IT top 5 stay logged into traditional services
Fast-growing digital services still form less than 20 per cent of their revenue
Here is a paradox. Demand for digital services — delivered through cloud technology and artificial intelligence — is growing at a smart clip of 30 to 50 per cent. Yet, India’s top five IT services firms, which account for 20 per cent of India’s $117 billion software exports, continue to draw the bulk of their revenues from traditional services of building applications and maintaining them on servers in their premises.
At the end of the July-September quarter, Wipro is the only one among large services firms to have touched nearly one-fourth of revenue through digital services. While larger peer TCS counts a little less than one-fifth (19.7) business from digital technology, Infosys’ platformbased services and software products forms about 11 per cent of turnover.
This is in stark contrast with global peer Accenture, which is seeing a faster transformation — half its revenue now comes from digital technology services. Another global peer Cognizant, which saw 23 per cent of $13.49 billion coming from digital, has taken a strategy of “digital at scale” to see faster growth. The company said it has been “aggressively building high- end digital skills in data science, design thinking, cyber security, Internet of Things, Artificial Intelligence and automation. Cognizant claims to have seen higher growth in digital transformation engagement for clients’ business.
“For the top 19 major IT service firms, traditional or legacy services have been shrinking at 3.6 per cent a year and represent 74 per cent of their market. Digital has been growing at 20.1 per cent and makes up 26 per cent of the market,” said Peter Bendor Samuel, chief executive, Everest Group, a global IT research and advisory firm.
Despite higher growth compared with legacy services, the digital transformation efforts of the top five has not been able to offset decline in traditional services. “For the top five Indian firms, the picture changes. They have grown traditional or legacy work at 2.2 per cent this year, so legacy makes up 80 per cent of the market. For the top five Indian firms, digital is growing at 24.5 per cent but it only makes up 20 per cent of the base. What is lost in this analysis is the role of acquisitions or inorganic growth,” he said.
In fact, they pointed out, inorganic growth through acquisition of new capabilities and skills has played a significant role in digital revenue growth for many Indian IT firms. For example, Wipro counts a great deal of cloud revenue through Indianapolis-based Appirio, which was acquired last year for $ 500 million.
Wipro said at 24.1 per cent revenue from digital technology services, cloud business is at a run rate to achieve $ 1 billion revenue a year. TCS saw an increase in digital deal wins during the second quarter of FY18.
The reason for the slow-paced shift for these large Indian firms is the non-acquisitive approach. “Wipro is an exception to this as they have been aggressive in acquiring large books of digital business inorganically,” said BendorSamuel, adding that “the non-Indian firms are far more aggressive in gaining market share in digital through acquisitions and are building a large lead despite slower growth organically, and this underlines that at this stage of the market a grow-your-own-strategy is not as successful as acquire and build”.
Wipro’s cross-town rival, Infosys, which has started accounting for digital revenue from this year, saw a marginal quarterly growth in JulySeptember to 11 per cent (from 9.9 per cent in Q1). Analysts said the digital revenue growth might look rapid but that is because it is on a small base.
Infosys is yet to catch up with its peers in terms of the digital shift. Under first nonfounder chief executive, Vishal Sikka, an executive said, the company made good inroads in design thinking. Those efforts, however, were temporarily impacted by the feud between the board and founders during the past couple of quarters. While many initiatives for digital pivot remain, the company is now on a look-out for new CEO who could put the transformation process on the fast track.
“Our endeavour now in the next 12 months to 18 months is to accelerate our pace of change to aggressively embrace automation both for the traditional services, as well as use automation to make our new services more compelling...if there is some acquisition which is going to help us to accelerate this, absolutely, we will make those acquisitions. But those acquisitions have to fit into the strategic envelope that we are talking about,” Nandan Nilekani, non-executive chairman, Infosys, told analysts in a recent call.
Bendor-Samuel claims Infosys’ slow digital growth shows how grow-your-own-strategy has not been effective. “Infosys’ well documented slow growth in their platforms and new services group is a good example of the difficulty in a grow-your-own-approach. To be fair to Infosys, the leadership team was keep to pursue an inorganic strategy but the personality clash with the founders and the ensuing issues hamstrung that initiative. It will be interesting to see if the new leadership pursues inorganic options more aggressively now that those issues are receding.”