Are Indian IT majors guilty of ‘digital overreach’?5 min read . Updated: 02 May 2016, 05:01 PM IST
In a bid to win deals and drive up valuation, firms are stretching the definition of their digital biz, say experts
Bengaluru: Are Indian information technology (IT) services firms defining digital too broadly in their quest for more business and higher valuations?
That’s the question experts and analysts are asking.
Tata Consultancy Services Ltd (TCS) recently claimed that its digital business grew 53.2% over 2014-15 to become a $2.28 billion business last year.
Wipro Ltd has said in internal presentations that its digital business unit is a more than $1 billion-a-year enterprise.
Given that TCS grew by 7.1% last year and Wipro 3.7%, it is evident that a lot of the new business won by the companies are being labelled digital.
Pure-play transformative work, which uses elements of new-age technologies such as data analytics to help transform business for clients, is still a tiny component of the digital business for most Indian companies, say experts.
Indeed, TCS said that much of the ‘digital’ business it won replaced existing revenue from ongoing projects. A senior executive who spoke on condition of anonymity said that “traditional work is morphing into digital".
“Our revenue base has two components: annuity and project revenues. Projects have tenures ranging from six to 18 months, so every year, as projects end and their revenue streams stop, we have to win more projects to replace those revenues. Over and above that come the incremental revenues which eventually manifests as revenue growth," said a spokeswoman for TCS. “New projects are digital by default, so most of the replacement revenues are tagged as digital."
Beginning July this year, Wipro will start to report its revenue from digital, which, according to executives familiar with the development, will be north of $1 billion.
Wipro Digital was set up as a unit in April last year. Wipro is expected to club business from its analytics practice ($544 million), along with its consultancy practice ($125 million), cloud computing and mobility revenues as part of its digital business, according to executives familiar with the development.
Wipro has been reporting its business from analytics, information management systems and consultancy for more than six years.
“At present, Wipro does not disclose its overall revenue from digital, but we intend to do so, beginning Q1 (April-June quarter) of FY2016-17," said a spokesman for Wipro. “With regards to Wipro Digital, the unit has been doing very well—building significantly differentiated capabilities and offerings in the market."
Experts are not happy at how Indian IT services firms are defining digital.
“The entire IT services industry is obsessed with the term ‘digital’ and fails to define the term correctly and use it in the right context—and the Indian majors are most guilty of this," said Phil Fersht, chief executive of US-based HfS Research, an outsourcing-research firm. “Digital transformation requires a great deal of change management and design thinking up front. It’s not like the old days of ERP (enterprise resource planning software like SAP), where you bought a software suite and then tried to retro-fit a company’s processes around it. The ‘digital shift’ is essentially businesses driving IT, not IT driving businesses. It appears that Indian providers are now badging any ‘custom project’ as a ‘digital project’."
“Digital is clearly a buzzword," said Ralf Dreischmeier, a London-based senior partner who heads the technology practice at the Boston Consulting Group. “In simplest of words, any modern technology platform that uses a mobility platform or an AI (artificial intelligence) solution that can help transform business is digital. But then, clients are no longer asking ‘what’ technology will system integrators (SIs) use. Rather they want to see ‘how’ SIs will execute, using that technology. The operating model of SIs will change. This is the fundamental difference—to use these modern technologies, backed by a strong consultancy-led practice, offering solutions that can be built quickly and are compelling for clients."
To be sure, Indian IT firms are developing solutions that can help their clients do business more efficiently. In the past 12 months, TCS and Wipro have launched intelligent platforms Ignio and Holmes, helping clients save on costs and run their operations more efficiently. However, revenue from these platforms is still small.
And all Indian IT firms are also engaging with nimble start-ups, to take their solutions, including mobility platforms and data crunching platforms, to their large clients.
Still, the way Indian IT firms classify digital revenue is puzzling.
“If you have a $5 million project, on top of which you get a $3 million mobile application-based module, do you define only $3 million as digital or the entire $8 million as digital? Remember, the $5 million project is just being worked by the system integrator to roll out some ERP. Our guess is that now, the entire project is being called digital," said a Mumbai-based analyst at a foreign brokerage, who spoke on condition of anonymity.
So, why are domestic IT firms doing this?
Firstly, it helps them win more new deals from clients looking to outsource new work.
Secondly, many believe it drives up valuation.
However, equity analysts caution that it is not that simple: stocks of smaller technology firms such as Mindtree Ltd and Persistent Systems have lagged despite claims that digital work accounts for more than a third of their revenue.
But not all companies do this. Nasdaq-listed Cognizant Technology Solutions Corp. said that it is “nearly impossible" to strip out revenue of analytics or cloud computing from traditional service offerings, and for this reason, the company does not disclose its earnings from digital.
And save for a brief period in the April-June quarter last year, Infosys Ltd has not talked much about its digital journey and rather focused on the user-centric approach of design thinking, building AI platforms, and a strong consultancy-led approach to sell its service offerings.
“Our digital practice is about 8% of business," Infosys chief executive Vishal Sikka said on 28 May 2015 at an analyst event sponsored by Cowen and Co., LLC. Since then, Infosys has stayed away from this theme of ‘digital’ and has declined to split the revenue from cloud computing or analytics, and said that “every facet of work" is digital.
Companies such as Accenture Plc do disclose revenue from digital, but thanks to their very strong consultancy practice, they undertake work that is more than just making some mobile-ready applications. Indeed, Accenture Digital boasts double the revenue per employee than the rest of the organization.