Muted growth in legacy biz, digital struggles twin worries for Indian IT
BENGALURU: Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd face twin challenges in muted growth in traditional business offerings even as their growth in digital areas pales in comparison with Accenture Plc, underlining the struggle faced by India’s three largest information technology outsourcing companies in this two-speed world of digital and non-digital.
Digital, the fuzzy and umbrella term which each firm uses to classify revenue generated from areas generally classified as social, mobile, analytics, cloud and Internet of Things, accounts for less than a fourth of revenue at Indian IT firms far less than business coming from selling these new technology solutions.
Accenture’s new and digital revenue reported a 9.5% sequential jump to $4.76 billion in the fourth quarter ended August.
Accenture, which follows the September-August financial year, grew 6% to end fiscal year 2017 with $34.9 billion in revenue, with new revenues alone totalling $18 billion. This means Accenture’s $18 billion new revenue is more than the entire business TCS did last year. In the June-August quarter, Accenture’s new business alone was more than TCS’s $4.74 billion revenue in the September quarter.
This explains why despite reporting a 2.9% sequential decline, on the back of a 12.5% drop in legacy business last year almost on par with Indian rivals: Accenture’s 6% dollar revenue growth last year is less than the 6.2% growth recorded by TCS. Infosys grew 7.4% and Wipro 4.9% in 2016 17 Keith Bachman of BMO Capital Markets estimate Accenture to grow faster than Indian IT services firms in the current financial year while some others believe that a relative underperformance nue growth and interest among shareholders.
“Indian IT players now have two parts to their portfolios: the legacy portion (55-83% of FY17 revenue) that is barely growing, and the smaller ‘new’ portion that is growing 20-30% y-o-y. Thus, how fast the ‘new’ grows and how well the slowdown in the legacy part is arrested could decide how revenue growth and valuations play out over the medium term,” BNP Paribas analyst Abhiram Eleswarapu wrote in a note earlier this year.
Considering most Fortune 1000 companies are cutting their spend on legacy work such as application maintenance, and ploughing the savings on newer projects in areas such as data analytics and cyber security solu need to strengthen their offerings in these areas.
“Digital parts of the business grow 2-3 times faster than the rest of the business , and this is simply driven by increased client demand for digital services,” said Ralf Dreischmeier, Londonbased head of technology practice at Boston Consulting Group.
For now, Indian companies are finding it challenging.
At the heart of Accenture’s better performance is the strong consulting practice and aggressive investments in new technology areas like cloud computing, data analytics and design capabilities: Last year saw Accenture spending $1.7 billion to buy 37 companies. This is more than the $1.58 billion spent by TCS, Infosys and Wipro together since 1 April 2014 tions like data analytics as part of legacy projects offers out sour cing companies to sell solutions in areas like software testing.
“I think it’s important to say that traditional business is an important enabler for digital Because of exception of what you call as digital natives, the other companies, which are majority of the world, are all building digita on top of the traditional technol ogy backbone,” Francisco D’Souza, CEO of US-based Cognizant Technology Solutions Corp said in an interview earlier in August.
A spokesperson for Cognizant clarified that its platform solu tions business, including that of Trizetto acquisition, and revenue from business process services are not part of digital revenue of