Smaller IT firms are yet to embrace disruptive tech
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Bengaluru: From building intelligent platforms to finding smarter ways to analyse complex data, it is becoming clear that the secret sauce to make it big in the information technology (IT) world now lies in mastering all things digital.
After the Y2K problem at the turn of the century, the current digital revolution presents the small IT firms the next best chance of disrupting the industry and even making it to the big leagues, but are they taking the bait?
Mint took a closer look at the prospects of a dozen-odd small and mid-tier IT firms; the findings were disappointing. Many of them realize the potential of the opportunity at hand, but most are squandering it and merely rebadging existing revenue as “digital”.
“At least 20% of the existing players must merge and consolidate in the market by 2020. Success for these firms will not come from a me-too strategy,” said Ray Wang, founder of Constellation Research.
“They have to start building out more IP (intellectual property) or carve out a team to build out software products, platforms and solutions. The area that they need competencies in will be in analytics, automation, smart services orchestration and in building out network economies by bringing together their customers in shared services delivery,” Wang added.
Despite tall claims of making investments in platforms and data analytics, most of the smaller IT firms are struggling to boost their revenue, with some even seeing a decline in business in the past few years.
Revenue per employee (RPE) at many of these firms lags behind those of their larger rivals. For instance, despite Mindtree Ltd’s claims of 40% of revenue coming from digital technologies (highest among all home-grown technology firms), the company’s RPE is still lower than that of Tata Consultancy Services Ltd (TCS).
Worse still, most of these companies continue to disclose revenue like in the past (no mention of revenue from analytics or cloud computing platforms).
There are a few exceptions, such as Pune-based Persistent System Ltd, which is clearly focused on building its own proprietary software. It generates about 28.3% of $315.65 million in revenue from its IP unit versus 17% in 2013. It is the only small firm that seems to be taking the cue from some of the larger firms such as Infosys Ltd and Wipro Ltd and investing in start-ups focused on disruptive technologies. (Take its investment in big data start-up Altizon Systems Pvt Ltd, for instance.)
Still, the high growth from new technologies has not helped Persistent records impressive growth because its exposure to traditional business is still high.
“It’s going to be a blood bath for some of them—the deals are moving away from labour arbitrage and towards specific expertise and cloud,” said Phil Fersht, chief executive of US-based HfS Research.
Currently, the five largest software firms focus on offering back office support to managing computers, writing codes for Fortune 1000 companies, offering better ways to analyse data and investing more in artificial intelligence platforms as their traditional approach of outsourcing work to cheaper locations is under pressure.
Smaller IT firms focus on fewer domains. For instance, business process outsourcing (BPO) services do not interest Mindtree, while Mphasis Ltd limits itself to being a provider of solutions to global banks in areas of governance, risk and compliance rather than offering a comprehensive suite of solutions.
Analysts like Fersht are not certain with the investments being made by these small companies.
“There are pockets of hope, such as the excellent focus on automation from Hexaware (Technologies Ltd) and the development acumen of NIIT (Ltd). Analytics with specific industry acumen is where to go for these guys, and specialization around various cloud apps like Workday (Inc.), Salesforce (.com.Inc), and NetSuite (Inc.). Mindtree did some good stuff in analytics and business intelligence, but Zensar (Technologies Ltd) seems like a fading force in today’s market. Zensar is too focused on Oracle (Corp.) and it’s digital play is second-tier,” Fersht pointed out.
Mindtree, which is the seventh largest outsourcing firm, and seven other small firms still believe the “digital wave” offers them another chance to make money from new-age technologies like building platforms and offering solutions using data analytics.
“Digital presents us with an opportunity which can actually be the great leveller,” said Ganesh Ayyar, chief executive officer of Mphasis, which was bought by Blackstone Group LP last year. “For the first time in more than a decade, small companies have a chance to scale up business because of this opportunity.”
In fact, eight of the smaller IT firms, with less than $1 billion in revenue, claim to be betting on digital to help them scale up business. Five of these eight companies analysed by Mint even claim that “digital” accounts for between 11% and 40% of their total revenue (see table 1).
But it looks like it will take a lot longer for the digital revolution to be the panacea to the Davids of Indian IT firms.
“The train has left the station and there is no point running behind it,” said Rostow Ravanan, chief executive officer of Mindtree Ltd, when asked if his company even aims to get to the scale of a Cognizant Technology Solutions Corp. “We do not think and we do not even aspire to become a company of a scale of TCS or Infosys (Ltd) or Cognizant.”
Ravanan claimed that his company’s data analytics practice brings in more than $100 million (of the total $286 million in digital revenue), but conceded that its platforms arm brings “minuscule” revenue for now.
Cognizant, which was founded in 1994, ended with $88.9 million at the end of 1999, the year Mindtree was founded.
Cognizant, along with TCS, Infosys and Wipro Ltd, grabbed the opportunity brought by Y2K bug at the turn of the century. The bug did not wipe out computers and disrupt business but it certainly put India on the global software services map and in turn made some companies grow big.
Cognizant ended last year (its follows the calendar year as its fiscal year) with $12.42 billion in revenue. Infosys ended with at $9.5 billion in revenue in the year to March 2016. TCS is the industry leader, while Wipro, HCL Technologies Ltd and Tech Mahindra Ltd are the other Indian companies with more than $1 billion in revenue.
Tech Mahindra was the last to join the billion dollar club in 2009, when it bought Satyam Computer Systems (Tech M’s organic business touched $1 billion only in 2011).
Mindtree ended with annual revenue of $715.2 million at the end of March 2016.
Clearly, Mindtree, along with over two dozen companies, missed the chance to scale up as many of them did not have differentiated offerings, compared with their larger rivals.
“Digital is a far more enduring opportunity than Y2K,”said Ashok Soota, co-founder of Mindtree, and currently running Happiest Minds, a start-up.