TCS’s revenue growth has fallen considerably short of the Street’s already toned down expectations
When IBM announces a 12th consecutive quarterly decline, when practically every other service provider is trying to mask layoffs and austerity plans as strategic moves to delink revenue from headcount, you have to hold your hands up and admit the services industry is going through a secular transition that is going to get considerably more painful, before it eventually reemerges in the As-a-Service Economy.
Service providers need to address the transition years we are currently in, to reach the As-a-Service promised land
With consolidation of the current environment clearly very much on the minds of senior leaders in the service providers (e.g. Capgemini and iGATE widely mooted to be close to tying the knot), it’s pretty clear that we’re distracting ourselves from entering the As-a-Service world anywhere as quickly as we should be. There are simply too many operations and IT careers tied to legacy ERP and business processes, and too many providers making too much money feeding off this legacy, for the change to happen at anything bar a snail’s pace. There simply is no burning platform for change – no Millennium Bug, no Dot.com bust, no Great Recession in the offing (perish the thought…).
It is my belief that we’re at the start of a ten-year cycle of interim change as operational human labor is gradually replaced by automated platforms that are in turn augmented by analytical and creative talent and cognitive computing. The smart service providers are those which are going to address this ten-year phase of transition head-on and not get distracted by maximizing their position in the old model.
So let’s pick on the biggest service provider of all in the middle of this industry transition, IBM, to assess its options:
The cool stuff is all great, but the dollars are relatively small
While IBM is making many right moves investing for the long-term, it’s this long drawn out medium-term period that’s the real problem. Watson, Apple and Twitter alliances, its new $3bn IoT unit, Softlayer etc. all create As-a-Service mojo, but it’s going to take years to get to the revenue levels that can replace the traditional services dollars that are in gradual decline.
IBM needs to work with clients at the pace they are comfortable with, if it wants to maintain its wallet-share with them. The problem with the current business is that prices are getting squeezed and second tier providers are getting desperate and practically buying deals with the hope of making them profitable down the road and keeping their investors happy.
The solution: Buy TCS and create a dominant giant to crush its competitors
It’s simple – make a move on the largest, most aggressive and dynamic of the Indian-heritage providers: TCS. Together, they would crush the market across all aspects of delivery, all verticals, all technologies because their individual forays in the As-a-Service world could play off each other and get scale even quicker. They would have skill at massive scale and could undercut the competition on key deals – almost at will – if they needed to. Together, they would have the footprint for global delivery, transformational talent, low-cost transactional labor, proprietary automation and cognitive capability, analytics, BPO, cloud platforms, mobility, digital consultants, unique software solutions and product engineering… the list is endless. An acquisition would also give the incentives to restructure the existing labor base of both providers through a very active program of automation.
The Bottom-line: This industry needs a mega-merger (or three) to change the game
Let’s face facts, we’re in a worrying downward spiral in the services business as enterprises and service providers face unprecedented challenges on this inexorable journey to replace operational and IT labor with products. Rather than price-compete each other out of business, the service providers need to figure out how to blend the best parts of each other – especially from the As-a-Service world – to get ahead of the change and the pain, and there is nothing like mega-mergers to mask the change that is needed for a few quarters to keep the Wall St investors at bay. Providers need to buy some time and some air-cover to get this right, and what better than complex mergers?
Now would IBM really buy TCS? Probably never, as there is simply too much history in both providers, and this is just too bloody big. Plus, it would create a leadership challenge of unprecedented proportions in this industry. But this industry needs change, it needs real disruption like this to shake us to our foundations and force the new thinking and new behaviors the As-a-Service Economy demands. Let’s hope this impending consolidation has this impact and we’re having a very different discussion in a few months… let’s keep the conversation rolling!
Value and volume of business pales in comparison with near-record 2014
Signs of price war emerge with drop in ACV and steady volume of smaller deals
Americas lone bright spot, posting fourth straight quarter of ACV greater than $2 billion
The global outsourcing market slowed in the first quarter of 2015 from its near-record pace last year, with contract values falling amid a growing industry price war, new research from Information Services Group (ISG) (NASDAQ: III), a leading technology insights, market intelligence and advisory services company, has found.
Data from the ISG Outsourcing Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show that first-quarter ACV fell 18 percent, to $5.1 billion, well below the average $6 billion in first quarters since 2006, and one of the slowest first quarters in the last decade. ISG had forecasted this weakness last quarter after several large contracts were awarded at the end of 2014.
The total number of first-quarter awards, 305, was down 7 percent from the prior year. Still, the volume of smaller deals, those with ACV of under $30 million, remained steady with the year-ago first quarter, totaling 269 awards valued at $2.5 billion. However, larger deals, those worth more than $30 million annually, declined about 25 percent in number and value (28 contracts worth $1.3 billion in ACV) from the previous year.
“The slow pace of the quarter is not a surprise, based on the activity we noted at year’s end, but we don’t view it as a portent of things to come,” said John Keppel, partner and president of ISG. “Smaller deals continue to flow, and value and volume for the trailing 12 months remains in positive territory. Still, what goes up must come down, especially against the strength of last quarter and the vigorous start the industry had in the first quarter of 2014. Across markets this quarter, we found examples of value increasingly being challenged while volume remained strong as clients sought out great deals in a buyer’s market.”
ISG found the number of new-scope awards in the first quarter was flat with the prior year, but the annual value of such deals dropped 19 percent. Restructured contract volume, meanwhile, declined 20 percent versus last year, with ACV down 16 percent.
“New scope, which usually makes a strong showing in the first quarter, had its slowest start since 2001, primarily the result of smaller awards than we’ve seen in the past,” Keppel noted. “In addition, even with a first-quarter decline in restructured contracts, it’s important to remember that restructurings are cyclical in nature, and they ended 2014 by breaking records.”
By domain, information technology outsourcing (ITO) slowed in the first quarter, with $3.5 billion in ACV awarded, off 27 percent from last year and the lowest such total for a first quarter since 2004. Conversely, business process outsourcing (BPO) saw contract volume grow 18 percent and ACV climb 13 percent, to $1.6 billion. This was the second consecutive quarter BPO had ACV of more than $1.5 billion, countering a retreat in this market in recent years.
The Americas had the strongest quarter of the three regions, with ACV up 10 percent, to $2.1 billion, the fourth consecutive quarter the region posted ACV higher than $2 billion. A total of 143 contracts were awarded in the quarter, up 27 percent. Restructured ACV reached more than $1 billion in consecutive quarters for the first time, and the value of restructured awards came in higher than that of new-scope awards, an event that has happened only twice before. Among industries, the Energy sector saw its ACV climb 125 percent and its volume soar 150 percent, as the pace of sourcing activity picks up in the face of falling oil prices. Healthcare and Pharma also had a strong quarter, with ACV more than tripling and volume up nearly 150 percent, reflecting the growing need to provide services at lower cost amid increasing regulatory and compliance pressures.
EMEA, the world’s largest outsourcing market, saw its ACV, at $2.4 billion, and its contract count, at 128, both decline about 25 percent for the quarter. This was due mainly to a drop in sourcing business in the U.K, a lull most likely caused by the run-up to the next election, and in France, which came off its best year ever in 2014. The DACH (Germany, Austria and Switzerland) sub-region, meanwhile, saw its ACV climb 65 percent. The Financial Services and Retail industries were bright spots, both recording significant double-digit increases in ACV.
In Asia Pacific, both value and volume edged down from last quarter, but dropped significantly against the first quarter of last year, when almost $1 billion in ACV was recorded and the number of large deals was more than twice that of this year’s first quarter. Among the sub-regions, Australia/New Zealand started the year with one of its weakest quarters in a decade. In contrast, India and South Asiacontinued a strong run, with ACV of $300 million this quarter, and substantially more contracts than a year ago. Across the region, only two industries saw year-over-year growth: Energy and Financial Services.
Looking ahead, ISG sees an explosion of new technologies and delivery models that will spur competition and falling prices not seen since the early 2000s. “While we are used to the ever-present competitive dynamics of the sourcing marketplace, even by our own industry’s standards we are currently witnessing some marked shifts in pricing across a number of areas as the compounded impacts of ARC (Automation, Robotics and Cloud) take hold,” said Keppel. “The unprecedented change brought about by ARC and technology innovation is creating substantial opportunity but also substantial risk. Clarity of leadership and strategy will be required to navigate these turbulent waters.”
As for 2015, ISG expects the sourcing market to rebound in the second half. “Although ACV may remain muted through the first half of this year, strength in verticals such as Energy and Transportation, along with solid results in large sourcing markets like the U.S., bode well for the second half,” Keppel said.
Now in its 50th consecutive quarter, the ISG Outsourcing Index™ provides a quarterly review of the latest sourcing industry data and trends for clients, service providers, analysts and the media. For more than a decade, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance.
Results of the ISG Outsourcing Index™, covering the first quarter of 2015, were presented during a conference call and webcast for media and analysts today. To listen to an audio replay of the call and view presentation slides, please visit http://www.isg-one.com/web/research-insights/isg-outsourcing-index.
About Information Services Group
Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience and global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 900 employees and operates in 21 countries.
For additional information, visit www.isg-one.com.
To view an infographic summarizing these data, visit: http://www.slideshare.net/ISG_Inc/1-q15-infographic
Outsourcing helps the existing staff to focus on core competencies and increase their efficiency and also save on costs, says Ved Raj
In a modern and competitive business environment, everyone is trying to push their limits to achieve their goals. As a business owner, one is always looking for new and creative ways to increase productivity and optimise the level of investment. One of the most cost-effective ways to achieve high productivity in your IT projects, is outsourcing. Outsourcing helps the existing staff to focus on core competencies and increase their efficiency. It also helps the organisation to gain a competitive edge through cost savings. It could be a new mobile app that you are planning or an e-commerce store, one can manage the entire development and maintenance, without hiring directly and creating infrastructure. The right approach in hiring and managing will definitely deliver excellent results.
f, as a business owner, one decides to outsource the project, he should clearly define his project goal and requirements to the service provider, up front. One should make sure that the remote teams have accurate and complete information of the project before they start working on it.
Growing mid-sized businesses will eventually reach a fork in the road where they have to decide whether to integrate or continue outsourcing.
The decision can be difficult. Vertical integration — when a company takes ownership of its supply chain — can give businesses greater control over costs, efficiency and product quality. But continuing to outsource portions of your supply chain allows you to focus on your core business while still relying on trusted business partners.
Here are four things to consider when deciding whether to vertically integrate your company or continue to grow your core business.
- Outsource what you are not good at
Vertical integration can increase efficiency and quality, and help you synchronize supply and demand. If you feel you can optimize your supply chain better than your suppliers, vertical integration should be carefully considered. But vertical integration feels like venturing into unfamiliar territory where you lack expertise and skill, consider continuing to outsource your supply chain to the experts. Vertical integration is a tall task, and taking it on is a commitment comparable to starting a new business from the ground up.
- Build strong relationships with good suppliers
You do not always have to vertically integrate your business to increase control of your supply chain. If you work with trusted suppliers, building long-term contracts or stronger relationships can help you lock in long-term supply or increase your say in product quality. If you want the control of vertical integration, but don’t want to tackle the task of building a fully integrated company, consider a compromise where you strengthen your relationships with suppliers to increase your efficiency, cost control and quality.
- Integrate for scale or scarcity
Vertical integration often requires scale and pays off when there is scarcity in your supply chain. If you are a fast-growing business that is scaling rapidly and your supply chain utilizes scarce resources, vertical integration might give you the control over your supply chain that you need.
Controlling a limited supply chain can differentiate you from your competitors. Battery makers that require rare metals, specialty builders than require high-quality wood or steel, high-end consumer packaged goods that require specialty grains or ingredients all should consider vertically integrating.
- Be tax smart and use good business strategies
Vertical integration is a big business decision, and comes with significant tax consequences. Make sure you calculate all the impacts of vertical integration before launching into the effort. Research and development tax credits, domestic production deductions and other incentives and tax credits should be fully explored by a business.
Approach vertical integration like opening a new business. Complete a tax analysis, audit the competitive landscape, and carefully consider the structure of the new business entity.
Finding the right IT support is one of the most important parts of running a successful business. For smaller companies, it generally pays to outsource IT provision rather than employ someone in-house – it’s cheaper for a start and you also get access to a wider range of expertise that is more in tune with the latest technology developments.
Whilst small businesses can benefit hugely from an outsourced IT partner, the challenge of finding the right one is an altogether different matter. Choosing the best partner cannot only help keep your systems running smoothly but also differentiate your business from others in your industry.
Here are our 10 areas to consider when looking for the right IT partner:
- Create an outline of what you need before approaching potential suppliers – If you are a growing business looking to outsource your IT, create a summary of the support you need. Most IT providers will offer a bespoke service so having a clear plan will help shape this. If you already have an IT supplier in place and are looking for alternative quotes, your current arrangement will form a basis for the new discussions. Highlight areas for improvement or further development.
- Location – The location of your IT partner has become less important over recent years. The majority of account managers will be more than happy to visit you at your offices and once set up, over 95% of all IT issues can be resolved remotely.
- Business longevity – New IT businesses are popping up all the time, especially with the latest developments in cloud based technologies. Whilst a new venture may offer all the service and support you could ever want, it is advisable to consider a company that has been operating for a while and has a good track record.
- Accreditations – If you are looking for a particular service or software, it is important to talk to potential partners regarding the technology suppliers they work with and industry accreditations, for example Microsoft Cloud accreditation.
- Management System – IT Support providers will use a technical management system to work with clients remotely. Some providers will develop their own, however we would recommend going with a partner who uses a reliable third party solution such as Kaseya.
- Going the extra mile – Look at what other services they offer beyond just IT support and whether they have the expertise to recommend new products to help reduce costs and improve the performance of your business systems.
- Reporting – If you have a number of teams in your business structure you will probably expect regular reports from them. Your IT support should be no different and it can help make sure that you are notified of any potential problems and their appropriate solutions.
- Is there a minimum contract? – To reduce the risk when signing up with a new supplier, some companies are now offering services without tying clients into a lengthy contract. This means if you are unhappy with the service provided, it would be easier to walk away and choose an alternative supplier.
- Case Studies – Most IT support companies will have put together case studies of the types of clients they deal with which means you should be able to take a look at a reasonably detailed breakdown of what to expect from the business. It is always preferable to review a business from another clients’ perspective.
- References – Once you are happy with the contract an IT supplier has to offer, they should be able to provide you with a list of recent clients for you to contact for a personal reference.
Continental Europe led cloud services adoption in 2014, while the UK saw an increase in average deal value of nearly six times. However, cloud adoption is not completely smooth sailing for enterprises.
Source: Everest Group