Mphasis initiatives offer the promise of a return to growth

Mphasis achieved modest 1.6% quarter-on-quarter growth in Q3 FY24 (October to December), the third quarter of a year in which it has registered a 5.2% year-on-year fall in revenue after three years of double-digit growth. Yet customers may draw confidence from the fact that despite the squeeze, Mphasis is sticking with its investment plans and initiatives.

Mphasis took a big hit from a sudden drop in banking and capital markets revenue in 2023. Banking, financial services, and insurance (BFSI) is the firm’s core market, as shown in Exhibit 1, heavily exposing it to the macroeconomic headwinds that hit the sector.

Exhibit 1: Banking and financial services contributes approximately 50% of Mphasis’ total revenue; insurance adds a further 10%

Note: All numbers are HFS estimates
Source: HFS Research, 2024

The firm’s leadership reacted with a stated intent to manage margins to continue to fund investments for the future, and that is materializing. In 2023, the firm scaled investment in AI initiatives and doubled down on capabilities in the regulatory-heavy BFSI sector. It also invested $132 million in New York-based Salesforce partner and digital transformation consulting shop Silverline, enhancing customer experience, transformation, contact center modernization, and conversational AI-enabled automation capabilities. Each of these initiatives and investments aligns well with client needs and, ultimately, a return to growth for Mphasis.

The pressure is on for mid-tiers in the face of economic headwinds

The IT service industry, particularly in Q3 2023 (October to December), witnessed a general slowdown in revenue growth. Mid-tier players like Mphasis often experience more pronounced effects of macroeconomic headwinds, yet they are also under pressure to report higher growth rates than larger peers. Mphasis returned 11% growth in 2020, 17.6% in 2021 and 23% in 2022, for example.

And Mphasis’ Q3 results are not a pretty picture compared to the performance of other mid-tier companies. For instance, Sonata Software and Globant report significantly higher year-over-year growth rates, driven by acquisitions and geographical expansion. Persistent, EXL, and Coforge also demonstrated notable growth, emphasizing investments in technology and market expansion. The transformation, BFSI, and AI initiatives Mphasis made in 2023 reflect a long-term commitment to investments in predicting and responding to technology trends. Q3 shows Mphasis may be pulling out of its year of revenue decline, but it has plenty of ground to make up.

AI and BFSI initiatives build potential for the long term

Against this industry backdrop, Mphasis’ strategic focus on AI through Mphasis.ai, its BFSI expansion via the WorkFusion partnership, and its acquisition of Silverline are good examples of a clear-eyed focus on maintaining the course in choppy economic waters.

Mphasis’ establishment of Mphasis.ai, broadly aimed at harnessing the excitement around generative AI (GenAI), positions the company to capitalize on emerging tech trends.

The partnership with WorkFusion, which focuses on fincrime compliance in BFSI, aligns with the growing demand for AI-driven solutions in regulatory-heavy sectors. Financial services is a key focus for Mphasis, accounting for as much as three-quarters of its revenue. The WorkFusion partnership extends an already strong market position, making Mphasis an appealing, nimble, industry-focused partner for BFSI firms.

Financial services revenue grew 0.9% and insurance 7.6% in the last quarter, helping offset an 8.5% fall in technology, media, and telco for Mphasis. A recent mortgage deal with one of the largest US banks in Q3 will likely boost revenue performance in Q4 23–Q1 24.

Talent Next prepares people to be the disruptive difference

At a time when talent is a critical differentiator, Mphasis’ investment in its Talent Next framework, focusing on GenAI and AI technologies, will align its workforce capabilities with market demands. The framework encourages people to add technology skills, domain competencies, and application capabilities through a digital and on-demand HR platform with personalized learning experiences. It is intended to give teams the power to disrupt.

This focus on talent for disruption is likely another route for Mphasis to return to the fast-growth track as customers increasingly crave something greater than incremental outcomes.

The Bottom Line: When faced with an uncertain economy and changing tech landscape, align initiatives to market trends and invest in people.

In the context of the industry-wide slowdown, Mphasis’ Q3 performance and strategic initiatives in AI and BFSI represent a balance between prudence and innovation that could make Mphasis more appealing to BFSI clients. While the firm hasn’t matched the high growth rates of some mid-tier peers, its focused investments in AI and talent development could set the stage for future resilience and growth. For enterprises, Mphasis’ strategy underscores the importance of aligning innovative initiatives with market trends and talent development, especially during economic uncertainty and technological shifts.