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
14000
980 6.00% 15.2% Growth Rates
10000 20.10% over 2 years

US Million Dollars
960 4.90%
Dollars

12000
4.50% 5.00%
940
USBillion

4.00% 8000 2011

6.60% 7.60%
920
900 3.00%

6000 18.10% 2012

880 1.50%

Values in
2.00% 2013
in

840 4000
Values

860 1.00% 2000

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 
Revenue contribution from project-based and staf
and information — are reshaping spending augmentation deals has continued to decline for the
patterns across all of the IT sectors” – Gartner. top five Indian-based providers, and the outsourcing
service line component has steadily increased.

Consumers and enterprises will continue to
purchase a mix of IT products and services – 
Cognizant displaced Infosys to become the second-largest
however the mix is going to change radically in Indian IT services provider in 2012-13.
the future e.g. transitions from PC’s to mobile
or licensed software to cloud.

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
Ability to control
Ability to control SG&A
Attrition MARGINS
Rates employee costs Expenses

Brand
Building

Timely management of CASH FLOWS Ability to manage capital

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

Understand the client’s Take over Sell technology 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 history into PC’s, Copiers, telephone’s,
and operations across the globe. WEAKNESS

Strong presence in high-growth
emerging markets such as BRICs.

Large number of satellites and now they are into
employees and high mostly software and services. More

Diversified portfolio of products and level of R&D spending
services across computer hardware, limits flexibility. than 80% of the companies revenues
computer software, IT services and
IT consulting.

Communication across comes from software and services
diferent countries is (50% +)

Has end-to-end provision capability and challenging in view of
additional strength of higher margin the size of the
software and services.
company.
“Technology companies must
pursue constant market
expansion and diversity to stay
SWOT alive and relevant” – Steve
THREATS Ballmer
OPPORTUNITIES
Possible acquisitions and merger THE NEXT-GENERATION IBM
 
Increasing competition
opportunities that the company can seize
and increase its market share greatly. in services market from
major players including IBM acquired Softlayer Technologies

Can benefit from emerging market for around $2 billion. This will make
demand growth via presence in BRICs Dell, Accenture, HP and
and frontier markets as enterprises Oracle. IBM one of the biggest players in the
modernize and governments invest in 
Heavy dependence on cloud computing industry.
infrastructure. Microsoft in computer

Strong brand aids acquisition and services division could
retention of high-value customers. The bottom line is that they have
be a weakness should

Investments in cloud, big data, security Microsoft's strategy recognized that almost everything
and analytics ofers medium-term growth
prospects in high margin activities. change in the future will be delivered
through cloud and they gain early
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 )
5% 5% Telecom

In the year 2008 it made big acquisition to the tune of $512 million all
4% by cash to buy out Citi Global Services. This helped TCS to become
Manufacturing number 1 in BPO service. Recently TCS acquired CRL which would
16% 43% allow it to ofer more diferentiated services to its global clients.
Retail
14% 13%

Growth was led by markets like the UK and Europe, growth markets
like India, Asia-Pacific, Latin America and the Middle East performed
Utilities well.
Healthcare

While financial services vertical’s relative performance is not as expected,
Others retail, manufacturing and telecom have performed well.

Competitive Analysis of IT Service Firms Page 5

 Competitive Analysis - TCS
WEAKNESS
STRENGTHS 
Derives large proportion of

One of the world's largest IT revenues from developed
services companies. markets, especially the US,
Increasingly viewed by that are facing economic
customers in the same difficulties.

league as IBM and HP. Lags some peers and

Large international workforce. multinational rivals in high-

Driving BPO services in India. end consulting offerings.

Diversified revenues across • Heavy exposure to
regions, services and verticals.
banking, financial services
and insurance vertical.

SWOT
OPPORTUNITIES THREATS
Lower outsourcing costs in Strategy for long term growth


Product portfolio expansion
enables TCS to move into neighboring South Asian
end-to-end services market, markets could see contracts Customer Centricity – For repeat business
benefiting revenues and move away from TCS.

margins. People-led linear growth means
Cognizant can beat it. Full Service Capability – Present in

Positioned among all Indian 
There are no visible leaders all segments and geographies
vendors to disrupt the global beyond N Chandrasekaran
league of IBM-HP-Accenture.

Geographical expansion into

Vulnerable to global economic Global Network Delivery Model –
relatively untapped regions. climate, with demand from Facilitate cost arbitrage across geographies

Potential for strong revenue developed market financial
growth from home market in institutions still a key part of its Strategic Acquisitions – For quick growth
India. revenue mix.
across segments and geographies
Non Linear Business Models – Strategies
to ensure growth without increasing the
head count.
Competitive Analysis of IT Service Firms Page 6
 Competitive Analysis - Cognizant
Key Drivers Performance
Repeat Business from customers 90% of business comes from existing clients
MARGIN 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
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
13% customers faster.
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
20% scale them up fast.
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
BIG 5 STRATEGIES

One of the fastest growing Closer to the clients – Spends heavily on
companies in the business of sales and marketing which has helped
outsourcing.

Concentration in 4 key verticals
win more deals.
helps focus investments.

Price competitiveness WEAKNESS

US-centric model helps in

Nearly 75% of business from the Lobbying – Spent 1.95 M USD last year
positioning. US could turn risky.

A laggard in BPO business the highest and more than the sum total

High wallet share of fewer large
customers ensures growth even

Lags peers in infrastructure
management business.
spent by all IT companies. ( Wipro - $.29
during crisis. M, Nasscom - $ .115 M, Infosys < $5000 )

Blends IBM's depth with
Accenture's front-ending
capabilities in its model. Two in a box Strategy – A relationship
management team and deep industry
SWOT expertise are assigned to every client.
THREATS
Consulting Practice - CBC, the consulting

Profit Margins among the practice, has over 3,300 consultants
OPPORTUNITIES lowest in the top 5 responsible for business, strategy and
players. Shows that they

Has beaten Wipro and more have sacrificed their operations consulting. This investment
recently Infosys to be the second margins for growth.
biggest player in IT Services has helped increase its mindshare with

Industry in India. TCS could be Pace of growth could cause clients, thereby driving market share,
fatigue among leaders.
next.  and also win and execute large-scale
 Will make for a good
Growing Europe business to acquisition target for an IBM
mitigate US risks. or Accenture in future.
transformation deals.

Geographical expansion into 
relatively untapped regions. Over-dependency on US could
afect prospects during
recession. Investment in SMAC (Social, mobile,
analytics and cloud) - Delivering SMAC
stack related work for over 60 per cent
of the top 100 customers.
Competitive Analysis of IT Service Firms 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
MARGIN

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
BFSI
pressured to cut costs in the backdrop of a slowdown. ( e.g. Infosys
6% 4% Telecom doesn’t favor reverse auction processes )

6%
Infosys has always focused on the high margin business. For this, it
35%
has concentrated on the business from the developed markets such
18% Manufacturing as the North America and the Europe. However it has ended up
21% Retail ignoring emerging markets like India and its revenue % from the
domestic markets ( 2.1 % from India in 2012) is among the lowest.
10% 
Infosys also gets a higher share of revenues from Consulting which has
Utilities helped it maintain its margins.
Healthcare

Infosys has better distribution of verticals and it has started focusing on
healthcare which is an emerging sector.

Others

Competitive Analysis of IT Service Firms Page 9

 Competitive Analysis - Infosys
Infosys 3.0 Strategy
WEAKNESS

Large proportion of revenues
STRENGTHS from developed markets, 1. Identification of seven game-
especially the US, that are

One of the world's renowned IT facing economic difficulties. changing trends that form the
services companies.

Early positioning as a high end

Lagging peers in making innovation framework.
differentiated player. strategic, 'game-changing' 1. Digital Consumers

Diversified revenues across acquisitions
regions, services and verticals. 
Consulting business has not 2. Emerging Economies
delivered the results as 3. Healthcare Economy
expected.
4. New Commerce
5. Pervasive Computing
SWOT 6. Smarter Organizations
7. Sustainable Tomorrow
OPPORTUNITIES
2. Products, platforms and

Best positioned to replicate THREATS
the Accenture model from
offshore 
Ongoing visa abuse case and
federal investigations in the solutions was set up as a

A game-changing acquisition in
a new geography could help US could affect brand and dedicated organization to focus
the company raise its profile. business.
 on innovation-led business

Profit Margins among the Management transition from
best in the industry which founders to professionals will growth for our clients.
offers cushion for further bring uncertainty. 3. Infosys manages the portfolio of
growth. 
Vulnerable to global economic

Geographical expansion into climate, with demand from
relatively untapped regions. developed market financial software assets and creates

Potential for strong revenue institutions still a key part of
growth from home market in its revenue mix. oferings around them
India.
A very futuristic looking strategy but
Infosys needs to make sure that it
implements it faithfully.

Competitive Analysis of IT Service Firms 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

Margins
20 Infosys 15 TCS
Ratios

20 Infosys
15 TCS 10 Wipro

Profit
P/E

10 Wipro
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 50 Infosys
ROE Values

NWV/Sales in %
Infosys
25 40 TCS
TCS
20 30 Wipro
Wipro
15
HCL 20 HCL
10
10
5
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%
in %

25% Infosys 30%

%
Infosys

PATGrowthin
GrowthRate

10% HCL 10%

20% TCS 20% TCS
Wipro
15% Wipro
5% 0% HCL

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.
Market Penetration Product Development
Old 
Companies like HCL and Cognizant are able to grow
MARKE faster because of their aggressive diversification
TS New strategies along with acquisitions. In this process
they have sacrificed their profit margins for growth.

Companies like Infosys have focused on growing
Market Development Diversification 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.

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 : [email protected]
Phone : +91 - 7389464800