Nasscom won’t define ‘digital’, says rationalization impractical

Bengaluru: Determining how India’s information technology (IT) industry is making itself future-proof just got more tedious. Industry body Nasscom will not come out with a broader definition for “digital”, the fuzzy umbrella term which each company uses to classify revenue generated from areas generally classified as social, mobile, analytics, cloud computing and Internet of Things, as it believes it is not practical to have a standard definition.

“We should not be too focused with a definition. Rather, one should ask each of the companies to define digital and see how it is progressing over years. Till the time it is an apple to apple comparison and the definition of digital remains unchanged over the years, I believe one should be okay with it,” said Rishad Premji, vice-chairman, Nasscom.

Simply put, digital technology is any solution offering from an IT vendor which allows its customers to run their businesses better.

“We don’t propose to rationalize or harmonize digital, which in a very broad sense all of us know. So we won’t come out with a rigid and rigorous definition for digital which cannot be applied because it is not practical,” said R. Chandrashekhar, president, Nasscom.

Nasscom’s position is significant because until now most equity and industry analysts and executives at IT firms have expressed hopes for a standard definition.

India’s $154 billion IT outsourcing sector faces twin challenges in slowing growth and declining profitability as traditional solution-offering work such as application development and infrastructure maintenance gets commoditized.

Almost all Fortune 1000 firms are cutting their spending on these legacy areas and ploughing the savings into newer projects in areas such as data analytics and cyber security solutions, all of which is clubbed under “digital”.

“Indian IT players now have two distinct parts to their portfolios: the legacy portion (55-83% of FY17 revenue) that is barely growing, and the smaller ‘new’ portion that is growing at 20-30% year-on-year. Thus, how fast the ‘new’ grows and how well the slowdown in the legacy part is arrested could decide how revenue growth and valuations play out over the medium term,” BNP Paribas analyst Abhiram Eleswarapu wrote in a note last year.

For this reason, IT companies are trying to impress investors and analysts amid claims of generating more digital business, which is growing faster and comes at improved profitability.

Digital business is less than a fourth of total revenue for the largest IT companies, including Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd, even as some of the smaller firms like Mindtree and Zensar claim digital business to be over 40% and 35%, respectively, of their overall revenue.

Analysts believe some companies are merely rebadging or reclassifying existing work as digital business, as despite claims of increase in profitability, most companies have seen a decline in revenue per employee over the last three years.

Since each company defines “digital” differently, most analysts are in a quandary when they try to draw comparisons between firms.

Accenture Plc, which claims over half of its overall revenue to be digital, does not club revenue from cloud and cyber security under digital; rather, it defines business from Accenture interactive and platforms, mobility and internet of things under digital. The company calls the business from cloud computing and cyber security “new”

, and together with digital, they constitute over $18 billion of the company’s $34.85 billion revenue.

Cognizant Technology Solutions Corp. does not include business from platforms as part of digital while TCS, Infosys and Wipro club business from platforms, cybersecurity and the social, mobility, analytics, cloud and Internet of Things stack as part of digital revenue.

Again, Wipro, unlike TCS and Infosys, does not count business from consulting as part of digital.

Still, analysts and executives tend to agree with Premji’s views on digital.

“He (Premji) does have a point that the definition of digital does keep changing. This is happening not only in services, but also in the software world. We don’t have a standard definition of cloud revenue, digital revenue, etc. So it’s going to be up to the analysts to classify how that revenue plays out,” said Ray Wang, founder of Constellation Research, a technology research and advisory firm.

“This question of what is digital is important because there are flaky pretenders who just want to be with the zeitgeist,” said Vinaya Chandran, formerly with Cognizant, and now at NextWealth, a social entrepreneurship firm.

“So one part of what Rishad Premji says implies that some firms may tend to add or drop certain revenues just to show boost in revenue from digital. In that sense they are clearly just dressing up for stock analysts, which doesn’t reflect very well on the firm. The other part implies that what is digital and considered leading edge and transformative today maybe table stakes tomorrow. The technologies evolve quite dynamically and it is pointless to demand consistency in the definition of digital,” said Chandran.