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Indian IT Services: Globalization and Products

Posted on Thursday, Feb 25th 2010

A recent Morningstar report on the IT services and consulting industry projects client demand to rise. Morningstar notes that the U.S. Tech Pulse Index has been rising since May of last year and registered 14.2% annualized growth in December 2009. No wonder ITO and BPO players in India are hiring and expanding their delivery capabilities to cater to the growing demand.

Cognizant Technology Solutions (CTSH) reported revenues of $902.7 million, registering annual growth of 20% and sequential 6% growth. The market was looking for revenues of $888.4 million. EPS of $0.50 also grew significantly over the previous year’s $0.41 and exceeded the market’s expected $0.46.

During the quarter, the company added over 10,300 employees, and despite the previous year’s depressed conditions it added more than 16,700 people during the year.

For the year, Cognizant reported revenue growth of 16% to $3.28 billion with EPS rising from previous year’s $1.59 to $1.90.

Cognizant is addressing the twin factors of cyclical and secular influences that are driving the market. While cyclical factors are creating revenue opportunities such as those offered by M&A integration, the secular trends are the “megatrends of digitization and disintermediation, government-mandated change and new disruptive technologies such as cloud social computing and virtualization coupled with accelerated competition from around the globe.” To address these factors, Cognizant is trying to create more efficient, effective, and innovative solutions which, the company says, offer “transformation and virtualization all in one single platform.” The company is creating product type solutions such as security services in banking or pharmaco-vigilance in life sciences in a move out of pure labor arbitrage.

Additionally, Cognizant is building strategic relationships and has recently tied up with Temenos, a market leader in core banking systems, to strengthen its presence within the financial services sector. Cognizant is also leveraging its tie-up with Invensys and recently launched an engineering and manufacturing solutions or EMS service offering. Within the retail space, the company acquired Active Intelligence, a systems integration company specializing in the Oracle retail solutions portfolio.

Cognizant has also managed to expand its reach globally through their Cognizant 2.0 web platform. The company is able to leverage its skills and knowledge database on any project across the enterprise. Given that it has 50 development centers operating out of eight countries, Cognizant’s platform has helped it to deliver a cost-effective model to clients.

For the current year, the company is targeting revenues of $3.94 billion with an EPS of $2.19. Q1 revenues are expected to come in at $935 million with an EPS of $0.52.

Their stock is trading at $47.03, taking its market capitalization to $13.9 billion. Earlier last month, the stock touched a new 52-week high of $48.95.

Wipro (WIPRO.BO), the third largest Indian player, recorded IT Services revenues of $1.113 billion for the quarter ended December 31, 2009. Revenues grow 2% over the year. IT Products business which deals with personal computing, enterprise and software products ranging from desktops to enterprise and networking platforms and solutions saw revenues grew 22% over the year to $218 million in the period. EPS rose to Rs 8.19 ($0.18) from Rs 6.91 ($0.15) a year ago. For the quarter, earnings from the services segment grew 17% over the year to $263 million.

In view of the growing demand, the company is expanding its global footprint and recently inaugurated an IT & BPO delivery center in Chengdu, China. There is already a center in Shanghai, and the Chengdu center is expected to cater to additional requirement in the region. Worldwide, Wipro added 4,855 people during the quarter to cater to the growing business.

To address the trends of virtualization, Wipro recently entered into a strategic agreement with Trend Micro. The two will jointly provide virtualized data center security, and data center consolidation solutions. Wipro is also addressing the cloud computing space. Forrester has identified Wipro as a key Indian player offering digital asset management and ADM services on Microsoft Azure.

Earlier this year, Wipro launched two new solutions, a digital customer experience platform and a loss prevention platform, to address the cloud specifically for the retail sector. The digital customer experience platform (DCxP) integrates social media, community and customization features to simplify retailers’ ability to manage their online business. By offering this as a pay-as-you-use service, Wipro has also ensured that the retailers don’t shell out a huge upfront payment. The other application, the loss prevention platform, includes an analytics suite that leverages predictive modeling to prevent fraud and internal and external theft.

Wipro expects revenues of $1.161 billion to $1.183 billion, up from $1.127 billion earned a year ago.

The stock is trading at $20.80, taking its market capitalization to $30.3 billion. The stock had earlier reached a 52-week high of $23.99.

Genpact (NASDAQ:G), an all-out BPO player, has been seeing good business as well. Up until five years ago, Genpact was a captive BPO unit for GE alone. However, over the past few years, it has started catering to third-party BPO requirements. Owing to its emphasis on Six Sigma delivery levels, the company has managed to secure big wins such as Walgreens, AstraZeneca and Max New York Life. Genpact too has a wide global footprint with delivery centers in 13 countries supporting over 25 languages.

The company recently announced Q4 results and saw revenues grow 5.4% over the year to $296.9 million. EPS of $0.19, however, slipped from the $0.23 earned a year ago. The market was looking for revenues of $295.7 million with EPS of $0.16. Genpact closed the year with revenues of $1.12 billion, recording 7% growth over the year. EPS for the year of $0.73 was marginally lower than previous year’s $0.76.

Genpact recently launched Smart Enterprise Processes (SEP), a scientific methodology that optimizes process effectiveness and efficiency while aiming to deliver superior business outcomes. Through the SEP, Genpact manages end-to-end process effectiveness, thus delivering up to “two to five times” the impact on clients’ financial and operational metrics.

To expand in the retail, consumer packaged goods, and pharmaceutical verticals, Genpact recently acquired Symphony Marketing Solutions, a leading provider of analytic and data management services with expertise in these verticals, for $34 million.

The company expects revenues of $1.28 billion to $1.31 billion compared with the Street’s expected $1.27 billion.

The stock is trading at $15.15 after having reached a 52-week high this week of $15.65. Its current market capitalization is $3.3 billion.

The ITO and BPO space is set to grow in the coming years. According to the National Association of Software and Service Companies’ (NASSCOM) report, India’s export revenue from these services is projected to grow 5.5% to $49.7 billion for the year ended March 31, 2010. The growth trend is expected to double to 10%-11% by the next year. But notice, the players are becoming much more global, and their revenue structures are changing away from pure labor arbitrage models. More on this coming soon.

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Great analysis!

Of the three players featured, each has a contrasting profile – Cognizant started as an IT Services player with a focus on North America, and predominantly business applications, especially in verticals such as BFSI & healthcare. Today they have used acquisitions and strategic partnerships to expand geographically(T-Systems, Europe), vertically (Temenos) and to expand service portfolio (Invensys). Wipro made a fairly successful transition from an R&D focused firm to one that straddles the applications outsourcing and R&d spaces. They have used acquisitions selectively to acquire capabilities. It is interesting that they have established a China presence as recently as the last quarter when many of their peer group companies had a stated plan for China more than 5-7 years ago ( but in my view, it has not hampered them in any way as the final verdict on the China vs India or China and India story is still not there, contrary to some analyst predictions on this in early 2000). Genpact is most interesting- the most recent player, they started life with BPO, and then also expanded into IT services. They have used acquisitions for growth in topline as well as rapid capability expansion.

Also all established companies have non linear growth initiatives to get away from a pure labor arbitrage led growth model.

With the global recession finally abating, and businesses figuring out the new normal, it would be interesting to watch developments in the outsourcing industry in the next 12-18 months.

Sudha Kumar Friday, February 26, 2010 at 5:46 PM PT

While major markets such as Brazil, Mexico, Colombia, and Argentina are reaching maturity in terms of quality of service (QoS) and infrastructure, the competition is fierce in developing markets.
New analysis from Frost & Sullivan, Latin American Contact Center Outsourcing Services Market 2009, finds that the market earned revenues of $6.8 billion in 2008 and estimates this to reach $13.7 billion in 2014.
While all clients expect outsourcers to improve their services, some new technologies can bring high client satisfaction and aggregate value on the current offers. For example, outsourcers are considering offering speech analytics to clients to help them know how their customers perceive them.
For greater revenue inflow, contact center outsourcers have to develop new ways to offer services. A good example is the virtual contact center, which can be used to popularize the ‘home-agent’ model. The result is better customer service as the agent will feel more comfortable working from home.

Answering Service Tuesday, March 2, 2010 at 12:57 AM PT

That’s true that the company is able to leverage its skills and knowledge database on any project across the enterprise. Nice blog.

IT Outsourcing Monday, March 29, 2010 at 2:58 AM PT

The Indian IT and BPO provider market should remain strong for the near and medium term. India continues its strong investment in education and that combined with birth rates and urbanization continues to create a massive low cost labor pool in which the major Indian players can draw from to support their customers. The question remains as to which other parts of the world will heat up next and how will their investments in education and training be viewed by the global client? Time will tell.

Ben Trowbridge Wednesday, March 31, 2010 at 12:56 PM PT

This is excellent analysis of the public horizontal IT services companies. I would also highlight another trend that is closely tied to this sector’s growth – that’s the trend for some services companies to move toward a more vertically-oriented focus, including a much heavier emphasis on specific technologies. Before I explain further, some disclosure is necessary – my name is Keith Higgins and I’m the SVP, marketing at a good example of this trend – a company called Aricent (, a global innovation, technology and services company focused exclusively on communications.

At Aricent, we’ve seen many organizations turn to companies like ours for our expertise across a range of disciplines rather than just elastic resources required to finalize a specific project. This trend is points to the potential for significant growth – we see the addressable market for consulting, design and product development services at approximately $150B USD / year globally. The convergence of innovation and technology in the product development lifecycle (PDLC), especially in communications-rich industries, has created significant demand for end-to-end strategy, design and development services. This growing need is a poor match to the fragmented supplier landscape, and created a substantial market opportunity for a new category of “outsourcing” company capable of delivering services from strategy through development and delivery.
This potentially huge opportunity did not go unnoticed. Approximately 3 ½ years ago, KKR and Sequoia Capital invested approximately $900M USD to form Aricent – combining assets including frog design and Flextronics Software Systems – specifically to address this growing market need. Providing end-to-end innovation through integrated consulting, design and product development services, Aricent helps leading organizations create and commercialize highly differentiated products, services, and business models. This approach reduces technology complexity, time-to-market, and overall PDLC costs. The company offers a high-value process from ideation to realization, helping companies unlock innovative concepts and commercialize them efficiently in their respective industries. Further, the company offers differentiated intellectual property in support of creating and sustaining innovative product and services.
The company, through its divisions, offers 40 years’ experience in developing innovation and technology breakthroughs that have transformed entire industries, including more than 3,000 products and services for 300+ of Fortune 500 companies. Since 2006, we have doubled our annual revenue to approximately $465M USD. Does anyone else care to share his or her experiences here? I would be very interested in getting feedback on whether others view this trend with as much enthusiasm as we do.

Keith Higgins Thursday, April 1, 2010 at 5:30 PM PT

[…] themselves” rather than letting their customers do the thinking for them. Just last week, in an overview of the outsourcing industry, she again noted that Indian outsourcing companies must become more global in their sales and […]

Is Outsourcing Dying Or Thriving? (Part 1) Tuesday, June 15, 2010 at 10:26 PM PT

Read this article and you will know why the Indian IT outsourcing industry is going to die. The article is a little dated but hits the bulls eye when it comes to predicting the future of the Indian IT industry:

nikkipolya Wednesday, March 9, 2011 at 5:13 AM PT

With Obama's Wall Street bailout money hitting the global shores, 2010 saw a boom for the Indian IT industry. In 2010 Sramana did a 180 degree maneuver, in stark contrast to her 2008 stance as penned down in her Forbes column, and started reveling about the future of the Indian IT industry. Come 2012, its a downer for the India IT co's. They are all busy scaling back the labor arbitrage heights, which they have now realized is their core competency.

Does it pay to be a Sramana Contrarian?

nikkipolya Friday, July 27, 2012 at 11:22 AM PT

Not sure I understand your question. But here are some pointers for further research:

(a) In 2008, I pointed out that India’s labor arbitrage advantage is eroding and competition is emerging. This was and is a fact.
(b) We have provided subsequent coverage about the competitive geographies at length: Latin America, China, Eastern Europe, East Asia.
(c) Also, automation replacing mechanical jobs that used to be outsourced is a real trend. We have provided coverage of that.
(d) I recommended rural and small town BPO for India as a possible alternative to sustain the labor arbitrage advantage. That is also happening,
and we have been covering that too.

Where is the contrarian point of view that you present? Pls elaborate.

Thanks, Sramana

Sramana Mitra Friday, July 27, 2012 at 11:41 AM PT