Moratorium on PwC business tells cautionary tale

My previous and current careers collided last week when the Kingdom of Saudi Arabia’s Public Investment Fund (PIF) announced a one-year moratorium on doing business with PwC (details continue to emerge even as I type this and the exact contours of the new Saudi PIF and PwC arrangement will likely shift, so I won’t try to evaluate a moving target). Having spent 13 years as a U.S. diplomat — including living in the Middle East for four years and taking at least a dozen trips to Saudi Arabia while working at the U.S. State Department, White House, and Department of the Treasury — I have some thoughts on how business and politics work in that region. I’ve also spent almost two decades trying to understand the Big Four firms, and I recently sat down in Washington, D.C., with some of PwC’s leadership to discuss the market, the firm’s ecosystem and what’s coming in 2025.
 
Bottom line upfront: Understand that this is a Saudi story, not a PwC story, although undoubtedly it doesn’t feel that way in PwC’s corridors right now. Saudi Arabia has an opportunity to send some critical messages to players in the country, in the region and globally, and the kingdom is taking advantage. If you’re among the many IT services companies and consultancies — and other multinational companies, although they’re less of a concern to me professionally right now — investing aggressively on growth in the Middle East and you’re misinterpreting this recent development as what PwC did wrong instead of listening to what the Saudis are trying to say, take a long pause and step forward only cautiously.
 

What are the Saudis saying?

First, the Saudis, through the PIF, have issued a warning — a shot across the bow — to management consultancies, IT services companies and others that have been enjoying a seemingly relentless flow of funds from the kingdom: Tighten up your accounts, sharpen your delivery, ensure your value proposition and the Saudis’ return on their investment in you will be abundantly clear. The McKinsey & Co., Boston Consulting Group and Deloitte partners may be enjoying some schadenfreude at the moment, but they understand the message coming from the Saudis: Bring tangible value, or don’t send us a bill.
 
Second, the Saudis have been feeling the positive heat of the world’s economic attention for a few years now, particularly as new leadership has pushed hard to invigorate the non-oil part of the kingdom’s economy. I wrote recently about what that has looked like in the United Arab Emirates — based on a webcast by PwC, coincidently — and for the Saudis, the initial success of those efforts and the increased global market and investor attention have been welcomed. What better time to send a message that Saudi Arabia has a transparent, high-functioning, rules-based economy, long since evolved from the souks of the old days and the opaqueness that characterized so much of the kingdom as late as the mid-2000s?
 
The Saudi Arabia and PwC story serves that purpose perfectly: We’re holding accountable a Big Four accounting and consulting firm and subjecting them to our high standards, just like every other advanced economy. The particulars of the kingdom’s regulatory environment and business culture can certainly be up for discussion, but the message, again, is clear: Everyone needs to play by the Saudis’ rules.
 
And maybe that’s the biggest takeaway as this story develops. Operating in the Middle East requires local knowledge, a regional presence, and an on-the-ground understanding that can only be sustained by being there. Yes, I am writing this 6,303 miles from Riyadh, but lessons learned hard are lessons long remembered, even over long distances. TBR has seen a surge in IT services companies’ and management consultancies’ investments in the Middle East and heard expectations around growth in the near term.
 
In my view, those investments and expectations are smart strategies and well founded. It’s the execution that matters, and a significant — perhaps the most significant — part of that execution comes from knowing the ground, reading the messages being sent, and understanding the story behind the story.

IT services leaders navigate choppy macroeconomic waters as discretionary spending tightens

Increased managed services activities around cost optimization and streamlined business processes and the recovering BFSI segment will help vendors alleviate revenue growth pressures in 2025

Due to tightened discretionary spending, the top 10 IT services revenue leaders continued to experience decelerating or declining trailing 12-month (TTM) revenue growth year-to-year in U.S. dollars during 3Q24. Accenture’s revenue landed above the midpoint of the company’s guided range, as Accenture leveraged its scale and broad-based functional and technology expertise across service lines to drive sales around helping clients build and manage secure foundations. Accenture’s FY24 total revenue growth of only 1.2% year-to-year — compared to 4.1% in FY23 and 21.9% in FY22 — reflects the choppy macroeconomic environment Accenture has been navigating, particularly in Accenture Strategy & Consulting, as buyers continue to limit discretionary spending.
 
At the same time, managed services enabled through Accenture Technology and Accenture Operations remains a strategic priority for clients seeking to drive cost optimization and streamline business processes, evidenced by Managed Services growth of 4.6% year-to-year in 3Q24 and 3.9% year-to-year in FY24.
 

IT services operating margins are stabilizing

Average TTM operating margin contracted for 4 of the top 10 category leaders

Operating margin performance is stabilizing in IT services, as just four of the top 10 margin leaders experienced year-to-year TTM operating margin contractions in 3Q24, compared to eight of the top 10 margin leaders experiencing margin contractions in 3Q23.
 
Infosys’ TTM operating margin declined 40 basis points year-to-year in 3Q24, landing within the guided range of between 20% and 22%. The use of generative AI (GenAI)-enabled sales automation tools, such as the Navi sales assistant, which accelerates time to insight, will help Infosys further improve utilization and decrease its reliance on sales support personnel. This will bolster the company’s margin, provided Infosys can withstand potential clients’ requests to lower pricing related to the use of automation.
 
TCS’ TTM operating margin improved 40 basis points year-to-year in 3Q24 as wage inflation appears to have leveled off and overall headcount remains stable. We expect TCS’ operating margin to remain in a similar range for the foreseeable future, as the company’s pricing flexibility, supported by its lower-cost resources, can help offset cost increases.
 
Wipro IT Services’ (ITS) TTM operating margin increased 10 basis points year-to-year in 3Q24 as the company benefits from operational improvements. While Wipro ITS faces pressures from furloughs and salary increases, it benefits from streamlined operations and a successful sales strategy to drive margin improvements. However, Wipro ITS’ margin performance might worsen as the company executes on training programs to build industry and technology capabilities in an effort to better work with clients, as well as expands its pool of AI experts, which currently consists of 44,000 employees.

IT services market outlook

Average revenue growth for benchmarked vendors will accelerate but also remain pressured due to macroeconomic challenges

TBR estimates IT services TTM revenue will increase slightly in 4Q24 compared to revenue growth of 0.1% in 3Q24 and a deceleration from revenue growth of 3.5% in 4Q23. Demand for greater productivity and lower costs continues to create digital transformation opportunities around finance and supply chain improvement, cloud modernization, and application development. Lingering pressures in discretionary spending negatively affected consulting activities and backlog realization in 3Q24, and this trend will continue in 4Q24. However, managed services activities are picking up speed as clients strive to optimize costs and streamline business processes.

TBR vendor spotlights

Accenture added $785 million in net-new revenue in FY24, the lowest amount since FY09 and FY10, following the financial crisis. We expect Accenture to improve performance and add over $3 billion in net-new sales in FY25. Maintaining a strong household name among IT buyers often comes at a price, with the company accelerating its acquisition activity to protect its turf. While Accenture has added new skills and IP that can help drive long-term organic revenue, the company’s acquisitions have also helped to buy short-term revenue growth as half of the projected expansion in FY25 will be due to inorganic contribution. Additionally, Accenture’s aggressive investment activity within the GenAI space has left partners and rivals wondering why Accenture is making so many acquisitions now when all vendors face similar challenges when it comes to securing the data quality needed to explore the full potential of the technology.
 
TCS’ core capabilities in integration, application and outsourcing services engagements sustain its healthy revenue growth levels. To reach the upper range of its revenue growth targets, TCS is strategically investing in GenAI capabilities. By initially focusing on lower-risk, high-volume applications like chatbots and virtual assistants, TCS is building a strong foundation of AI expertise. As GenAI matures in the market, the company aims to expand its offerings, positioning TCS to capitalize on the GenAI-related market opportunity and deliver enhanced value to clients. The company’s continued development of proprietary software and platforms aims to attract clients and support engagements as a foundational framework.

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TBR has been tracking performance of IT services companies for decades. As go-to-market strategies increasingly focus on industry-centric solutions, TBR determined to build trailing 12-month revenue based on a standardized breakout of key industry verticals.
 
In 2018 we expanded our IT services coverage to include estimates for seven industry vertical splits (full list below), leading to the recent launch of the IT Services Industry Vertical Data Excel file. This extensive data file includes revenue estimates for 17 IT services companies, including Accenture, Capgemini, DXC Technology, IBM and Tech Mahindra (full list below). Quarterly estimates, year-to-year growth, and percentage of IT services totals date back to 1Q21.
 
This proprietary data stream, in conjunction with our qualitative analysis of these firms, including their partners and how they operate, offers unprecedented intelligence on which companies are growing or maintaining their revenue or experiencing declines within industry verticals and allows for partner adjustments and competitive maneuvering.

TBR’s vertical-specific IT services data reveals notable industry trends

In the most recently published data file, several key insights stand out, including highlights from TBR’s research on Tata Consultancy Services (TCS), Capgemini and Wipro.

Most notable: TCS’ public sector success in India

Tata Consultancy Services’ (TCS) public sector revenues jumped 52.2% year-to-year in 3Q24, extending — and accelerating — five straight quarters of double-digit growth. Curiously, however, TBR’s data shows a deviation from the norm in geo data. Reported India revenues by TCS (as a percentage of revenue) have been growing at a mid-double-digit range for over a year. In fact, reported revenue has grown so rapidly that India generated more revenue for TCS than the rest of the Asia Pacific region combined for the first time in 3Q24, and that gap expanded in 4Q24.
 
While it is unquestionably an impressive growth story, public sector revenue accounts for less than 5% of TCS’ overall IT services revenue, making it strong growth from a relatively small base. Still, 52.2% is impressive relative to the market, and analysis in TBR’s quarterly reports on TCS can help us understand this success. In short: It’s India.

• “India was again a bright spot for TCS, nearly doubling its revenue composition from the previous year, now accounting for 8.9% of total TCS revenue. We attribute the growth in India to strong brand reputation and favorable government policies to incentivize companies to digitize their IT operations.” — TBR’s 3Q24 Tata Consultancy Services report
• “Although India has historically only accounted for 5% to 6% of TCS’ total revenue, we anticipate this share will rise over the next few years, reaching double-digit figures before peaking and stabilizing. IT spending in India continues to increase, indicating there is plenty of opportunity, particularly for locally based IT services firms such as TCS. For example, during 2Q24 TCS and Indian state-owned telco Bharat Sanchar Nigam Limited announced plans to build four data centers across India to meet rising demand.” — TBR’s 2Q24 Tata Consultancy Services report

 
According to TBR’s lead analyst on TCS, Senior Analyst Kevin Collupy, “They are killing it with local Indian enterprises and government organizations. And last year we reported on an uptick in consultancies and IT services companies investing in their India-for-India capabilities, offerings and scale. So, 52.2% growth in public sector, even as TCS itself only grew 6.4%, tracks with the overall India growth story while illustrating just how well TCS has been doing.” ​

Additional insights from 3Q24 data

Capgemini’s revenue declined 1% year-to-year in U.S. dollars (USD) in 3Q24, but the company’s public sector revenue increased by more than 4% in the same period. At 15.1% of the company’s total IT services revenue, public sector revenue significantly buoyed what would have been an even rougher quarter. Retail, CPG, Travel & Transportation declined 4% year-to-year in USD in 3Q24 and accounted for 15.1% of Capgemini’s IT services.
 
Wipro’s 19.1% drop in public sector revenue in 3Q24 looks terrible, particularly in the context of an overall IT services decline of just over 2%. The vertical did not pull down Wipro as a whole though, as it represents just 0.5% of total revenue. The real culprits were Financial Services (down 1.3%, while accounting for 33.9% of revenue) and High Tech, Communications & Media (down 8.1%, at 15.4% of revenue).

Access all IT services vertical-specific data

While a single quarter is only a snapshot of the market narrative, the numbers in TBR’s vertical-specific IT services data starts to paint the picture while company reports fill out the story. An updated IT Services Industry Vertical Data Excel file will be released quarterly in TBR’s digital platform, Insight Center™.
 
If you are a current TBR user with access to the IT Services Vendor Benchmark, you can download the IT Services Industry Vertical Data Excel file today.  If you’re interested in gaining access to the data, as well as TBR’s entire IT services research stream, start your free trial to Insight Center™.
 
Vendors covered in TBR’s IT Services Vendor Benchmark Data:

• Accenture
• Atos
• Capgemini
• CGI
• Cisco Customer Experience
• Cognizant
• DXC Technology
• Fujitsu
• HCLTech
• Hewlett Packard Enterprise Services
• IBM
• Infosys
• Kyndryl
• Tata Consultancy Services
• Tech Mahindra
• T-Systems
• Wipro IT Services

Industry coverage in TBR’s IT Services Vendor Benchmark Data:

• Financial Services
• Healthcare & Life Sciences
• High Tech, Communications & Media
• Industrial Solutions, Manufacturing, Automotive, Energy, Utilities & Chemicals
• Other Industry
• Public Sector
• Retail, Consumer Packaged Goods (CPG), Travel & Transportation