India IT-BPO Industry 2012 – Contradictory Growth forecasts by Top Indian Players

Indian Outsourcing Industry (ITO/BPO) top players include TCS, Infosys, Wipro & HCL technologies and these players gave contradicting growth forecasts for their companies wherein Tata Consultancy Services (TCS) and HCL Technologies, announced good growth in earnings for the quarter ended June 2012 and despite the challenging macro environment gave good growth forecasts for the year 2012 while Infosys and Wipro, announced not so great earnings for the quarter ended June and not so great growth forecasts for the year as both the companies are still struggling with internal restructuring and Infosys seeing budget cuts by their Clients. Both Wipro & Infosys have seen major changes in the Leadership where in new CEOs took over and also saw significant changes in the internal organization structures and they are struggling to adapt to changing business environment. The global economic slowdown is a matter of concern for the IT industry, fall in volume growth and pricing, shortening of contracts and slow decision-making, geopolitics (since it is election year there are visa hurdles) and currency arbitrage particularly weakness in rupee are major concerns for the Indian Outsourcing industry.

TCS has been doing well since past three years post the 2008 subprime mortgage crisis and has been able to sustain double digit growth in sales and profit in the changed outsourcing demand. The growth has been good across the verticals and across geographies not limited to few specific verticals and geographies and has benefited the most by the upsurge in outsourcing demand in the past three years. For the quarter ended June 2012, TCS reported volume growth of 5.3% and it saw growth across markets, industries and service lines. The reason for such good performance by TCS is because the company identified and invested in various non-linear opportunities such as software products, platform based BPO offerings and Cloud offerings like software as a service (SaaS), and focus on unit-priced contracts for the past few years. Also TCS has scale in terms of presence in major geographies, skills, capability and focuses towards creating intellectual property. TCS is also looking at inorganic growth wherein it is looking at a deal size of USD 50 million to USD 500 million if the target is a strategic fit particularly looking at inorganic growth to strengthen its European presence.

Infosys earnings for the quarter ended June 2012 were disappointing and the company did not give guidance for September 2012 quarter and cut its guidance for 2012-13 to 5% which is far below the NASSCOM ’s forecast of 11-14% growth for FY13. Infosys is still struggling with internal leadership and organizational changes as it had a new CEO and Chairman and is facing difficulties with its business model adaption to the new demand environment as there is a continuous commoditization of traditional IT services (Application Development & Maintenance) and it is finding it difficult to maintain premium pricing during contract renewals. Major part of Infosys business is from discretionary IT projects and it is looking to migrate large part of its business into non-discretionary since couple of years and looking to utilize discretionary resources to focus on growth of consulting and systems integration (33 % business comes from CSI) and products, platform and solutions (PPS) business. Infosys’s product efforts are centered on Finacle which is core banking solution, and other platform-based services for the likes of Airtel Money. Infosys built a US$ 2 Billion Packaged implementation business   and also focusing to create an IP-based and non-linear revenues. Infosys is looking at both organic and inorganic routes for growth and has a healthy cash pile which can be used for acquisitions that helps to penetrate new markets, create new markets and acquire intellectual property.

Wipro too had a new CEO coming in 2011 but is still struggling with internal reorganization issues and announced a 1.4% QoQ dip in dollar revenue following a decline in most of its businesses (BFSI fell 2% & Retail & Transportation fell 4%) and geographies for the quarter ended June 2012 and  guidance for the quarter ending September 2012 is also disappointing. Despite the acquisition of several companies fore inorganic growth in the last decade to strengthen its business verticals, which Wipro calls the "string of pearls" strategy, the company has not been able to overtake its peers both in terms of revenue and profit growth. But CEO TK Kurien is confident about Wipro recovering as it had done well in terms of adding clients and its strategy comprises of three phases which is growing the existing client base to continue to get short-term sustainable revenue, invest and broaden its customer base and make sure they do not get caught up in the changes and swings of their client business and prepare to face adversities. Wipro believes it is doing well with the first phase and expects the second phase to take another 8 to 12 months and the third would be a year-round story.

With strong QoQ growth across verticals (infrastructure management services (9.2%), enterprise applications services (4.8%) and engineering and R&D services (3.9%)), HCL Technologies posted better-than-expected results. But HCL Technologies is still struggling with its BPO business as it continues to be sluggish with a 2% fall in growth but it has moved to an outcome-based pricing model from its current input-based model. For the first time HCL Tech crossed $4 billion in terms of revenue and the company signed eight multi-year, multi-million transformational deals, while in the fiscal 2012, it won 52 deals. HCL Tech believes despite over all IT spends being flat there are contract restructuring and significant churn in the renewables market and it looking to capture significant share through these two. HCL Tech CEO believes that Indian IT industry should look to convert challenges to opportunities and is focusing on the specialization, domain competency and vendor churn is playing out for HCL Tech and it is aggressively investing in the areas of infrastructure services, engineering and ERP (enterprise resource planning). HCL Tech has also inorganically with its acquisitions of companies like Axon and these acquisitions have been key drivers of growth for the company.

Indian IT industry is facing many challenges in the current year and all the four top players have announced specific strategies that will help them overcome the growth problems and are investing in technologies like Cloud Computing, Platforms, products & other nonlinear initiatives According to NASSCOM, aggregate revenue for the Indian IT-BPO sector is estimated to cross USD 101 billion for FY 2011-2012 and exports accounted for ~USD 69 billion( IT Services $40bn, BPO $16bn & Engineering Services & Products $13bn) , growing by 16.3% over the last fiscal year and for FY2013, the export revenues are expected to grow by 11-14% while the domestic revenues will grow by 13-16%. 

Wipro Non Linear revenue strategy focus on Cloud, Mobility & Analytics

Early 2011 Wipro dismantled its joint CEO model and appointed TK Kurien as CEO who restructured Wipro into more simple, agile and customer centric with focus on core momentum verticals and the four key industry verticals included 'Banking, Financial Services and Insurance (BFSI)', 'Energy & Utility', 'Retail and consumer products' and 'Healthcare'. Wipro has been undergoing a massive restructuring exercise under TK Kurien, who is making extensive cultural changes within the organization, to bring back sustained growth for Wipro as it lost its number three position to Cognizant Technology Solutions. Some of the changes are aligning the organization structure with demand generation process and efficiency, variable component of management and mid management salaries linked to client and employee satisfaction, focusing more on existing accounts for more revenues, new team for chasing the change the business deals and focusing on increasing the non linear revenues from emerging areas like cloud, mobility and Analytics. “The future is clearly the non-linear model. We are already seeing signs of it. The linear model will break. Our focus will now be on cloud, mobility and analytics,” said Kurien. “I want to leave behind a legacy of growth. Thought leadership will not bring revenues.”

Wipro is focusing on analytics, social media (for enterprises), cloud and mobility for its future revenue growth and hopes these new service lines grow by 30% YoY and it is aggressively investing on these non linear initiatives. Wipro is looking to invest $1Bn in overseas acquisitions over the next 18 months and looking at deal size of around $50Mn - $300Mn and looking for specialized companies in analytics, cloud computing and mobile communications. Wipro is focused on industries including health care, financial services, energy and utilities, and retail and is looking for regions like Saudi Arabia and in parts of Northern Europe and Asia for their acquisitions. The company recently acquired Promax, an Australian company specializing in trade promotion for strengthening its analytics practice which gives it a head start over competitors in a segment where its peers are looking to enter for future growth. According to industry sources, Wipro had around 250 analytics clients and the company is strongly betting on Analytics for non linear revenue growth. Wipro has been showcasing client wins in new areas like analytics and cloud. "The company's keen focus is to grow its new focus areas like Analytics (35 new accounts in the year), Cloud (40 new wins in this quarter) and Mobility (50 new customers added in FY13)," reads a recent report from brokerage house Prabhudas Lilladher.

Wipro is also focusing on mining its 138 largest clients by using dedicated engagement managers and a report by Motilal Oswal highlights the fact that post restructuring, Wipro has seen impressive client additions and mining of large clients to increase its number of customers in the higher contribution buckets (USD100m+ clients up from 1 to 7 in 5 quarters). In a recent conference call with analysts, Kurien also mentioned that the company was investing in sales capabilities and had divided its sales teams into hunting (new client acquisition) and farming (mining existing customers) teams. Consequently, Wipro's sales and marketing expenses were the highest since the fourth quarter of 2003-04, adds the Prabhudas Lilladher report. Wipro restructuring is almost complete and company is looking at specializing in sub -verticals with longer revenue cycles, build capabilities in analytics and cloud computing through acquisitions and standardize its back-end using lean manufacturing principles for revenue growth. Another area where Wipro is betting big is mobility and company had less than 150 people working on mobility solutions earlier; the number now stands at over 1,500. Wipro Technologies has announced that Wipro’s Mobility Solutions will collaborate with Kony Solutions, Inc., a mobile application development platform provider and will offer an integrated portfolio of mobile application technology and services to enterprise customers in the US, UK, Australia and West Asia.

Wipro revenue growth for IT services was lowest among peers in Q4 FY 12 and its guidance for the first quarter of FY13 was muted and the company blamed it on certain delays in deal closures during the fourth quarter FY12 and lackluster domestic market revenues, especially in the telecom and government verticals. Wipro is also seeing pricing pressures, challenges in its key BFSI vertical and problems in some of its largest clients who are slowing down spend and internally with in Wipro it has to improve its cost structure and CEO Kurien also said that he is looking to trim the middle management and encourage them to improve their performance. Wipro is also targeting a different strategy which will allow its clients increasingly look at it as a combination of a consultant and technology company and have a say at the management or board rather than being just looked at as technology providers. Analysts believe Wipro will log a net profit of 15% CAGR FY12 through FY15 fueled by a significant contribution form these non linear initiatives. 

Increased focus on Non Linear Revenue growth by TCS for FY 2013 growth

Tata Consultancy Services (TCS) became the first $10-billion Indian IT company in March 2012 and this significant achievement is fueled by the solid base it created over the past few decades and the domain depth & expertise it has acquired across different domains. Despite the persisting macroeconomic challenges, slower GDP growth & job growth, and continued currency volatility, TCS, in FY2011-12, registered 15 % increase in net profit to Rs 13,517 crore, while its revenue increased 31% to Rs 48,894 crore. TCS believes there is significant potential for growth as the addressable market is still large which is also expanding continuously and market growth is further assured with relatively low current level of penetration. To further fuel the growth momentum TCS is focusing its efforts to generate more revenue from its non-linear businesses that includes three strategic initiatives-- software products (TCS financial solutions), platform-based BPO, and iON (IT-as-a-service solution for small and medium businesses). It is also planning to increase its focus on new technologies such as smartphones, mobility and cloud to drive growth and has made significant investments in these areas. TCS, with a brand value of $4.1 billion is competing with the big boys like IBM, HP and Accenture.

TCS Financial Solutions increased its client base by adding 39 new clients in FY12. TCS BaNCS is a market ready universal financial platform for banking, capital markets and insurance, offered by TCS FS. Recently Malaysia-based financial services group AmBank has decided to deploy 'TCS BaNCS', integrated banking suite, spanning conventional and Islamic banking, will support both retail banking and lending functionalities and also has bagged a contract from South Africa's Nedgroup Insurance Company (NIC) for deploying TCS BaNCS Insurance, part of the it's financial services platform, will serve as the new policy administration system for Nedgroup short-term insurance services. TCS also announced that Letshego Holdings (LHL), a leading consumer lending company based in Botswana, has selected the TCS BaNCS suite as the core banking system for its Greenfield venture into retail banking in Africa. The integrated core banking solution will process loans and deposits across seven countries in Africa — Botswana, Swaziland, Tanzania, Uganda, Zambia, Namibia and Mozambique. TCS is increasing its focus on Africa as it is trying to increase its revenues from the region.

iON uses scalable cloud computing technology to deliver automation suite to SMBs, eliminating the need for them to invest in any IT assets and requiring them to pay monthly rentals rather than a one-time license fee. The suite includes human resource management, customer relationship management, payroll and finance management solutions along with niche industry-specific solutions. iON is being marketed through a channel partner network of 109 cloud service providers and has 256 mid-market customers. The company also said that it wants to ramp up over 1,000 customers this year and targets a revenue of $1 billion in the next five years.

Through its Platform-based BPO offering, it offers services in segments like Life Insurance and Pension Policy, Analytics and Finance and Accounts. TCS was the first Indian IT Services Vendor who initiated platform-based BPO in 2007 as the then CEO, S Ramadorai felt that platform-based services can be ‘templatised’ and some processes can be leveraged across different sectors. This strategy has been successful for TCS as it yielded dividends and this offering has been well received by TCS clients, which has been proven by the fact that TCS has bagged multi-million dollar deals in life insurance and pension policy, analytics and finance and accounts verticals. For example, since some processes in retail are similar to manufacturing which will eliminate the need to develop applications or write codes from scratch. Diligenta, UK subsidiary of the company has won the Friends Life Deal based on its insurance platform offerings. TCS has aggressively invested in developing its Platform BPO offerings in the past few years.

According to Motilal Oswal Report on TCS, as a part of its disruptive innovation strategies, TCS is increasing investments in many areas including new sensor-based technologies, intelligent infrastructure, platforms for genomic research, information fusion for enterprises and green technologies. The company has significantly increased its intellectual property (IP). It filed 460 patents in FY12. Cumulatively, TCS has filed 855 patents till date, of which 72 have been granted.

In the recent TCS Annual General meeting, Ratan Tata announced TCS's growth plans, "Our focus is to find a balance between traditional markets like the US and Europe and other emerging markets like Australia and the Middle East, which present good opportunities. Going forward, TCS will be focusing on non-linear growth since the situation in the West continues to be a concern."  Future opportunities for TCS are extremely good and banking, financial services and insurance (BFSI) segment continues to be the thrust area for the company, TCS CEO and MD N Chandrasekaran added.  The company has opened multiple development centers in Latin America, China and Philippines. With all these initiatives, TCS is hoping ride over the economic volatility and demand concerns and company is all set to a lead revenue growth in FY13 too. TCS expects analytics, mobility, cloud computing and non-linear platform-based services to contribute 10% of its total revenues by 2014-2015, which will be around $1 billion given the company’s $10 billion-plus revenue last fiscal.

List of Cloud Computing Outages 2012 – Businesses not prepared for outages

The month of June saw four cloud computing outages where in Google Gmail, Amazon Web Services, Apple iCloud and Twitter saw outages ranging from 2-4 hours and these are not big outages when compared to previous outages that these companies faced in the previous years that lasted for days. But millions of users and companies like Quora, DropBox, Pinterest, Heroku, etc who use the cloud totally or partially for running their day to day operations were severely affected which also led to a lot of negative chatter on social media platforms like blogs, discussion forums, Twitter, Facebook, etc. Despite many precautions taken by cloud service providers there have been outages on a regularly basis caused majorly due to human errors, quality issues, technical glitches and natural disasters which also highlighted that there is no escape from cloud computing outages and companies have to include the outage risk concerns in their data security and disaster management plans. Cloud Computing has become a vital part of the IT infrastructure of many companies and reliance on cloud computing is even more increasing in the near future to power business, government, consumer services, etc and  major players in the space include Amazon, Rackspace, Microsoft, Salesforce, AT&T, Google, etc. Investing in Cloud computing is a significant IT decision that the CTO and his IT team along with consultations with CEO, CFO and other stakeholders have to make and also have to frame the necessary policy or upgrade the Organizational IT policy accordingly for the successful transition to cloud computing.

According to a recent report by the International Working Group on Cloud Computing Resiliency, every year minimum of 10 hours are lost because of service disruptions and according to the thirteen biggest cloud computing service providers since 2007 a minimum of five hundred hours has been lost, which also translates in monetary terms to be worth a minimum of $70 million. In that same report, the group claims that a cloud computing service is usually down for an average of 7.5 hours each year, although an electric power service outage is pegged at a low 15 minutes yearly. The group gathered the data from various sources such as Twitter, Amazon, Google, Paypal, Yahoo, Microsoft, Facebook, and others. Cloud service analysis firm Newvem says 40% of Amazon's biggest cloud users are not ready for the next outage which can be totally blamed on those users only as they don't follow rule No. 1 in computing: make backups. This is a major threat for these companies as in case of a major outage they may loose critical and confidential data forever. Cloud users must create a back up of their data either on another cloud or on their premises. Some of the cloud providers like Amazon provide tools like Elastic Load Balancers, which automatically shift traffic around, and Snapshots, which automatically make backups. Cloud service providers should reduce the human errors, technology glitches, improve the testing process and prepare for tackling the natural disasters to avoid frequent outages and consumer confidence on cloud computing will be affected by frequent outages.

Apart from backing up the data cloud users too have to deploy the cloud across multiple geographical regions as highlighted by Amazon and it strongly discourages the practice of deploying in one region only as the two major outages on Amazon Web Services over the past two years were limited to servers in a single region (its Eastern US servers). So cloud computing services users must spread their workloads across various geographical parts of cloud service providers in order to prevent being hugely affected if an individual region experiences service disruption as for some of the companies their websites going offline for couple of hours will lead to significant amount of business loss both in terms of revenues and profitability added with brand reputation loss and customers moving to their competitors. Cloud computing users should realize the fact that cloud computing do not work on its own and the cloud service providers will take total responsibility for the data safety and smooth running of the business operations rather they should carefully monitor and manage the cloud performance and also have a back up and disaster plan in place especially for what will happen in the event of a service disruption. Companies should be very clear on how to integrate the cloud computing into their IT infrastructure and should also have total understanding of the cloud computing limitations and should have a plan in place to tackle the risks.  Both the users and providers of cloud services should have the relevant contracts in place and should also be very clear about the service level agreements.

List of Cloud Computing Outages in 2012:

SaaS Market will increase in near future –Vendors pushing & Businesses Adopting

Despite the turbulent economic environment, SaaS market has constantly grew at a healthy rate and the overall SaaS market did not grow as expected and it is still below 5% of the total overall software market and in next three years despite growing at healthy 20% rate its size will still be 20% of the overall software market. The growth of SaaS market had been slow as enterprises had concerns in terms of Data Security and integrity, cloud outages, privacy concerns, regulation, failure to understand contract terms and obligations, scalable pricing models, technology still under development with many players working on developing and improving the cloud technologies further, lack of skilled man power, and lack of sufficient cloud based applications available for enterprises to utilize. But businesses are being forced to adopt cloud computing particularly SaaS as the IT budgets have become tighter, the demand for SaaS solutions increased due to their lower implementation costs, faster deployment times, increasing familiarity with the SaaS delivery model and vendors effectively marketing them which also led to a growing comfort level with the security and performance parameters of cloud computing. According to IBM survey, 13% of organizations have substantially implemented cloud technology, which is expected to increase to 41% by 2015. Additionally, 21% of survey respondents said their companies are currently adopting the cloud and overall 90% of businesses expect to use the cloud in some capacity within the next three years.

In the times of economic slowdown and crises most of the businesses focus not on business expansion but look to improve profitability by reducing costs of the existing operations and this has driven the demand for SaaS offerings as IT plays crucial role in reducing costs. With rise in SaaS markets there will be erosion in the on premise software market particularly in next two years and businesses are forced to shift toward hybrid on-premises and Cloud offerings but ultimately much of that hybrid focus shifts toward pure-play SaaS/Cloud within just a few years. Gartner Research expects hybrid cloud computing will gain prominence and hybrid cloud configurations will allow organizations to move data and operations from a private to a public cloud easily, thereby improving scalability and efficiency. SaaS use is shifting away from point-solution-use and increasingly towards integrating business operation and management benefits and this fact is substantiated by the issues the most businesses are highlighting like integration and customization concerns. Even more IT organizations within the businesses are able to convince the management the return on investment on investing in cloud computing technologies and can safely move existing workloads and operations to the cloud to improve efficiency and service. For IT organizations too there are certain challenges like Cloud-based licensing are different from traditional on-premises licensing, the traditional software sales cycle is very linear (RFI, RFP, contract, maintenance, handoff to an internal sales rep), understand the Service level agreements and contractual obligations , acquire the relevant technology skills and develop a cloud centric IT strategy for the business with an ultimate goal of reducing costs and improving profitability and customer satisfaction.

According to Saugatuck’s 2012 Global Cloud Business Software Survey Data Report, CRM, Collaboration, Customer Support, HR/HCM, and Collaborative Commerce will lead SaaS/Cloud solution demand through 2016. The Unisys 2012 Predictions for Cloud Computing expects organizations – both IT and business units – will accelerate their adoption of SaaS solutions for email and collaboration to further reduce costs and simplify operations. Additionally, in 2012, Unisys predicts SaaS will extend into line of business applications, supporting mission-critical transaction processing. Over the next few years, intelligent analytics built into these SaaS applications will enhance the ability for organizations to support sales, supply chain, logistics and support personnel in real time, making better sense of huge volumes of data more quickly to provide better responsiveness and customer support. Along with large organizations, Small & Medium Businesses are embracing SaaS solutions as they are simple to install, minimal configuration, on-demand everywhere availability, and integrated web-based data backup. The most popular SaaS apps for SMBs are core business productivity tools like Google Apps and Microsoft Office 365  and prefer to deploy other apps related to office, collaboration, customer relationship management solutions, marketing, project management, email list management, database development and administration tools.  Gartner believes in the next two years, buyers are most likely to purchase SaaS solutions in packaged CRM, procurement and ERP applications.

SaaS vendors too have to be constantly be in contact with their customers and understand their requirements and develop their offerings accordingly. According to Forrester Analyst, Holger Kisker in his post “Looking through the Cloud” explains SaaS vendors need an automated system that provides benefits to developers and customers alike:

Þ    Manage ongoing, dynamic metrics. Because SaaS typically uses a subscription licensing model, vendors need to manage the ongoing license entitlement and application usage for the correct billing process. And because the trend is going from user-based pricing to more dynamic metrics, the need for and challenge of providing continuous, automated usage tracking will only increase.

Þ    Track customer usage for product innovation. With limited (if any) feedback from sales reps, resellers, or implementation partners, SaaS vendors urgently need customer insights gleaned from usage to improve their solutions and feed the fast innovation cycle that SaaS solutions need to follow. Constant usage tracking provides detailed feedback on popular, critical, or unused features and functions and helps firm’s better target R&D investments.

Þ    Make gathering customer insights a two-way affair. Last, but certainly not least, customers will appreciate it if SaaS vendors play back some of their usage information, not only to monitor their license utilization but also to identify new opportunities, process optimization, and benchmark themselves against their peers.

Indian IT Outsourcing Vendors both large and small too have developed SaaS offerings and offering them to their customers and this is even more important for these vendors as they are looking at Cloud Computing offerings as a way of increasing their non linear revenues which helps them to charge higher billing and earn more revenues, increase profit. Unisys highlights the fact that organizations should increasingly consider SaaS a viable option for common line of business applications and IT management solutions, especially if they’re already considering outsourcing, as SaaS vendors may provide more cost-effective solutions than traditional outsourcers.