market Forecast and Hosted Private Cloud Market Forecast provide insights into how market sizes, growth and vendor positions will change over the next five years. Each forecast is broken down into four subsegments and both forecasts cover the Americas, EMEA and APAC.

What makes Egypt attractive

Egypt’s growing IT services and technology sector has been built on important natural advantages and few forward-looking investments in recent years. The country’s proximity to Europe, considerably large and educated talent pool, and relatively low costs compared to nearshore locations such as Poland, Romania and Bulgaria make Egypt a natural hub for IT services, just as it has been a hub for commerce for millenniums. In addition, multinational companies have long-established histories of doing business in Egypt, building up the trust and goodwill needed for large investments and sustained operations. IBM has had a presence in the country for 66 years, and in addition to its six regional delivery centers in Cairo, in 2019 it opened two new centers — an Innovation and Industry Client Center and a Marketing Services Center — to accelerate digital transformation for public and private sector clients through next-generation solutions such as AI, cybersecurity, digital technology, blockchain and hybrid cloud. Sharing a time zone with much of Europe provides Egypt with a natural advantage, particularly relative to India and the Philippines, two outsourcing megacenters. 

Atop these advantages and potentially separating Egypt from other growing outsourcing locations has been active investment by the Egyptian government in developing a business ecosystem, creating jobs and exports, fostering entrepreneurship, encouraging foreign direct investment, and assisting Egyptians in innovation efforts. While this mandate may sound ambitious, Egypt, a country known for large projects, has kept a tight focus on successful development of IT services and technology exports.

Sustained investment in talent

Egypt’s critical advantage could be its talent base, particularly due to the group’s size, technology skills and fluency in multiple languages. According to the Central Agency for Public Mobilization and Statistics in Egypt, approximately 500,000 students graduate from universities in Egypt every year, of which around 90,000 speak English. To assist graduates in finding employment with multinational companies — and to help those companies develop their employees’ skills — the Egyptian government, through ITIDA, partners with companies to provide mentoring, tools and competitions for startups as well as sponsor various hackathons and other initiatives.

The Egyptian IT sector exported around $4.2 billion in services in 2019, according to the Egyptian Information Technology Industry Development Agency (ITIDA). The country’s IT sector has become a substantial part of the overall economy growth, contributing both jobs and export revenues, primarily from BPO, software, application development and maintenance, and technical support services. TBR sees advantages for Egypt in the post-coronavirus world.

COVID-19 will accelerate a range of secular trends in federal IT

Despite the inevitable short-term impact of COVID-19 on federal technology outlays, IT infrastructure modernization will eventually return to the top of the list of federal IT spending priorities, as will investments in cybersecurity, analytics, AI, big data, cloud and machine learning. The epidemic will disrupt contract delivery, create resource deployment challenges at federal IT vendors and their agency clients, and may cause nonhealth-related discretionary spending to be redirected to healthcare areas, benefiting vendors such as Leidos, Accenture Federal Services, Maximus and ManTech (Nasdaq: MANT).

As federal agencies transition large portions of their workforces to remote environments IT infrastructure improvements and migrations to cloud and everything “as a Service” will follow, along with projects to improve private networks and broadband connections and engagements to enhance security requirements as the “threat surface” exposed to new security breaches expands. Federal IT decision makers are increasingly seeking methods of combating COVID-19 that have been proved in the commercial sector.

Federal spending levels are expected to increase on preparedness and response activities and other disaster recovery or mitigation work in the fiscal 2021 budget, with a growing volume of IT modernization opportunities around disease surveillance improvement, including the implementation of new IT systems and advanced analytics. Still, the overall landscape for products and services to counter biothreats remains unclear and federal IT vendors will be tapped to provide the vision and road map for the adoption of biothreat surveillance solutions. Spending on electronic warfare, countering drones and unmanned systems and other areas of the National Defense Strategy will remain strong for the next two years and in fact may expand to include bio-monitoring and bio-surveillance technologies.

Most of the results from the 1Q20 earnings season are in, and federal technology contractors have provided initial reactions to the impact of the coronavirus pandemic on their fiscal performance and their outlook for federal fiscal 2020 and beyond. By and large, the fiscal effects of COVID-19 were limited to the final few weeks of the quarter, according to a plurality of federal IT vendors, minimizing the top- and bottom-line impacts for most federal technology contractors. Negative impacts were most concentrated in the global aerospace sector, and as such, companies with a footprint in commercial or government aeronautics encountered severe growth and margin headwinds. However, all federal contractors had to scramble to acclimate resource management, operations, service delivery, business development and supply chain management strategies to the new COVID-19 environment.