For the Indian information technology (IT) sector, it appears to be the best of times and the worst of times, contradictory as it may sound. The best because after the subprime crisis, the world is relying on the outsourcing capabilities of Indian IT firms like never before to transform businesses and stay competitive. And, the worst because the sector is gradually waking up to the fact that not all the top players are on an equal footing when it comes to business momentum.
Some of these firms are grappling with serious issues pertaining to either lack of strategic focus or able leadership or both. This week, ET Intelligence Group takes a closer look at the changing dynamics of the employee-driven sector to identify the ones among both the large and smaller companies which will perform well in the long run.
THE JUGGERNAUT CALLED IT
The IT-BPO sector has been one of the fastest-growing sectors in terms of revenue, exports and employment generation. Data from trade body the National Association of Software and Service Companies (Nasscom) shows that the export revenue of the sector grew at 28% in the past 10 years when compounded annually.
Its share in the country's total exports grew to over 26% from less than 10% during the period.What also makes the sector unique is the rate at which it has generated employment. Unlike most other sectors in the manufacturing industry, the IT sector has been at the forefront in terms of adding jobs. In FY11, IT companies are reckoned to have added 2.4 lakh jobs to take the total headcount to 25 lakh, according to Nasscom estimates.
OLD GAME, NEW CONTENDERS
The sector faced a sharp slowdown due to turbulence on the macro-economy front twice in the past 10 years - once after the dotcom bubble in early 2000 and then in 2008 when the subprime crisis hit the global economy. It, however, bounced back on both occasions.
The rebound was much faster in the aftermath of the global financial crisis twoand-a-half years ago. But it is less secular this time around compared to the post dotcom era wherein most IT companies took advantage of the demand recovery.While demand has improved in the past six-eight quarters, it has not benefited top companies in equal measure. While Tata Consultancy Services , Cognizant and HCL Technologies were at the forefront of the demand uptick, traditional contenders, including Infosys and Patni, looked constrained due to their own strategies adopted in the past.
Take for instance, the comparative growth rate among top three peers, including TCS, Infosys and Wipro. Infosys and Wipro grew their respective net profits at a compounded annual growth rate (CAGR) of 21-22% in the past four years. The growth was much faster at 28% for TCS. A starker picture emerges if we take into account a two-year horizon. Between FY09 and FY11, the net profit of Infosys rose by 4.5% compared with the 11% growth in Wipro's bottomline and 18.6% in TCS's (see graph).
THE DIFFERENTIATORS
What has separated the performance of these companies is the difference in strategies, which each one of them followed over the past five years. Infosys largely focused on margin-driven organic growth with a greater thrust on improving business efficiency. Wipro paid more attention to embedded technologies and infrastructurerelated segments. TCS made investments in increasing onshore presence across Europe, Latin America and Australia. It also acquired a few companies to enhance its vertical presence.
The strategy seems to have worked well because TCS could take advantage of the revival in outsourcing demand over the past six quarters. It commanded the biggest share of the incremental revenue and operating profit during the period. The company also pruned its operating cost structure to improve profitability of its business.
Some of these firms are grappling with serious issues pertaining to either lack of strategic focus or able leadership or both. This week, ET Intelligence Group takes a closer look at the changing dynamics of the employee-driven sector to identify the ones among both the large and smaller companies which will perform well in the long run.
THE JUGGERNAUT CALLED IT
The IT-BPO sector has been one of the fastest-growing sectors in terms of revenue, exports and employment generation. Data from trade body the National Association of Software and Service Companies (Nasscom) shows that the export revenue of the sector grew at 28% in the past 10 years when compounded annually.
Its share in the country's total exports grew to over 26% from less than 10% during the period.What also makes the sector unique is the rate at which it has generated employment. Unlike most other sectors in the manufacturing industry, the IT sector has been at the forefront in terms of adding jobs. In FY11, IT companies are reckoned to have added 2.4 lakh jobs to take the total headcount to 25 lakh, according to Nasscom estimates.
OLD GAME, NEW CONTENDERS
The sector faced a sharp slowdown due to turbulence on the macro-economy front twice in the past 10 years - once after the dotcom bubble in early 2000 and then in 2008 when the subprime crisis hit the global economy. It, however, bounced back on both occasions.
The rebound was much faster in the aftermath of the global financial crisis twoand-a-half years ago. But it is less secular this time around compared to the post dotcom era wherein most IT companies took advantage of the demand recovery.While demand has improved in the past six-eight quarters, it has not benefited top companies in equal measure. While Tata Consultancy Services , Cognizant and HCL Technologies were at the forefront of the demand uptick, traditional contenders, including Infosys and Patni, looked constrained due to their own strategies adopted in the past.
Take for instance, the comparative growth rate among top three peers, including TCS, Infosys and Wipro. Infosys and Wipro grew their respective net profits at a compounded annual growth rate (CAGR) of 21-22% in the past four years. The growth was much faster at 28% for TCS. A starker picture emerges if we take into account a two-year horizon. Between FY09 and FY11, the net profit of Infosys rose by 4.5% compared with the 11% growth in Wipro's bottomline and 18.6% in TCS's (see graph).
THE DIFFERENTIATORS
What has separated the performance of these companies is the difference in strategies, which each one of them followed over the past five years. Infosys largely focused on margin-driven organic growth with a greater thrust on improving business efficiency. Wipro paid more attention to embedded technologies and infrastructurerelated segments. TCS made investments in increasing onshore presence across Europe, Latin America and Australia. It also acquired a few companies to enhance its vertical presence.
The strategy seems to have worked well because TCS could take advantage of the revival in outsourcing demand over the past six quarters. It commanded the biggest share of the incremental revenue and operating profit during the period. The company also pruned its operating cost structure to improve profitability of its business.
No comments:
Post a Comment