How smaller rivals beat Wipro and Infosys and turned India’s IT sector upside down

How smaller rivals beat Wipro and Infosys and turned India’s IT sector upside down

By Nandagopal Jayakumar Nair April 23, 2013

Nandagopal Jayakumar Nair is a Knight-Bagehot fellow in economics and business journalism at Columbia University in New York. He previously worked for CNBC-TV18 in India.

The players in India’s $108 billion information-technology industry are realigning. Finally.

While pioneers like Infosys and Wipro have been caught wrong footed, agile rivals are banking on aggression and vision to grow their businesses.

Today, shares of India’s third largest software provider Wipro fell more than 8% as the management said revenue would grow 1.3%, at best, in the next quarter. Earlier in April, India’s second largest software exporter Infosys lost more than a fifth of its value in a single trading session after it gave a disappointing annual revenue growth forecast of 6-10%. While Wipro is optimistic about a turnaround later in the year, Infosys admitted that the tough macroeconomic conditions would hamper the company’s performance. “There is uncertainty all around us. I don’t believe that this is something we can wish away,” said Infosys CEO SD Shibulal.

But how then to explain Tata Consultancy Services? TCS, as it is better known, is decidedly bullish on its near future. India’s largest software exporter is confident of beating IT industry body Nasscom’s estimate of 12-14% revenue growth for 2013-14.  “The global economic environment is providing us with many new opportunities,” said CEO N Chandrasekaran. “We are going to have a better year this year.”Smaller rival HCL Technologies also delighted investors with a strong operational performance and robust guidance. Speaking to the Economic Times, CEO Anant Gupta said, “We continue to feel bullish on that (outsourcing) market and we are making investments in sales, presales, and customer acquisition.”

The divergence in outlook can be partly explained by the differences in the management structures and strategies adopted by these firms. Wipro’s growth has been hampered by organizational flux. In January 2011, the company fired its co-CEOs ending an ill-fated experiment that was started just before the global economic meltdown in 2008. In November 2012, the management decided to spin off its non-IT businesses to focus on its technology operations and “accelerate investments necessary to capitalize on market growth opportunities.”

Infosys’ reliance on a high-margin business backfired when clients preferred to save costs to tide themselves over the global slowdown. In late 2010, the company unveiled its new strategy, Infosys 3.0. The plan was to reduce its dependence on conventional information technology services and garner at least one-third of its revenue from new areas such as mobility, cloud computing and data analytics. The $100 million initiative was slow to take off and Infosys has been forced to offer discounts and be more flexible on margins to boost its growth prospects. The firm has also been hobbled by a rigid management structure that has allowed only founders to become CEOs so far.

In the meantime, Infosys’ rivals have been far more aggressive in adding new businesses. TCS has expanded into new geographies and service lines and is focused on winning orders from fewer, larger outsourcing customers. The firm, which has over 275,000 employees, is also looking to grow inorganically. Earlier this month,TCS announced the acquisition of French IT services company Alti SA for $98 million.

HCL Tech has adopted a leaner approach. The firm manages to keep a lid on hiring by focusing on non-linear growth, where revenue expansion is not linked to increase in headcount. HCL Tech has aggressively expanded its infrastructure management business, which now accounts for 30% of its revenues, even though the new business delivers lower margins than the traditional software service verticals.

Nasdaq-listed Cognizant, which employs a majority of its 150,000 plus employees in India, has consistently outpaced rivals like Infosys and Wipro by offering superior customer service at lower margins. The company has a “three-in-a-box” model—where a senior business leader works closely with a project delivery head and a consultant for each large customer account. This ensures that the front-end sales and customer-facing staff are empowered to make decisions quickly. Cognizant operates with margins of under 20%, significantly lower than TCS and Infosys, which have enjoyed margins of between 20-25%.

The growing divergence in the Indian IT field comes at a time when the industry is facing rising wages, less plentiful visas, and growing competition from cheaper destinations. The business itself is seeing drastic changes with the rise of the outcome-based model, where outsourcing companies start earning revenues only once project implementation is complete and clients make payments on a pay-per-use basis.

The companies that have embraced change are already reaping the benefits. The message for the rest is clear: adapt quickly or risk becoming irrelevant.