IT Services Business Management

ODigitech Consulting

IT SERVICESBUSINESS MANAGEMENT

september 2014

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CONTENTS1. QUARTERLY PERFORMANCE ANALYSIS 4

1.1 Competitive Analysis 4 1.2 Quarter I FY 2013 Financial Performance 5 1.3 Quarter I FY 2013 Vertical Leadership 5 1.4 Quarter I FY 2013 Results Summary 6 1.5 TCS Quarter I FY 2013 Performance 7 1.6 Cognizant Quarter I FY 2013 Performance 7 1.7 Infosys Quarter I FY 2013 Performance 8 1.8 Wipro Quarter I FY 2013 Performance 8 1.9 HCL Quarter I FY 2013 Performance 9

2. VERTICAL PERFORMANCE ANALYSIS Q2 FY 2012 102.1 Vertical Leadership Realignment among top Indian Service Providers 10

3. EUROPE PERFORMANCE ANALYSIS 133.1 Indian Tier I providers Europe Strategy 13 3.2 Indian Tier I providers Europe Acquisition 13 3.3 Indian Tier I providers Financial Performance 14

4. IT STRATEGIC OUTSOURCING 164.1 Introduction 16

5. IT SOURCING MODELS 175.1 Key Model 17 5.2 Multi-Sourcing 17

6. IT OUTSOURCING DEAL ANALYSIS 186.1 Manufacturing IT Outsourcing Deals 18 6.2 Quarterly Outsourcing Deal Analysis 19

7. IT INFRASTRUCTURE OUTSOURCING DEAL ANALYSIS 217.1 Manufacturing 21 7.2 CPG and Retail 21 7.3 Pharmaceutical 22 7.4 Banking 22

8. INDIA IT OUTSOURCING ANALYSIS 238.1 Private Sector Outsourcing Deal Trends 23 8.2 Public Sector IT Outsourcing Objectives 23 8.3 Public Sector Outsourcing Deal Trends 23

IT Services Business ManagementBy Manish Tiwari

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QUARTERLY PERFORMANCE ANALYSIS

1.1 CoMpeTiTive analysis A broad definition of competitive intelligence is the action of defining, gathering, analyzing, and distributing intelligence about products, customers, competitors and any aspect of the environment needed to support executives and managers in making strategic decisions for an organization. (Wikipedia) The dynamics of competitive evaluation changes depending on the requirements. The tier – I Indian IT service providers have been evaluated on a quarterly and annual basis. The evaluation criteria has been designed covering the following broad categories

• Financial Capabilities • Vertical Capabilities • Horizontal Capabilities • Employee Strength • Client Base • Growth Metrics • Outlook: Acquisition, Growth Plan, Alliances

NOTES

• The fiscal year considered for evaluation is based on the time period followed by each company for their fiscal cycle so the time period for competitive evaluation on an annual basis may vary for each company though ideally the evaluation time period must be same for all providers however there is not much material difference in the status of providers when considered otherwise.

• Consolidated reported revenue figures have been considered for the calculation of the growth rate and size.

• Constant currency/organic growth rates have been indicated wherever available.• The information is sourced through public sources such as news articles, company

websites and company reports.

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1.2 QuarTer 1 Fy 2013 FinanCial perForManCe

1.3 QuarTer 1 Fy 2013 verTiCal leadership

All revenues and profit are in US $ million

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1.4 QuarTer 1 Fy 2013 resulTs suMMary REVENUE

• Cognizant has overtaken Infosys in terms of quarterly revenue in the June quarter with revenue of $1795 million against Infosys $1752 million. With the current pace of growth Cognizant will emerge as the second largest India based IT service provider behind TCS at the end of financial year.

• Cognizant leads all other tier-1 provider in terms of year-on-year and sequential growth.• Compared to the same quarter year ago TCS and Cognizant have increased their quarterly

revenue by $316 and $310 million while HCL has added $116 million in quarterly revenues even as Wipro and Infosys had added $106 and $81 million.

• TCS leads the tier-1 providers with almost $1 billion revenue differential with next provider Cognizant. Globally TCS and Cognizant have improved their rankings from 21 and 30 to 16 and 27 respectively even as Infosys and Wipro maintained their ranking of 26 and 31. HCL moved from 48 to 46.

NET INCOME

• HCL leads in terms of sequential and year-on-year growth in profits but such high growth rates are not consistent across the quarters with large degree of deviations observed from quarter to quarter.

• Cognizant has exhibited highest net profit growth rate of 21.15% among the other four providers.

• TCS and Infosys has highest operating profit margin of almost 28% and lead others in terms of net profit margin as well. Infosys leads TCS in terms of net profit margin with 1.5% even as Cognizant has the least net profit margin among all providers.

• Infosys is ahead of Cognizant in terms of absolute profit by $127 million

EMPLOYEE

• TCS and Cognizant has added close to 5000 employees in the quarter indicating that they will continue with their robust performance in the quarters ahead compared to other providers.

• Infosys has higher employee base to the extent of 6000 compared to Cognizant even though the quarterly revenue is less indicating less per employee revenue realization for Infosys.

OThERS

• Cognizant added six new strategic customers in the quarter, including Philips Electronics NV according to president, Gordon Coburn. The company defines strategic customers as those who have the potential to bring in at least $5 million to more than $50 million a year in annual revenue. The company entered into a $330 million deal in June with the U.S. unit of Dutch insurer ING Group NV to expand the business process management contract between the two.

• Growth for Cognizant was across divisions and regions. The only concern area remains Europe and pharmaceuticals under its healthcare service line.

• TCS Signed new $100 million contract with North American retailer. • During the Quarter, HCL signed 8 multi-year, multi-million transformational deals.• Wipro has won a multi-year contract from Royal Philips Electronics.

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1.5 TCs QuarTer 1 Fy 2013 perForManCe

1.6 CognizanT QuarTer 1 Fy 2013 perForManCe

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1.7 inFosys QuarTer 1 Fy 2013 perForManCe

1.8 wipro QuarTer 1 Fy 2013 perForManCe

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1.9 hCl QuarTer 1 Fy 2013 perForManCe

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2.1 verTiCal leadership realignMenT aMong Top indian serviCe providers Indian tier-1 companies have shown good growth in second quarter of fiscal 2012 with the combined sequential revenue growth for TCS, Infosys, Wipro and HCL being 4.5% though there was negligible growth in net profit. This can be attributed to salary increase, promotion and fresher’s joining the companies in the last quarter.

Cognizant had the highest incremental revenue of US $ 116 million followed by TCS with incremental revenue of US $ 113 million. Infosys and Wipro trails with incremental revenue of US$ 75 million & US$ 64 million. A breakup of incremental vertical revenue compared to first quarter of FY 2012 is depicted in the table.

VERTICAL PERFORMANCE ANALYSIS Q2 FY 2012

TCS Infosys Cognizant* Wipro HCL

BFSI 53.98 24.80 49.08 22.98 1.12

Manufacturing &Hi Tech

22.72 13.48 ** 2.30 20.94

Telecom -‐12.02 4.46 *** -‐5.44 -‐2.46

Retail 25.73 2.95 -‐ 5.18 9.09

Energy& Utilities

16.92 4.28 -‐ 38.34 0.23

Healthcare & Pharmaceuticals

8.40 17.57 29.63 0.64 0.08

*Cognizant vertical revenue distribution for 2010 is taken for calculations since the company does not provide vertical revenue break up on quarterly basis.

**Cognizant Manufacturing revenue is inclusive of retail revenues also so it has not been included for evaluation since a fair comparison will not be possible with other providers.

***Cognizant Telecom revenue is combination of multiple micro verticals so it has been excluded from evaluation.

Provider’s Retail vertical composition varies however major revenue contribution is from core retail. TCS classifies as Retail & Distribution, Wipro as Retail & Transportation, HCL as Retail & CPG and Infosys Retail is inclusive of CPG, Transportation & Logistics.

For TCS Hi-Tech and Manufacturing revenues has been combined while for other providers it is assumed that Manufacturing revenue is inclusive of Hi-Tech revenue

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An analysis of provider’s vertical incremental revenue indicates that there is good growth across all verticals except telecom. The top performing providers has shown robust growth in their strong verticals.

• Banking Financial Services & Insurance (BFSI), a strong vertical for TCS and Cognizant, the incremental revenue has been high for both the providers at US$ 53.98 and US$ 49.08 million.

• Another strong vertical for TCS is Retail where the incremental revenue has been US$ 25 million even as Infosys has shown marginal revenue increase though the vertical is one of highest revenue contributor for the company.

• Infosys is a leading provider in Manufacturing & Hi-Tech vertical however the growth is muted as compared to TCS and HCL who have performed better.

• A bright spot for Wipro is its incremental revenue in Energy & Utilities where it is the leading provider while another strong vertical performer is TCS with equally good growth.

• Once again Cognizant has achieved high incremental revenue of US$29.63 million in Healthcare & Pharmaceutical where it is the strongest provider even as Wipro another top provider in the vertical has shown flat growth.

TCS dominates the vertical leadership by leading in three verticals deriving highest revenue among all Indian providers. TCS leads in BFSI, Telecom & Retail and closely following Infosys in Manufacturing & Hi-Tech vertical. Wipro leads the Energy & Utilities while Cognizant leads in Healthcare & Life Sciences vertical with huge revenue difference with its closest rival.

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verTiCal revenue disTriBuTion For QuarTer-2 Fy 2012 (July To sepTeMBer 2011)

Revenue $ Millions

By the end of third quarter, we can expect some rejig in the vertical leadership among Indian providers. There is possibility of TCS becoming leading provider in the Manufacturing & Hi-Tech vertical overtaking Infosys. TCS can move ahead of Wipro in Healthcare and Pharmaceutical to become the second leading provider following Cognizant if TCS maintains better growth rate.

The best course for Infosys and Wipro is to enhance competencies in their strong verticals and attempt to gain higher market share in those respective verticals. There is a need for focused approach in terms of geographical and vertical opportunities.

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EUROPE PERFORMANCE ANALYSIS

3.1 indian Tier i providers europe sTraTegy

TCS exposure is primarily to countries such as Belgium, Netherlands, Luxembourg, the Nordic region, Germany and Switzerland. TCS operation has presence in Amsterdam, Brussels, Luxembourg & Eindhoven.

Cognizant had near-shore centers in Hungary, and France. When it comes to building local teams in the respective countries, the company has followed organic as well as acquisition approach.

Infosys had plans to double the revenue share from Europe to 40 per cent of its total sales by the end of FY 2014 however the company had missed its goal. The company had planned revenue mix of 40 per cent from Americas, 40 per cent from Europe and 20 per cent from Asia by the end of fiscal 2014.

3.2 indian Tier i providers europe aCQuisiTion

• INFOSYS Infosys had acquired Zurich-based Lodestone Holding AG, a leading management consultancy firm, for 330 million Swiss francs ($345 million or Rs.1,925 crore). The Swiss company added more than 200 clients from across several industry segments, to Infosys’ pool of over 700 clients. The acquisition of Lodestone would strengthen its consulting and systems integration (C&SI) capabilities, by adding more than 850 employees, including 750 experienced SAP consultants into the company. Geographically, the acquisition augmented its presence in continental Europe and emerging markets such as Latin America and Asia Pacific.

• TATA CONSULTANCY SERVICES Tata Consultancy Services bought French technology services company Alti SA for over 75 million euro (Rs 530 crore) in a deal aimed at giving India’s largest software company the competitive edge in the European market. Alti, which has about 1,200 employees, counts Banque de France ( French central bank), BNP Paribas, Credit Agricole, and Societe Generale among its clients in banking sector besides others such as Air France, L’Oreal and telecom company Orange.

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indian Tier 1 providers FinanCial perForManCe

2014 2013

2013 2012

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2012 2011

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IT STRATEGIC OUTSOURCING

4.1 inTroduCTionDeals are classified as strategic if they meet any of these criteria:

• Good brand reference for the service provider portfolio• Fortune 2000 company or one of the top 1000 focus customers of the service provider• Value of the deal is greater than $10 million per annum (criteria may vary by company)

A large strategic deal is usually serviced through a separate organization commonly referred as Strategic solutions organization (SSO). Deal process followed is similar for all kinds of deal though the efforts and review process involved increases with the value of the deal.

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IT SOURCING MODELS5.1 Key ModelMentioned below is a quick summary of the key sourcing models that are available (please note that these are not distinct concepts and there are overlaps):

• STAFF AUGMENTATION: External provider offers staff to support initiatives. Most common in IT applications development and maintenance.

• ExTENDED ENTERPRISE: An extended IT team is built at suppliers facilityo The extended team would be managed by supplier but dedicated to customer o Customer commits to a certain volume of work with certain allowance for capacity changes o Focus is on operations stability and while ensuring continuity/scalability o Customer’s IT team leads the project initiates

• OUTSOURCING: Utilise experience of outsourcing partner - technologies, quality and development modelso Retained IT organisation program manages supplier o Supplier offers business value o Supplier accepts ownership and associated risks

• hYbRID: A hybrid between extended enterprise and outsourced modelo Supplier team is able to accept independent responsibility and deliver services o Deliverables are measured based on SLAs o Such hybrid model is restricted to one or more projects, functional or technology areas o Focus is on operational excellence and productivity improvements

• IN-SOURCE: As defined here, it refers loosely to a offerings that are essentially provided by staff (as opposed to a service provider), and this is characterised by a low competitive environment. This is usually suitable for niche work.

• ShARED SERVICE CENTRE (SSC): As defined here, SSC is a shared-service (composed of services that are shared across multiple business units) that is managed internally but with similar service agreements as with a service provider.

• GLObAL SOURCING: When projects/services are outsourced or Shared Service (a service that is shared across business units) or any of the above models are established out of the home base of the process. Global sourcing includes offshoring, near- shoring or any combination of these.

5.2 MulTi-sourCingMulti-sourcing refers to the sourcing of technology services from multi-vendors across different geographies. This is essentially done from the perspective of technical expertise and risk management.

Bruno Laquet , CIO of Corus also moved the company to a multi-sourcing approach following the end of a 10-year outsourcing contract with Capgemini which covered infrastructure and application maintenance in the UK. After the Capgemini contract expired in 2008,

Laquet split the outsourced services into several service lines - mainframe data, PC support, application maintenance, and service management - some of which was outsourced to

several suppliers and some was in-sourced.

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IT OUTSOURCING DEAL ANALYSIS6.1 ManuFaCTuring iT ouTsourCing deals• APPLICATIONS

• INFRASTRUCTURE

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6.2 QuarTerly ouTsourCing deal analysis

Q3 2012

• United States and Continental Europe recorded highest number of outsourcing deals

• United States continues to be the largest market for outsourcing with highest dollar value deal originating from the region

• India recorded one of the highest outsourcing deal in terms of value though the number of deals recorded was low

• India is at par with UK in terms of number of deals

• Australia is also emerging as market for outsourcing

• BFSI dominates the outsourcing landscape with largest number of deals from the vertical

• BFSI vertical has highest no of deals in Europe followed by India

• Government sector has emerged as the second most important outsourcing vertical

• Government sector deals are higher in Europe & UK

• Though Telecom and Manufacturing lags in terms of no of deals but they have recorded top two highest deals in terms of value

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• TCS & Cognizant are the Indian providers among the top in the outsourcing league table based on the number of deals

• Infosys and HCL lags in bagging the outsourcing deals while Wipro has not announced any deals in the quarter

• Tier-II Indian providers have made their presence felt winning 40% of all the outsourcing deals won by Indian providers

• Major tier-II providers, iGate Patni & L&T Infotech does not figure in the outsourcing deal table

• TCS has won two BFSI and one telecom deals with none of the deals announced from the United States

• Cognizant has won two government deals from Europe and UK region while BFSI deal was an extension deal from United States

• Indian providers have claimed more than 50% of the deals that originated in Europe and UK

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IT INFRASTRUCTURE OUTSOURCING DEAL ANALYSISAn analysis of IT Infrastructure outsourcing deals across different verticals have indicated the following trends. There are distinct trends observed across verticals in addition to the common characteristics.

7.1 ManuFaCTuringOUTSOURCING DRIVERS

• Reduce on-going costs.• Enhance infrastructure service quality • Improve workforce efficiency • Flexibility• Deliver new solutions

OUTSOURCING DETAILS

7.2 Cpg and reTailOUTSOURCING DRIVERS

• Standardised Infrastructure• Optimise IT cost and rationalise vendor base• Performance and flexibility to support growth • Tap the scale of the providers across different global locations to support their local operations.• Improving service quality and reactivity and proactivity of front office• Evolving desktop services to provide workforce with anywhere, anytime access to tools

critical to their business productivity.• Improve its time-to-market for IT systems

OUTSOURCING DETAILS

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7.3 pharMaCeuTiCalOUTSOURCING DRIVERS

• Improve efficiency and effectiveness of IT functions by transforming processes and increasing automation

• Consolidate and rationalize infrastructure services and technology infrastructure. • Establish a robust and scalable environment that will support goals to grow the

business.• Achieve operational cost savings and flexibility. E.g. A variable cost structure to address

varying economic factors, such as patent lifecycles.

OUTSOURCING DETAILS

7.4 BanKingOUTSOURCING DRIVERS

• Lower IT costs and improve operating performance• Flexible capacity • Scaleable platform that can support future growth. Extending and “progressively

renovating” that platform • New automation tools for provisioning and managing the overall IT environment will

be implemented, improving the time to market for new IT solutions in the Bank as well as ensuring the systems remain stable and secure.

• Deploy new technologies to improve customer service and sustainability• Create a single view of customers that would enable the bank to quickly introduce new

products and services tailored to customer needs.

OUTSOURCING DETAILS

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INDIA IT OUTSOURCING ANALYSIS

8.1 privaTe seCTor ouTsourCing deal Trends OUTSOURCING DEALS ARE DRIVEN bY bUSINESS ObjECTIVES

• The drivers for enterprise IT investment in Indian market are efficiency, process improvements and enhanced customer experience.

• The companies are looking for business solution rather than buying discrete services.

OUTSOURCING DEALS ARE FIxED PRICE AND TRANSFORMATIONAL

• In India, most of the deals are fixed-price deals and these deals are transformational in nature as opposed to overseas deal which are more about cost arbitrage.

DEALS ARE SPLIT AMONG VENDORS

• As the Indian IT services market matures the Indian enterprises have started following the global trend of splitting the deals among different vendors in their core area of strength.

INCREASE IN DEAL SIzE

• The average deal size now range between Rs 40 crore and Rs 80 crore though there are many large multi year deals.

• Even the BPO deals size has increased in recent years with average deal now range greater than 5 crore.

8.2 puBliC seCTor iT ouTsourCing oBJeCTivesThe objectives technology implementation by government departments and public sectors are as

• Improve efficiency through standardization business processes• Limited set of functionalities in existing systems• Modernization of legacy systems and processes• Reduce paper work through automation• Reduce operational cost and improve productivity • Increased service offerings and new business models• Up-gradation of system to increase geographical reach

8.3 puBliC seCTor ouTsourCing deal Trends DEAL STRUCTURE

• There are two kinds of government contracts. One is purely price contract, which means the lowest bidder wins. This is called an L1 tender. In the L1 tenders, no matter what solution you suggest, you are always decided based on price. The other is T1L1, where T1 will be the highest technology and L1 is at the lowest price.

• Government contracts are all about an end-to-end delivery spanning hardware, software, services, support and consulting components

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LONG DECISION CYCLE IN GOVERNMENT DEALS

• Government contracts are prone to litigation and can sometimes be caught in legal cases causing months of delay even after the L1 or the lowest bidder in the commercial bid has been finalised which are executed after the technical bids.

• The decision making gets slow due to overcautious outlook of officials to avoid getting trapped in legal cases.

PAYMENT DELAYS IN GOVERNMENT DEALS

• The real challenge in government projects is getting sign-off without which the vendor can’t raise the invoice and get paid.

• The soft skills assume high significance in government deals where a strong relationship in the government facilitate an early sign-off.

hIGh LIAbILITY AND REPUTATIONAL RISkS

• In the event of failure the vendor can be sued up to five times of the contracted fees. There are penalties for not adhering to the schedule and there for a very clear definition of milestones is necessary. For eg TCS was asked to pay penalty of Rs 2 lakhs per week of delay in e-passport project.

• Additionally there is risk to reputation of the vendor in the event of being blacklisted leading to disqualification from bidding for government projects causing future revenue loss.

bOOT( bUILD-OPERATE-OwN-TRANSFER)

• The government buying strategy-has shifted to revenue driven models. The government prefers the build-operate-own-transfer (BOOT) model in some of the projects.

ODigitech Research, Mumbai

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IT Services Business Management