TCS, Infosys and Wipro Next  IT Service Megavendors?

August 13, 2008

Tata Consultancy Services (TCS), Infosys Technologies and Wipro Technologies, collectively referred as ‘India-3’, will emerge as the next generation of IT service megavendors. These vendors are increasingly being considered for strategic service deals, and will augment or, in some cases, replace today’s acknowledged megavendors by revenue - IBM Global Services, Accenture and EDS - in this space by 2011. These emerging megavendors are much smaller than the current megavendors but will increasingly compete for the same megadeals that had been the exclusive domain of the incumbent megavendors.

The ‘India-3’ have leveraged their strong success with meeting client needs to achieve record growth levels during a long period of time (30 quarters continuously) and have outperformed the incumbent megavendors by almost a 3:1 margin in growth rates. A comparison of the key data and statistics between the ‘India-3’ vs. the current megavendors shows the differences in growth rates between these companies and reveals the rise in the market capitalization of the emerging megavendors. The market capitalization of the Indian providers is significantly higher than that of EDS, and almost on par with Accenture, which are much larger companies in terms of revenue (See Table 1).

“The emerging megavendors have made dramatic progress in the past few years and have more than doubled their revenue in a four-year period, with the 2007 revenue being 2.6 times the 2004 revenue,” said Partha Iyengar, vice president, distinguished analyst and regional research director, Gartner. “This level of growth differential has continued even as these vendors have become multibillion dollar enterprises. To put this in context, there are just 100 service enterprises globally with more than $1 billion in revenue.”

Table 1. Statistics for Emerging and Current Megavendors (Service-Related Statistics Only)

 

Source: Partially compiled by Gartner from company annual reports, Capital IQ, OneSource, Hoovers and 10-K filings. Additional inputs from company responses and Gartner analysis

The emerging megavendors have leveraged four critical competencies to achieve their status as emerging megavendors. The competencies are: process excellence; world-class HR practices; providing high quality services at a low cost; the achievement of significant and disproportionate ‘mind share’ compared to their actual size.

To achieve process excellence, the ‘India-3’ providers have invested heavily to establish frameworks and have aggressively marketed these capabilities as evidence of being able to deliver in a consistent, predictable manner.

Supporting the levels of growth witnessed by the ‘India-3’ has required a high level of HR excellence and capabilities. This has helped them to create a world-class human resource management (HRM) infrastructure. For the past few years, these companies have been adding more than 30,000 people to their workforce every year. The recruitment, training, induction and overall onboarding challenges of this kind of scale could only be supported by the creation of a world-class HRM infrastructure, which has been a significant competitive differentiator for Indian companies. By combining process excellence to deliver higher quality with the less expensive (and larger) workforce available in India, the India-3 providers were able to create the combination of low-cost, high-quality services, which has proved to be the most alluring factor for clients. These qualities have resulted in a higher level of mindshare among clients and prospects globally that is significantly disproportionate to their revenue and overall size, as compared with the incumbent megavendors.

However, the challenges facing emerging megavendors to truly achieve this status are also evident in Table 1. Looking at the "revenue per employee" data, it is clear that there is a divide between today's megavendors and the aspiring Indian megavendors. The Indian providers will have to address the issue of moving away from resource-intensive revenue growth to a model that provides higher leverage and increases revenue without a linear relationship to head count, which is the situation that exists today. They will have to achieve similar (to the current megavendors) levels of revenue per employee benchmarks to truly achieve megavendor status. Furthermore, they will increasingly have to deal with the business constituency that is often deeply involved in these higher-end projects and develop strong relationships with the business stakeholders.

“There are strong indicators that ‘India-3’ (TCS, Infosys and Wipro) will be the next megavendors in IT services. However, to achieve this, the current standing of the India-3 will need to expand quickly to keep pace with the changing client environment for IT delivery in the future,” said Mr. Iyengar. “Revamping and continually reinventing their delivery capabilities, even as they address the challenges of managing their growth opportunities, will determine how and when these emerging megavendors will actually achieve megavendor status.”

‘India-3’ is an acronym devised by Gartner for Tata Consultancy Services, Infosys Technologies and Wipro for the purpose of this research.