Competitive Analysis of

IT Service Firms

By Sayan Maiti
DATE : 6th June, 2013
 IT Services Industry Overview
Global IT Services Spend IT Services Spending Projected Worldwide revenues- Indian IT
Growth % services
980 6.00% 14000 Growth Rates
15.2%
4.90% over 2 years
Values in US Billion Dollars

960

Values in US Million Dollars

12000
4.50% 5.00%
940 10000 20.10%
4.00%
920 6.60%
8000 2011
900 3.00% 7.60%
1.50% 6000 18.10% 2012
880
2.00% 2013
4000
860
1.00% 2000
840
820 0.00% 0
2012 2013 2014 TCS Cognizant Infosys Wipro HCL

Source : Gartner IT Spending Forecast Mar’13 Source : Gartner IT Spending Forecast May’13

Globally IT industry is going to grow steadily The top five Indian providers grew 13.3% exceeding the
despite a weakening global economy. 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 PC’s 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 second-
largest 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 Getting new/renewed projects from clients
from existing clients
Ability to cross sell and up sell

Ability to bid and win Ability to grow

new contracts inorganically

Total Hours Billed REVENUES Billing Rates

No of Utilization Hours per Onsite/ Position in

Employees X Rates X employee per year Offshore mix
Competition
value chain

No of billable Total no of
employees / employees Client Business
Targeting Development

Attrition Ability to control Ability to control SG&A

Rates
MARGINS
employee costs Expenses

Brand
Building

Timely management of Ability to manage capital

CASH FLOWS
receivables and payables and generate adequate ROI

Key Business Drivers

Competitive Analysis of IT Service Firms Page 2

IT Service Firms - Worldwide
 Competitive Analysis - IBM
Key Drivers Performance
Repeat Business from customers Presence in IT & ITES, H/W and Software helps them serve the customer in many ways
REVENUES

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
MARGIN

Employee Costs High attrition rates ~15% ( Overall IBM )

SG&A Expenses Around 22-25% of Revenues which is high

Sell technology
Understand the client’s Take over Additional
development for
problem and suggest implementation revenues for
client as a
solution and cross sell maintenance of
proprietary
( Business Consulting) services products
product

Competitive Analysis of IT Service Firms Page 3

 Competitive Analysis - IBM
STRENGTHS Started with Mainframes and then
 Technology firm with a century-long into PC’s, Copiers, telephone’s,
WEAKNESS
history and operations across the globe.
 Large number of satellites and now they are into
 Strong presence in high-growth
emerging markets such as BRICs.
employees and high mostly software and services. More
level of R&D spending than 80% of the companies revenues
 Diversified portfolio of products and
limits flexibility. comes from software and services
services across computer hardware,
 Communication across
computer software, IT services and IT
different countries is
(50% +)
consulting.
challenging in view of
 Has end-to-end provision capability and
the size of the
additional strength of higher margin
company.
“Technology companies must
software and services. pursue constant market
expansion and diversity to stay
SWOT alive and relevant” – Steve
THREATS
Ballmer
OPPORTUNITIES
 Possible acquisitions and merger  Increasing competition THE NEXT-GENERATION IBM
opportunities that the company can seize in services market
from major players
IBM acquired Softlayer Technologies
and increase its market share greatly.
 Can benefit from emerging market including Dell, for around $2 billion. This will make
demand growth via presence in BRICs Accenture, HP and IBM one of the biggest players in the
and frontier markets as enterprises Oracle. cloud computing industry.
modernize and governments invest in  Heavy dependence on
infrastructure. Microsoft in computer The bottom line is that they have
 Strong brand aids acquisition and services division could
be a weakness should
recognized that almost everything
retention of high-value customers.
 Investments in cloud, big data, security Microsoft's strategy in the future will be delivered
and analytics offers medium-term growth change through cloud and they gain early
prospects in high margin activities. expertise through this acquisition.

Competitive Analysis of IT Service Firms Page 4

IT Service Firms - India
 Competitive Analysis - TCS
Key Drivers Performance
Repeat Business from customers More than 95% of TCS revenues comes from repeat business
REVENUES

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
MARGIN

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 )
Telecom
5% 5%
4%  In the year 2008 it made big acquisition to the tune of $512 million all
Manufacturing by cash to buy out Citi Global Services. This helped TCS to become
43%
16%
Retail number 1 in BPO service. Recently TCS acquired CRL which would
14%
13%
allow it to offer more differentiated services to its global clients.
Utilities
 Growth was led by markets like the UK and Europe, growth markets
Healthcare like India, Asia-Pacific, Latin America and the Middle East performed
well.
Others
 While financial services vertical’s relative performance is not as
expected, retail, manufacturing and telecom have performed well.
Competitive Analysis of IT Service Firms Page 5
 Competitive Analysis - TCS
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.
WEAKNESS
 Derives large proportion of
revenues from developed
markets, especially the US,
that are facing economic
difficulties.
 Lags some peers and
multinational rivals in high-
end consulting offerings.
• Heavy exposure to banking,
financial services and
insurance vertical.

SWOT
OPPORTUNITIES
 Product portfolio expansion
enables TCS to move into end-
to-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.
Competitive Analysis of IT Service Firms
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.
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
Key Drivers Performance
Repeat Business from customers 90% of business comes from existing clients
REVENUES

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
MARGIN

Employee Costs Attrition rate of 11% and lowest among peers

SG&A Expenses SG&A expense of 21% is highest among peers

Cognizant Verticals  Growth Strategy followed by Cognizant is as follows

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.
13%
Manufacturing, 3. Aggressive strategy for acquiring market share.
42% Logistics and Retail
25%  Cognizant has been constantly adding more businesses to its
Healthcare 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.
20% Media,
Entertainment and  Cognizant has promised the market a lower margin compared
Technology to its peers, in return for higher growth.

Competitive Analysis of IT Service Firms Page 7

 Competitive Analysis - Cognizant
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.
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.
Competitive Analysis of IT Service Firms
WEAKNESS
 Nearly 75% of business from
the US could turn risky.
 A laggard in BPO business
 Lags peers in infrastructure
management business.
SWOT
THREATS
 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.
BIG 5 STRATEGIES
Closer to the clients – Spends heavily on
sales and marketing which has helped
win more deals.
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 )
Two in a box Strategy – A relationship
management team and deep industry
expertise are assigned to every client.
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
Key Drivers Performance
Repeat Business from customers Repeat business percentage dropped from 98% in 2012 to 95% in Q4’13
Inorganic Growth 3 Acquisitions since 2000. Acquisition of Lodestone Management Consulting in
REVENUES

September’12
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
MARGIN

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
BFSI pressured to cut costs in the backdrop of a slowdown. ( e.g. Infosys
doesn’t favor reverse auction processes )
6% 4% Telecom
6%
 Infosys has always focused on the high margin business. For this, it
35%
18% Manufacturing has concentrated on the business from the developed markets such
as the North America and the Europe. However it has ended up
21% Retail ignoring emerging markets like India and its revenue % from the
10% domestic markets ( 2.1 % from India in 2012) is among the lowest.
Utilities
 Infosys also gets a higher share of revenues from Consulting which
Healthcare has helped it maintain its margins.
Others  Infosys has better distribution of verticals and it has started
focusing on healthcare which is an emerging sector.
Competitive Analysis of IT Service Firms Page 9
 Competitive Analysis - Infosys
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.
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.
Competitive Analysis of IT Service Firms
WEAKNESS
 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.
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.
Infosys 3.0 Strategy
1. Identification of seven game-
changing 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
A very futuristic looking strategy but
Infosys needs to make sure that it
implements it faithfully.
Page 10
 Indian IT Services Industry Ratio’s Comparison
Comparison of P/E Ratio for 5 years Comparison of Profit Margins across 5 years
30 30

25 25

Profit Margins
20 Infosys 20 Infosys
P/E Ratios

15 TCS 15 TCS
Wipro Wipro
10 10
HCL HCL
5 5

0 0
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

Comparison of ROE for 5 years Comparison of Net Working Capital as % of Sales

45 80
40 70
35 60
30 Infosys NWV/Sales in % Infosys
ROE Values

50
25
TCS 40 TCS
20
Wipro 30 Wipro
15
HCL 20 HCL
10
5 10
0 0
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

Competitive Analysis of IT Service Firms Page 11

 Indian IT Services Industry Overview
Revenue Growth for IT Service Firms PAT Growth for IT Service Firms
40% 50%
35%
40%
30%
Growth Rate in %

PAT Growth in %
25% Infosys 30% Infosys
20% TCS TCS
20%
15% Wipro Wipro

10% HCL 10% HCL

5%
0%
0% 2010 2011 2012 2013
2010 2011 2012 2013 -10%

Old PRODUCT New 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
Old

Market Penetration Product Development faster because of their aggressive diversification

MARKETS

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.
Market Development Diversification
 Companies like TCS and Wipro have taken the inorganic
New

route for growth through mergers and acquisitions

looking to expand their customer base.

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