HCL Hurdles Wipro into 4th Place – but for How Long with the Alight Deal?

Perhaps, given the tumultuous past few years that the major Indian outsourcers have just been through, rally racing would be a better analogy than Formula 1. But, if we’re to pause for a second and take a look at revenues over the last three years, we’ll see that HCL has been steadily gaining on Wipro for fourth place in the “who earns the most money” Grand Prix and managed to sneak finally into the fourth spot in Q2 2018.

Let’s take a look at the overall IT services provider podium before we dig into the details of the TWITCH (TCS, Wipro, Infosys, Tech Mahindra, Cognizant and HCL) race. Exhibit 1 shows that little has changed at the top over the past few years. Despite a lengthy period of revenue decline, IBM still holds pole position. It’s anyone’s guess for how long—even though the firm has finally posted revenue growth, it may not be enough to stave off the consistent and steady rise of Accenture. If Accenture keeps on acquiring so voraciously, first place may become a real possibility. Quite far back in third place is TCS, but don’t underestimate this firm in the race. TCS has been posting steady growth that could see it cross over the $20 billion annual revenue mark by the end of 2018.

Exhibit 1: IT services market revenues 

Source: HFS Research

However, the TWITCH providers take on a life of their own when we kick IBM and Accenture off the track (see Exhibit 2). TCS, Cognizant, and Infosys in first, second, and third respectively have generally been posting robust revenue growth since 2011. At the macro level, the gaps are opening up between them—particularly between Cognizant and Infosys; however, there’s nothing to suggest we’ll be seeing any overtaking any time soon in the top three. It’s in fourth place and fifth place where the real drama is taking place. HCL’s bumper revenue growth pushed it ahead of Wipro for the fourth position.

Exhibit 2: Revenues from TWITCH providers

Source: HFS Research

But HCL’s continued growth is only half of the story—if we zoom into the duel between these firms in Exhibit 3, we can see that while HCL’s revenues have grown steadily, it’s only the slowing of Wipro’s that allows for the overtake to take place. If Wipro had continued on its growth path, the two firms would likely still be in their former positions. This makes us wonder if HCL will be able to maintain its new position. Particularly as there’s evidence of a sizeable deal in the pipeline for Wipro that could see it manoeuvre back into 3^rd place.

Exhibit 3: HCL versus Wipro 2017/18

Source: HFS Research

In the race for digital dominance, there are still plenty of turns on the course for overtakes and crashes

Wipro has certainly shown more willingness to loosen its purse strings for digital investments over the past few years, including design firms DesignIT in 2015 and Cooper in 2017. If this continues, it might be able to bolster its reserves and regain position in the field. However, HCL could pull a similar move out of the bag; the firm has been championing organic growth for a long time, but even it has more recently opened up the war chest to buy the data management and analytics firm Actian. It also seems to have an easier time pricing competitors out of large IT transformation deals, which could consolidate its position, even with Wipro’s increasingly lucid vision for digital in the modern enterprise.

One of the points we contested a year ago when we published the first wave of IT Services Blueprints, was that despite almost every vendor advising they were shifting their approach to be more selective about engagements by focusing on high-value transformation activities, there was still an abundance of IT heavy lifting work to do. While many vendors are turning their noses up at this work (or at least are telling us they are), the big power-lifters such as HCL have an open market for Hoovering up large deals. If these trends continue—and we’ll be sure to tell you if they do in our next round of Blueprints—HCL may find itself with plenty more work to feast on.

Let’s predict what will happen in the coming months

There’s no point writing a POV like this without at least tantalising the reader with a few predictions – even ones that are somewhat misguided in a market that’s changing as quickly as this one. We’ve compiled some of the most valuable data for TWITCH providers in exhibit 4, to help guide the following ‘back of a cigarette packet’ predictions for the market:

Exhibit 4: TWITCH Fact Sheet

Source: HFS Research

• A big acquisition could change the game: After the Atos-Syntel tie up, this isn’t so much a prediction, but a statement of fact. Mega-acquisitions and mergers are likely to be a fairly regular occurrence as tier 1 firms look to shore up revenues by buying up profitable mid-tier firms. Given the spate of mega-mergers during the height of the offshore era, it seems overdue as we enter the digital automation phase of the market. Some of the tier 2 firms are pulling in up to $1bn in revenues, so when looking at the race between the TWITCH providers, this could be a gamechanger. There are several mid-tier firms we’ve highlighted as potential acquisition targets in a recent article – including Virtusa Corp, Hexaware, and Mindtree. If one of the big providers goes on a spending spree and snaps up one of these players, it will change the course of the race considerably.

• HCLs profitability will support it underpricing rivals: HCL has done a fantastic job of building efficient processes that enable it to squeeze the most revenue out of its employees. Although this is a somewhat false economy as automation drives a wedge between headcount and delivery, it’s still an important signal of the firm’s ability to find room for manoeuvre in pricing that another firm might struggle with. HCL has a reputation for taking deals of incumbents by offering the same or improved service delivery for a better price, a reputation that has enabled it to grow its market share at pace. If HCL continues on this path, we can expect it to continue growing as it hoovers up heavy-lifting work from price-sensitive.

• Major deals will nudge Wipro back up: Wipro has a healthy pipeline, and the rumour mill recently floated the prospect of a major deal that will set it back up above HCL. The fact is, Wipro has developed a much clearer digital vision than many of the players nipping at it’s heels, and while HCL is investing in building out digital capabilities, there is a question over whether it has the scale and reach to make a difference as enterprises raise the stakes. While HCL hoovers up major IT deals, Wipro seems to be building out major transformation deals that make use of its recent digital acquisitions – this should see the firm regain position.

• The conclusion: Assuming there are no major acquisitions amongst these players, it is reasonable to expect the positioning of vendors to move largely back to their original positions. Something major would need to happen to knock TCS and Cognizant off 1^st and 2^nd, and Infosys and Tech Mahindra would need to fall victim to some disastrous leadership crisis (we’re looking at you Infosys) or tap into an undiscovered gold mine to change their positioning. And while HCL has the edge now thanks to some fancy manoeuvres’ – it seems unlikely that Wipro will acquiesce. And given the potential pipeline at the firm, and the continued push for digital capabilities, it seems like Wipro has the long-term edge. But, honestly, in this crazy market – it’s not out of the question for Wipro or HCL to gobble up Tech Mahindra and leave us, analysts, feverishly changing overall revenue lines and amending this report.

Bottom line: There’s plenty of work still to go around, and in the TWITCH race for first place, it’s all up for grabs

But, let’s be honest, the way revenues are growing in the IT services space, we’re only beginning to see the impact of the tipping point shifting from traditional work to digital. Enterprises seem to be coming to market with a whole new appetite to embrace a new, holistic approach to digital—and they’re asking for help from tech-focused providers and consultancies to help them make sense of their business internally and the quickly changing market externally. In this environment, anything can change for IT services providers that can excel at meeting client demands or fail to remain relevant in the digital space.

We’re currently in a period of transition, and there seems to be plenty of work to go around, but providers can’t bank on that going on indefinitely. So while TWITCH provider revenues are on the upswing and we’re seeing a gripping race developing, the tipping point becomes more pronounced, and shifts in position are likely to be an accurate reflection of a provider’s ability (or inability) to race at the speed the digital market demands.