Competitive Analysis of

IT Service Firms

By Sayan Maiti
DATE : 6th June, 2013

IT Services Industry Overview

Projected Worldwide revenues- Indian IT
services

IT Services Spending

Global IT Services Spend

Growth %
4.90%

960

5.00%

4.50%

940

4.00%

920
900

880

14000

6.00%
Values in US Million Dollars

Values in US Billion Dollars

980

3.00%
1.50%
2.00%

860
1.00%

840
820

0.00%
2012

2013

Growth Rates
over 2 years

15.2%

12000

20.10%

10000

6.60%

8000

2011

7.60%

6000

18.10%

2012
2013

4000
2000
0

2014

TCS

Source : Gartner IT Spending Forecast Mar13

Cognizant

Infosys

Wipro

HCL

Source : Gartner IT Spending Forecast May13

Globally IT industry is going to grow steadily

despite a weakening global economy.

The top five Indian providers grew 13.3% exceeding the

worldwide IT services industry growth of 2%.

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 PCs to mobile
or licensed software to cloud.

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 secondlargest Indian IT services provider in 2012-13.

Competitive Analysis of IT Service Firms

Page 1

Key Business Drivers and their linkages

Ability to get repeat business
from existing clients

Getting new/renewed projects from clients

Ability to cross sell and up sell

Ability to bid and win

new contracts
Total Hours Billed
No of
Employees

Utilization
Rates

No of billable
employees

Attrition
Rates

Ability to grow
inorganically

Hours per
employee per year

Onsite/
Offshore mix

Total no of
employees

Ability to control
employee costs

Billing Rates

REVENUES

Client
Targeting

MARGINS

Competition

Position in
value chain

Business
Development

Ability to control SG&A

Expenses
Brand
Building

Timely management of
receivables and payables

CASH FLOWS

Ability to manage capital

and generate adequate ROI

Key Business Drivers

Competitive Analysis of IT Service Firms

Page 2

IT Service Firms - Worldwide

Competitive Analysis - IBM

MARGIN

REVENUES

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

Understand the clients

problem and suggest
solution
( Business Consulting)

Take over
implementation
and cross sell
services

Competitive Analysis of IT Service Firms

Sell technology
development for
client as a
proprietary
product

Additional
revenues for
maintenance of
products

Page 3

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.

SWOT
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

Competitive Analysis of IT Service Firms

Started with Mainframes and then

into PCs, Copiers, telephones,
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.

Page 4

IT Service Firms - India

Competitive Analysis - TCS

MARGIN

REVENUES

Key Drivers

4%

5%

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

TCS Verticals Breakdown

Focused on volume growth using cost as a leverage and has the

largest workforce among IT service companies.

BFSI

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 verticals relative performance is not as

expected, retail, manufacturing and telecom have performed well.

Telecom

5%
43%

16%

Manufacturing
Retail

14%

13%

Utilities
Healthcare
Others

Competitive Analysis of IT Service Firms

Page 5

Competitive Analysis - TCS

WEAKNESS
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.

Derives large proportion of

revenues from developed
markets, especially the US,
that are facing economic
difficulties.
Lags some peers and
multinational rivals in highend consulting offerings.
Heavy exposure to banking,
financial services and
insurance vertical.

SWOT
OPPORTUNITIES
Product portfolio expansion
enables TCS to move into endto-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.

Competitive Analysis of IT Service Firms

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.

Page 6

Competitive Analysis - Cognizant

MARGIN

REVENUES

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

Cognizant Verticals
Breakdown

1.

Gets into new areas, and putting the full force of

organization behind it.

BFSI

2.

Acquisitions in key spaces to achieve scale or to access

customers faster.

Manufacturing,
Logistics and Retail

3.

Aggressive strategy for acquiring market share.

13%
42%

25%

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.

Healthcare

20%

Growth Strategy followed by Cognizant is as follows

Media,
Entertainment and
Technology

Competitive Analysis of IT Service Firms

Page 7

Competitive Analysis - Cognizant

BIG 5 STRATEGIES

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.

Closer to the clients Spends heavily on

sales and marketing which has helped
win more deals.

WEAKNESS
Nearly 75% of business from
the US could turn risky.
A laggard in BPO business
Lags peers in infrastructure
management business.

Two in a box Strategy A relationship

management team and deep industry
expertise are assigned to every client.

SWOT
THREATS

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.
Geographical expansion into
relatively untapped regions.

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 )

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.

Competitive Analysis of IT Service Firms

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.

Page 8

Competitive Analysis - Infosys

MARGIN

REVENUES

Key Drivers

Performance

Repeat Business from customers

Repeat business percentage dropped from 98% in 2012 to 95% in Q413

Inorganic Growth

3 Acquisitions since 2000. Acquisition of Lodestone Management Consulting in

September12

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

Infosys Verticals Breakdown

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
doesnt 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.

BFSI

6%

6%

4%

Telecom

35%
18%
21%

Manufacturing
Retail

10%

Utilities
Healthcare

Others

Competitive Analysis of IT Service Firms

Page 9

Competitive Analysis - Infosys

Infosys 3.0 Strategy

WEAKNESS
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.

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.

1.

Identification of seven gamechanging 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

SWOT
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.
Geographical expansion into
relatively untapped regions.
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.

Competitive Analysis of IT Service Firms

A very futuristic looking strategy but

Infosys needs to make sure that it
implements it faithfully.

Page 10

Indian IT Services Industry Ratios Comparison

Comparison of Profit Margins across 5 years

30

30

25

25

20

Infosys

15

TCS
Wipro

10

HCL

Profit Margins

P/E Ratios

Comparison of P/E Ratio for 5 years

20

Infosys

15

TCS

0
2009

2010

2011

2012

2013

40

70

35

60

Infosys
TCS
Wipro

15

HCL

10

NWV/Sales in %

ROE Values

80

20

2010

2011

2012

2013

Comparison of Net Working Capital as % of Sales

45

25

HCL

2009

Comparison of ROE for 5 years

30

Wipro

10

50

Infosys

40

TCS

30

Wipro

20

HCL

10

5
0

0
2009

2010

2011

2012

2013

Competitive Analysis of IT Service Firms

2009

2010

2011

2012

2013

Page 11

Indian IT Services Industry Overview

Revenue Growth for IT Service Firms

PAT Growth for IT Service Firms

40%

50%
40%

30%
25%

Infosys

20%

TCS

15%

Wipro

10%

HCL

PAT Growth in %

Growth Rate in %

35%

5%

30%

Infosys
TCS

20%

Wipro
HCL

10%
0%

0%

2010
2010

Old

2011

2012

2013

PRODUCT

MARKETS

Market Development

2012

2013

-10%

New

Old
Market Penetration

2011

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.

Product Development

Diversification

New

Competitive Analysis of IT Service Firms

Page 12

Future Growth Engines for IT Service Companies

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.
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.

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

Competitive Analysis of IT Service Firms

Page 13

THANK YOU

Sayan Maiti
Mail : sayan.comc@gmail.com
Phone : +91 - 7389464800