Indian IT services companies lagging in the next big thing

Bengaluru: Indian IT companies are looking to build up their presence in the social, mobile, analytics and cloud (SMAC) space, but they have a long way to go to catch up with their global outsourcing peers when it comes to offering elements of these new technologies to clients.

Infosys Ltd gets 8% of its $8.7 billion revenue from offering solutions to clients in the SMAC or digital space, a relatively small percentage when compared to global outsourcing giant Accenture Plc, which gets a fifth of its $30 billion revenue from client spending in that area.

Client spending in the digital space brought about $800 million in revenue for Infosys, which is about the same its cross-city rival Wipro Ltd generated for the year ended March. Wipro generated about 11.4% of its $7.1 billion revenue from client spending in that area.

“Digital or how we internally define it as social, mobility, analytics and cloud is about 8% of total business,” said an Infosys executive, declining to be named as he is not authorized to speak to reporters. “But we are investing in this (space) as almost all clients want benefits that can transform their business.”

Mumbai-based Tata Consultancy Services Ltd, which recorded revenue of more than $15 billion for the year ended March, does not disclose revenue from SMAC, but earlier this year, the company for the first time said its cloud platforms had generated $125 million.

Cloud, according to Nasscom, is the smallest component in the SMAC stack, accounting for about 15-17% of the $200 billion space. Analytics and mobility are seeing the largest client spending, which many believe could make SMAC a multi-billion dollar opportunity in coming years.

Although the contribution from SMAC for both Infosys and Wipro is higher than 5%—the average estimated by industry body Nasscom for many pure-play IT vendors—experts say Indian IT firms have a “challenging task” ahead of themselves, as their clients spend more on transformational projects and curtail their budgets for maintaining their IT infrastructure.

“The numbers tell you the story why Indian IT outsourcers are struggling to record high growth numbers,” said a Singapore-based analyst at a foreign brokerage.

“All this talk of (Indian) IT firms making investments is merely doing a catch-up. (Infosys chief executive officer) Vishal (Sikka)’s emphasis on renewing service lines is good for he realizes that the digital flavour in almost all large IT contracts will only increase. And if you don’t have the capabilities, you will not be able to survive. But it’s a huge task. The companies which have the lead (in the SMAC space) will not just sit and watch,” the analyst said, asking not to be identified.

The analyst’s views are reflected in the aggressive streak of global outsourcers.

Earlier this year, International Business Machines Corp. said the company would invest $4 billion in 2015 in the SMAC space, as it expects business from these areas to bring about $40 billion in revenue by the year 2018, up from the current $25 billion.

Some experts such as Bozhidar Hristov, analyst at US-based research firm TBRI, said that while home-grown IT vendors’ investments in “co-developed and proprietary industry-specific cloud-based solutions” are encouraging, “consulting on operations remains a weak link”.

“To overcome the limited cloud-enabled infrastructure in mature markets compared to global outsourcers, India-centric vendors need to seek alternative channels such as partnerships to generate cloud sales and become the premier providers of specific and unique partner-based solutions,” said Hristov.

Socially enabled business process, mobility, data analytics and cloud computing are reshaping the way companies, globally, have relied on technology for doing business, and for this reason, they want their IT vendors to offer smart solutions in this space when they are bidding for outsourcing deals. This has led to commoditized outsourcing deals coming under pressure, leaving IT vendors to bring in elements of disruptive technologies, including automation and artificial intelligence in their service offerings, promising to offer greater efficiencies for their clients. Hence, software exporters are making big investments, including having more data scientists who can sift through huge stacks of data, while working on intelligent technology platforms, and offer solutions to customers.

“You see, we are in the midst of a once-in-a-decade shift in the technology landscape which is creating significant opportunities for firms like us,” Cognizant Technology Solutions Corp. CEO Francisco D’Souza said last month. It is unclear for now what percentage of revenue Cognizant gets from the SMAC space.

While the company last declared in 2013 that about 6% of its then revenue of $8.5 billion came from client spending in the digital space, a senior executive said the proportion of revenue from digital has “significantly increased” since then.

“A shift to digital by clients is in turn driving demand for our traditional services. It is like more of a pull factor but then it helps us do the traditional application maintenance and infrastructure management business too. And that is helping us with a more broad-based growth,” explained D’Souza.

Indian IT firms have been slowly but steadily investing more in strengthening their service offerings in this space. About one in five of Wipro’s 20,000 ongoing projects have elements of SMAC, compared to less than 4% in 2011, Mint reported on 31 March.

“The shift in Wipro’s mix towards SMAC is clearly due to a deliberate increase in Wipro’s attention on SMAC-related deals combined with a natural shift in customer demand trends,” said Rod Bourgeois, founder and head of research at US-based DeepDive Equity Research Llc, a tech stock research company.