It’s a good time to be a mid-tier IT services company3 min read . Updated: 30 Jul 2018, 11:54 PM IST
Number of times IT services firms get chances at contracts has gone up three-fold
What a week it has been for fodder for a columnist! Facebook’s precipitous plunge in the stock market will rattle investors in tech stocks for some time to come. Netflix’s stock also saw a double-digit percentage decline. It is certain that companies who form part of the FANG (Facebook, Amazon, Netflix and Google) category will be taking a good hard look at their business plans soon enough.
Rather than add to the millions of words that will be written this week about this topic, I have chosen to stay closer to home by focusing on news about information technology (IT) services providers that have a sizable presence in India.
Neerja Sethi and her spouse Bharat Desai, who co-founded Syntel, Inc. in 1980, have sold their firm, which has a very large India-based presence, to France’s Atos for about $3.5 billion. Sethi and Desai, along with their other investors, now stand to walk away with a pile of cash when the transaction concludes. Atos’s offer was about 5% above the prevailing market price.
This is a good time for mid-tier IT services companies. Most of their client firms’ IT is externally sourced, rather than internally created.
In addition, technology has always defined business opportunity. While the “run the company" or “legacy" piece is just a support function, the “change the company" piece ends up defining new ways of working for each firm.
In recent years, new competitors to traditional businesses are coming from nowhere, each with a technology-centric business model with the potential to upend the traditional business. Organizations now look to change themselves through the use of technology before a technology-centric upstart displaces them. Most of these efforts which went by names such as “business process re-engineering" in the past, have found a new catch-all in the phrase “digital disruption".
And so, the IT outsourcers are beginning to define large swathes of their work as “digital", both to catch the market’s attention, as well as to prove to their investors that they are indeed ahead of the curve when compared to their peers.
While much is said about digital, given the current state of “run the company" work routines, very few chief information officers (CIOs) have had the time or the energy to turn their attention to questions that will fundamentally alter the businesses they serve. Most CIOs today are vendor managers who govern a multi-vendor, multi technology type organization. And most of these vendor contracts have now shrunk in their time-cycles. What once used to be 10-year contracts have progressively fallen in tenure—to the point where the average contract life span is now around three years. This means that these contracts are up for grabs more often, and the number of times IT services firms get chances “at bat" has gone up three-fold.
While the contracts became smaller, due to fragmentation, best of breed contracting and “digitalization" of new work, many mid-sized providers who were once tiny have now reached a run-rate where their annual revenues are close to a billion dollars. This annual revenue number automatically includes them on vendor procurement panels, and they get to take a crack at deals that were once reserved only for the big boys. And in cases where they haven’t reached this run rate, relentless focus on niche areas has allowed them to be counted in the “best of breed" category on large deals.
This “perfect" storm has created a large opportunity for mid-sized IT services vendors. The so called “Tier 2" firms such as Hexaware, Luxoft, Larsen & Toubro Infotech, Mindtree, NIIT Technologies, Syntel and Virtusa are now at the table and are given opportunities to eat their big brothers’ lunch.
There outsourcing parties now have new guest lists—and the recent acquisition of Syntel by Atos is a validation of this. The deal also allows Atos more access to clients in North America where Syntel had built up a strong presence.
Investors have seen this opportunity as well and have reacted by driving up the stock prices of mid-tier IT services firms over the last 24 months.
This could be a category-killing opportunity, much like the rise of “offshore" was about a decade ago. We may have new “Tier-1’s" soon enough.
Siddharth Pai is founder of Siana Capital, a venture fund management company focused on deep science and tech in India.