After nearly a decade of lagging Cognizant Technology Solutions Corp. in annual revenue growth, India's top software firms Tata Consultancy Services Ltd and Infosys Ltd are beginning to catch up with the US-headquartered rival by increasing their proportion of business from Europe and pushing aggressively to win bigger outsourcing contracts from customers such as Nike Inc. and Citigroup Inc.
Both TCS and Infosys could crunch the revenue growth rate gap with Cognizant to about 5% this year, analysts said. Cognizant, which employs nearly 80% of its staff in India, disrupted the pecking order among domestic tech firms by overtaking Wipro Ltd to the third position in annual revenue last year.
TCS has already managed to reduce the annual revenue growth rate gap with Cognizant, narrowing it to 8.9% in 2012 from 24.8% in 2004. Infosys is expected to be 14% behind Cognizant in terms of revenue growth this year, compared with a nearly 20% gap in 2004.
"A mix of arithmetic, business mix (higher exposure to the US and financials) and Infosys' new-found aggression in the market could potentially drive compression of that growth gap in our view," CLSA analysts Nimish Joshi and Arati Mishra said in a 25 January report. "Cognizant's growth gap with peers Infosys/TCS will likely be at historic lows (5%) in 2013 in our view."
"Even assuming Cognizant retains its quarter-on-quarter growth gap with Infosys/TCS through CY13 (calendar year 2013), it will still end up with a much lower YY (year-on-year) growth advantage over Infosys/TCS than seen through the past 10 years," they said.
Executives at TCS and Infosys wouldn't comment officially about Cognizant because these companies do not speak about specific rivals in public, but they said catching up with the Teaneck, New Jersey-based firm is very much on top of their to-do lists for 2013.
"Even with a revenue base of over $10 billion, we believe such growth rates are achievable. Our business mix is far better, and we are not just focused on the US market," a TCS official said, requesting anonymity.
Cognizant, which grew from a revenue of $229 million in 2003 to $7.5 billion in revenue in 2012, gets 79.5% of its business from US customers that include eBay Inc.
The Indian IT industry will watch Cognizant's earnings, to be announced on 7 February, for clues on future prospects and whether it will be able to forecast better revenue growth for calendar year 2013. Historically, Cognizant has grown 10 to 20 percentage points faster than Indian IT firms by following its decade-long strategy of investing back profit margin in excess of 20% into the business.
At the centre of TCS's strategy is more business from fewer, large outsourcing customers such as Citigroup, which contributes nearly $750 million in annual revenue to the company. And among India-based software firms including Cognizant, TCS is the only one to have won several billion dollar outsourcing contracts. For instance, in 2011, TCS's UK-based insurance and pension outsourcing arm Diligenta won a $2.2 billion contract from Friends Life.
"Under Chandra (TCS chief executive N. Chandrasekaran), TCS has upped the bar in terms of attracting and retaining top talent, building trust, unleashing entrepreneurial energies and facilitating innovation," said Peter Schumacher, chief executive of European advisory firm Value Leadership Group. "Most important, however, TCS is in the process of building a moat made up of a wide range of customer relevant intangibles that are difficult for competitors to emulate."
Infosys is betting on its so-called Infosys 3.0 strategy to increase revenue from software products and platforms, and demonstrating more hunger for regaining revenue growth by bidding for long-term outsourcing deals that may not be too profitable.
Infosys's chief executive S.D. Shibulal hinted while announcing the firm's December-quarter earnings that he will not shy away from chasing growth. This is a significant departure from the company's past strategy of protecting the best profit margin in the industry -- above 30% -- even if it meant letting go lucrative and large commoditized projects.
Experts say it's about time Infosys showed more aggression. "After years of failing to fully exploit its potential and missing many opportunities, it seems that Infosys has now decided to shift gears and compete more aggressively. A key lesson for the industry should be that risk aversion is not a guaranteed safe harbour, but in itself inherently risky," said Schumacher.
Three In a Box
For TCS and Infosys to catch up with Cognizant on a sustained basis, it will take more than just aggression. Some experts said the real test for these firms is to ensure their front-end sales and customer-facing staff are adequately empowered in terms of decision-making -- an area where Cognizant excels. Cognizant has adopted what it calls a "three-in-a-box" model -- where a senior business leader works closely with a project delivery head and a consultant for each large customer account.
"The litmus test is how long does it take for an account manager to take a decision. That is around 10 minutes for an IBM and could be around three weeks for many others," said Partha Iyengar, head of research at Gartner Inc.'s Indian operations.
"This is where you are starting to see a separation taking place between the Indian IT firms in terms of results. You hear two leaders from two companies talking about the market and you wonder if they are from two different planets," Iyengar said.
Stronger leadership in the US and Europe is helping Cognizant stay ahead for now.
"Having a US-based leadership team is really reaping dividends for the firm," said Phil Fersht, founder of outsourcing advisory firm HfS Research. "Until Infy, TCS and others realize that they need to globalize their leadership more effectively, the gap will not start to close the other way."
For now, top executives at TCS, Infosys and Wipro are preparing to bid against Cognizant for several large outsourcing contract renewals worth $50 billion this year, including from Johnson and Johnson, the world's biggest consumer health products firm.
Distributed by MCT Information Services
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