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With post-pandemic world in sight, 6 IT services, digital transformation and consulting trends emerge

1Q21 belongs to the India-centric IT services vendors

India-centric vendors demand considerable attention at the start of 2021 for three trends cutting across their sales motions, talent strategies, and avenues to new partnerships and intellectual property. 

Winning deals the old way

In a return to the old-school tactic of rebadging client employees, India-centric vendors have begun winning larger outsourcing deals, in part because the pendulum has swung back to clients demanding “run-the-business” IT services, which naturally favors outsourcing by low-cost offshore IT services vendors. Using an old-school approach to buy their way into mega-sized contacts or secure renewals may heighten competitive pressures for IT services vendors that lack the same scale in offshore locations or willingness to absorb headcount to open doors for long-tail managed services opportunities. Across the outsourcing space, TBR sees a broad trend of vendor consolidation in contracts up for renewal, further pressuring all competitors to expand contract sizes in any way possible.

The most challenged, but also the vendor group with the biggest opportunity, will be the Big Four. Over the past five-plus years, all four firms, to varying degrees, have expanded their application services capabilities delivered through low-cost locations to better appeal to new buyers. Although firms like Deloitte have experienced some initial success, reaching critical mass will require partnering more strategically with the India-centric vendors, unless the Big Four want to adjust their pricing for more mainstream, almost commoditized IT services.

Developing talent onshore  

With attrition diminished by COVID-19, India-centric vendors will continue to push to expand onshore U.S. talent, including in ruralshore locations. By focusing on recent university graduates, the India-centric vendors can access relatively cheap talent, spend less on visas, and market locally based talent as part of their sales pitch. In addition, all IT services vendors could face a tech talent threat from cloud and software majors. While companies such as Google (Nasdaq: GOOGL) and Microsoft (Nasdaq: MSFT) have mostly gone after upper-mid-level and senior-level services talent, strategies could change as those software and cloud vendors expand their services capabilities (for more detail on technology vendors’ expansions in the services realm, see TBR’s September 2020 Digital Transformation: Cross-vendor Analysis). 

Turning to open source

Lastly, India-centric vendors, especially those lacking software-specific talent and IP, have begun promoting their value to Microsoft and other cloud and software giants by investing in and developing more talent through open-source consortiums. In contrast to traditional R&D efforts, open-source consortiums can provide less costly and time-consuming avenues to developing IP and possibly unlock new business opportunities through consortium partners. TBR also believes increased participation in open-source consortiums could potentially have long-term impacts on services vendors themselves, including development of software mindsets and associated practices. 

India-centric IT services vendors focused on protecting margins to survive rough market conditions

Select vendors pursue alliances and deals in the growing cloud market to offset choppy financial performance

During the first couple quarters of the pandemic, Cognizant (Nasdaq: CTSH), HCL Technologies (HCLT), Infosys (NYSE: INFY), Tata Consultancy Services (TCS) and Wipro (NYSE: WIT), the India-centric vendors covered in TBR’s IT Services Vendor Benchmark, looked to form partnerships and sign new deals, especially those around cloud capabilities, with strong patterns of continued growth in cloud implementation, migration and advisory to offset deteriorating areas in traditional outsourcing engagements. For example, Wipro’s partnerships with cloud infrastructure experts, such as Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT), will allow Wipro to build solutions off these technologies and pair them with its advanced AI and automation capabilities to strengthen its position in the market.

To mitigate the damage caused by COVID-19, the India-centric vendors will also make resource management improvements, such as enhancing their training and hiring efforts, and solidify existing client relationships by supporting clients through optimization and digital transformation offerings as they transition to digital business practices. Cognizant must secure alliances to bolster the company’s cloud and analytics capabilities while focusing on internal stability.

HCLT performed rather well financially, all things considered, and should utilize its cloud and software power to further develop its portfolio mix, leading to improved client satisfaction. TCS, on the other hand, should capitalize on its global presence as well as its diverse portfolio to gain traction and improve its financial performance. Wipro also struggled during 1H20, but its financial performance is expected to improve if the vendor focuses on acquisitions, similar to its recent purchase of Europe-based 4C, to add new sources of cloud services revenue in the region while driving portfolio investments around cybersecurity. Similar to HCLT, Infosys came through 1H20 mostly unscathed, due to its healthy pipeline and a strong first quarter. The company should continue to tap into new areas of opportunity, such as digital transformation and blockchain, using its recent partnerships with Essential Utilities and the National Bank of Bahrain.

True to their business models even in a pandemic, India-centric IT services vendors prioritized margin protection as a primary damage control strategy during COVID-19. To adjust management operations and combat growing company expenses, IT service vendors will likely increase employee training and look to hire internally to fill positions. Additionally, TBR believes it is imperative for vendors to continue their focus on upselling to existing clients and leaning on strategic partnerships to offset revenue losses due to geographic macroeconomic disruptions.

Two Back, Three Forward: All about consecutive quarters

In our new weekly blog series Two Back, Three Forward, we look at two numbers in TBR reports from the prior week as well as three numbers from our upcoming reports, highlighting the analysis TBR provides and the vast amount of data — the numbers — we’re working with every day. It’s all about the data and what that data means to you.

Two Back

$1.47B, Cognizant’s 4Q19 earnings from financial services clients: As noted in our full report, Cognizant’s Financial Services (FS) revenue increased last quarter, but at a slower pace than the company overall, partly due to softness from European banking clients, according to Cognizant. We’ve heard this complaint from other India-centric vendors and will be publishing a special report this month on what those companies have been doing to offset those pressures. To keep some context, FS remains Cognizant’s largest vertical, at 34.3%, but this trend bears watching.

3, consecutive quarters IBM’s healthcare IT services revenue has declined: 2019 was unquestionably an off year for IBM’s healthcare IT services (HITS), but our most recent analysis indicates the company will rebound in 2020 through new leadership, partnerships and technologies. Considering IBM’s long history of excelling in all three of those areas, we’re predicting a modest 2.2% expansion this year. See the full IBM HITS report for all the analysis.

Three Forward

71.2%, contribution of DXC Technology’s Cloud Professional Services segment to overall cloud revenue, per TBR estimates: Nothing surprising about cloud professional services earning the greatest share of revenue, but what stands out is the 9.6% growth rate of that service line within DXC’s overall cloud practice. Ahead of the other service lines and far better than the company as a whole (-3% over the same period). As we note in the upcoming full report, “DXC’s established relationships with major public cloud providers such as Microsoft and AWS [Amazon Web Services] enable the company to build out integrated solutions and maintain healthy growth in 2020 providing cloud management and migration services.” Further, the company continues investing in cloud-savvy professionals even as it bolsters its traditional IT services talent. DXC’s long-term strategy, including around cloud, appears solid.

More than 50%, Capgemini’s digital and cloud revenues as a percentage of total revenue: Like most IT services peers, Capgemini has strategically shifted resources and investments toward new opportunities in cloud and digital, in part through expanding capabilities alongside partners, developing solutions with partners like AWS, and acquiring talent and IP. Even if revenue growth slows from 5.3% year-to-year in constant currency in 2019 to something closer to 4% in 2020, as Capgemini expects, we don’t expect digital and cloud revenues will ever again dip below the 50% line, even if Capgemini joins market leaders in moving beyond the term digital.

3, consecutive quarters in which Perspecta elevated its FY20 guidance: Due to accelerated demand and strong bookings of net-new work, Perspecta is now guiding for annual revenue growth of between $4.45 billion and $4.5 billion, or 4.1% and 5.3%, over FY19. Even with healthy revenue growth, TBR projects the company’s full-year gross margin will erode 2020 (declining from 24.9% in 2019 to 23.6% in 2020) due to  accumulating costs from its acquisition of Knight Point Systems, the launch of new delivery facilities, and investment in Perspecta Labs. Perspecta’s 2020 operating margin should increase 10 points over 2019, from 6.2% to 6.3%, as unprofitable contracts are completed and Perspecta converts strong bookings of more lucrative and net-new contracts featuring the company’s expanding store of homegrown IP. In all, TBR sees steady growth as more important than financial guidance adjustments, given our concern for strategy and performance, not stock price.

8 digital transformation trends for 2020

“Those service providers that don’t acquire their way to digital prominence will partner to do so. ‘No vendor can do it all, despite many positioning themselves as end-to-end service providers,’ TBR analysts wrote in their September 2019 Digital Transformation Insights report. ‘Technology partners are and will remain an integral part of India-centric and consulting vendors’ go-to-market strategies, especially as clients seek off-the-shelf, minimally customizable solutions.'” — The Enterprisers Project

India-centric vendors defy gravity and all sensible expectations

An exclusive review of TBR’s IT Services Vendor Benchmark

Every quarter the large India-centric IT services vendors — Infosys, Tata Consultancy Services (TCS), Wipro, Cognizant and HCL Technologies (HCLT) — produce revenue growth and profitability that keep them in the top half, and sometimes in the top five, vendors TBR tracks, despite market trends that seem to run counter to their core strengths. As consulting-led digital transformations using emerging technologies and delivered on-site (not from offshore) drive investments and acquisitions, these five vendors manage to expand into new areas just enough, hire the right onshore talent, and manage costs to sustain their growth. But for how much longer?  

Join Kelly Lesiczka, Kevin Collupy, Boz Hristov, Elitsa Bakalova and Patrick Heffernan as they dig into key findings from TBR’s latest IT Services Vendor Benchmark.

Don’t miss:

  • How India-centric vendors compare to other leading IT services vendors
  • Which vendors are transforming faster and with better results
  • TBR’s predictions on where the IT services market is heading
  • Which vendors have the most to lose from sustained success among India-centric vendors

TBR webinars are held typically on Wednesdays at 1 p.m. ET and include a 15-minute Q&A session following the main presentation. Previous webinars can be viewed anytime on TBR’s Webinar Portal.

For additional information or to arrange a briefing with our analysts, please contact TBR at [email protected].