SECTOR ANALYSIS- IT
NOVEMBER 2020 Inside this issue
INTRODUCTION
RECENT M&A'S
COVID-19 IMPACT
PRODUCT OFFERINGS
ATTRITION RATE : SIGN OF WORRY
REGULATIONS IN IT SECTOR
NOVEMBER 2020
SNAPSHOT OF I.T INDUSTRY The market size of Indian IT industry in export has grown from 136 billion USD in FY19 to 147 billion USD in FY20E and in domestic it has grown to 44 billion USD. The revenue of IT-BPM industry has seen a y-o-y growth of 7.7% amounting to 191 billion USD in FY20. 1.02 million people have been employed by the key players in the sector as of 2019.
In FY20 IT industry of India contributed to almost 7.7% to the GDP and is expected to contribute 10% by 2025. Currently IT industry is booming with start-ups and has a presence of 5300 tech start-ups as of 2020. Foreign Direct Investment of 44.91 billion USD has been invested in IT sector of India between 2000 and 2020.
Leading IT firms have managed to bag international contracts and deals thereby garnering recognition around the world. The Indian IT sector has 4 major players, TCS, Infosys, Wipro and HCL Technologies with smaller players like Mindtree and L&T Infotech growing rapidly. We can see from the data below that TCS is the clear market winner with Infosys coming at a distant second. Wipro and HCL have similar metrics and are close competitors with HCL outgrowing Wipro for the last 3 quarters.
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NOVEMBER 2020
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NOVEMBER 2020
TYPES OF CONTRACTS Time & Material: Charging
the
client
Fixed Price: time
Charging client a Fixed Price to deliver the
booked and material used in providing the
agreed scope irrespective of the resources
services.
utilized in the project. Eg- Coaching classes
E.G.
based
Hiring
on
driver
the
for
your
personal car on hourly basis.
charging fixed fees for the agreed syllabus
Suitability
or
Charging
a
fixed
fee
per
month
Unclear/Dynamic requirement from
supporting given number of servers.
client E.G. : Agile development
Suitability
Client has preference for transparent
When requirements are clear & firm
pricing
Clients
Client
wants
to
have
full
control
&
ownership Pros: Flexibility
preference
for
pricing
model
doesn’t
have
with minimum risk Where
the
client
supervisory bandwidth Pros:
Better control for the client
Supplier takes the ownership
Simple & Transparent
Promotes innovation
Low risk for the supplier
Better budget planning
Cons: Lack of ownership No incentive for innovation
for
Cons: Lack of control for client Lack of transparency
Difficult to plan the budget
Outcome Based Pricing: Charge is linked to the achievement of pre-
Unit of Work: Charging customer for each unit of output service at a pre-agreed rate. Eg- INR 50 for a ride in an amusement park. Suitability Scope of service consists of standard and measurable units Volume is Predictable with reasonable level of certainty Pros: Easy to understand Encourages efficiency Cons: Lack of control for client
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Lack of transparency
defined business outcomes of the project. E.G: Infosys billing Airtel for the volume of transaction on Airtel Money platform. Suitability Outcome are predictable & measurable Clients
prefer
a
business
partner
share the risk and reward Pros: Supplier is a partner in business risk Encourages collaboration & creative problem-solving Cons: Difficult to design and implement High upfront investment for supplier
to
NOVEMBER 2020
PRODUCT OFFERINGS Businesses across industries stand at an inflection point today led by far-reaching disruption catalysed by technologies like Digitalization, Analytics, Cloud, IoT and Automation. Under the umbrella of various contract type discussed earlier, the major offering by IT companies are categorized as-:
Existing core services-: These services offer clients a leadership position and enhance the business competencies for their core business processes, products and services through the highest level of reliability
and
consistency
through
extreme
automation,
efficient
delivery
and
operational agility. It leverages the current business and IT landscape by consolidating a company’s existing core and unearthing new ways to enhance that core with new technologies.
These
services
offerings
include
Application
Development
&
Maintenance, Infrastructure Management, Engineering and Research & Development and Digital Process Operations.
Accelerating New Services-: This set of services helps enterprises advance digitally through experience-centric, insight-based, outcome-oriented integrated offerings leveraging new technologies. It provides scaled digital transformation frameworks that help enterprise clients build robust new-age capabilities and pivot to new business models. It includes Digital and Analytics,
Internet
of
Things,
Cloud
Infrastructure
and
Cybersecurity
&
Digital
experience. Product & Platform-: The offerings represent vision to create innovative IP by leveraging an ecosystem model through strategic partnerships, carve-outs and co-innovation programs. Through both internal and external IP creation, it achieves two objectives - take advantage of specific next-generation opportunities and enable the enterprise clients to be future-ready.
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NOVEMBER 2020
ATTRITION RATE: A SIGN OF WORRY? Although the IT sector is one of the most promising sectors in India, with 8% contribution in GDP, the attrition rate is one of the biggest worries of the HR belonging to the sector. With an attrition rate of 21.4%, one of the highest in any sector in India. Of which 14.1% of which came from the voluntary attrition, another source of worry.
71% of the people cited higher compensation as a significant reason for leaving the job, 47% better working conditions, 32% more responsibility, 26% lack of creativity, 9% to be a part of the start-up. Nevertheless, the condition for the start-ups is even worse with most of the techies leaving the job in less than two years. The primary reason is the demand and supply gap. Industry hires both freshers and experienced persons. Freshers coming from the educational institutions are enough to meet the demand and hence lower attrition rate.
However, a substantial demand-supply gap exists in the top talent, which comprises of 510 years of experience bracket and hence higher attrition in this domain. The BPO industry is served by young and immature people, mostly entering the industry after three years of graduation to enter the job. Hence, this part of the sector had always suffered from higher levels of attrition rates. Due to the cost associated with the hiring and training of the employees, the company faces a huge problem.
When an experienced person leaves, he/she takes away priceless knowledge, creates bottlenecks, also leaves the other employees with increased work further leading to the imbalance in the workload of employees and reduced productivity. It is imperative to ask why, despite being such a significant issue, the problem persists. One of the critical factors is the cost of attrition in India is still lower than the cost that is saved due to lower salaries in India as compared to outside.
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NOVEMBER 2020
It is not that the companies are not trying to retain the "key" talent in the firm. Through various incentives like salary hikes, client-facing roles, flexibility in working conditions, better learning opportunities, promotions companies are trying to improve the overall employee value proposition.
According to mint, in Wipro, the employees are given the mid-managerial roles after having the right amount of experience. Indian IT industry is among the best among Asian countries in terms of the average salary hike with 9.6% in 2019, 10.1% in 2018.
Touching double digits for a good number of years shows the kind of intent companies are showing in retaining talent. Salary gap among the employees is a problem due to higher incentives for "key" talent and low increment for others.
Companies are not hesitating to give a huge pay raise to the "key" talent while letting go of the employees who are not delivering up to the mark. Impact of COVID-19 had been positive in terms of attrition rate for all the major IT companies.
People are even refusing a raise from the competitor for job safety and are even willing to work for salary cut in the existing firm. "Fear" is playing a massive role in this recent shift.
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NOVEMBER 2020
RECENT MERGERS & ACQUISITIONS Mergers and Acquisitions are consolidation of companies which are strategic decisions taken for enhancing growth of the company. Though the global pandemic had disrupted a lot of markets but IT sector witnessed a spree in the M&A deals this year. The top major players were aggressively playing against each other to acquire companies and increase their growth perspectives. The country’s IT firms utilised their cash on the balance sheet to strength their digital, cloud and healthcare offerings. Companies are eyeing to expand their presence in newer markets through inorganic expansion. They also foster localization which is enhanced by M&A. Cloud Migration is one of the most important challenges faced post-merger by IT firms.
Major M&A in IT sector in 2020: In March, Infosys acquired SimPlus (Outbox Systems Inc.), one of the fastest growing Salesforce Platinum Partners in US and Australia for $250 million. HCL Technologies acquired DWS Ltd which is an Australian IT, business and management consulting group for $158 million. This will help HCL to expand its client coverage and enhance its presence in Australia and New Zealand. Wipro
Ltd
completed
acquisition
of
4C
for
$79
million.
This
acquisition
will
strengthen its position as leading provider in Salesforce solutions in various markets. In the same month it acquired a Brazilian IT firm IVIA for $22.4 million. In October it acquired engineering services firm Eximius Design for $80 million. Tata Consultancy Services is acquiring the Postbank Systems AG from Deutsche bank for an undisclosed amount. Postbank provides IT services to the bank. TCS will acquire 100% of the shares and also its 1500 employees will be part of TCS. This will help TCS to expand its presence in Germany. Deutsche in a press note said that this
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deal will lead to cost saving of 120 million euros.
NOVEMBER 2020
REGULATIONS IN I.T INDUSTRY The General Data Protection Law of the European Union is unique as it extends to organisations which may have nothing to do with the EU. For instance, you may be a US web development company based in Denver, Colorado, selling websites primarily to companies in Colorado. But you could be subject to the requirements of the GDPR if you monitor and evaluate EU visitors to your company's website.
It is designed to give people more control over their data's online collection, use, and security. It also obliges organisations, through the compulsory use of technical protections such as encryption and higher legal thresholds to justify data collection, to stringent new guidelines on the use and protection of personal data they receive from individuals. The GDPR imposes a penalty structure of 20 million EUR or 4% of global turnover (on the higher side) in cases of non-compliances.
Apply outside European Union when: Offering goods and services to EU Customers Monitoring behaviour of EU citizens through cookies or I.P addresses
The size of IT industry in the top two EU member states (i.e. Germany and France) is estimated to be around 155-220 Billion USD. Thus, the Indian IT industry needs to comply with the GDPR in order to continue doing business in Europe. Currently the usage and transfer of persona data of Indian citizens is regulated by Information Technology Act 2000.
The personal data protection bill introduced on December 11, 2019 aims to protect individuals'
privacy
relating
to
their
Personal
Data
and
establish
a
Data
Protection
Authority of India for the said purposes and the matters concerning the personal data of an individual. With some similarities with the provisions of GDPR, the Bill proposes to supersede
the
Information
Technology
Act,
2000
deleting
the
provisions
compensation payable by companies for failure to protect personal data.
related
to
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NOVEMBER 2020
IMPACT OF COVID-19 PANDEMIC IT outsourcing is one of the most flourishing industries around the world. However, with the outbreak of coronavirus, a mixed impact was expected on the IT industry. As many economies started with the lockdown due to the Covid-19 issue, revenue generation for most companies across sectors was affected while rate of unemployment has also inched upwards. Amidst fear of worsening economic conditions, the countries and companies largely dependent on outsourcing tried to control the IT service imports so that they can use their own resources to the assigned job. For instance, major company of Australia, Telstra and Britain’s Virgin Media, which had partnered for process outsourcing with India, have announced to give preference of employment to host country candidates only. Due to the adverse impact of COVID-19, the annual growth of the Indian IT services market is expected to grow 6.5 percent to reach 14 billion dollars by December 2020, according to the forecast from International Data Corporation (IDC).
According to earlier forecast from IDC in November last year, before the outbreak of the pandemic was reported, the IT services market was expected to grow annually by 6.8 percent to be valued at 14.2 billion dollars by December 2020. Amid the pandemic, project-oriented services, such as custom application development, consulting, systems integration, etc. are expected to see steep drop in the short-term.
But services, such as application management, hosting services, network management, IT outsourcing,
etc.
are
expected
to
reduce
only
marginally
in
short
term.
In
light
of
pandemic, forecasts indicate continued increased demand for cloud infrastructure services and potential increases in demand for specialized software. Ever faster access to data and automation will increase the demand for IT services like never before. Most companies don’t
have
a
tech-oriented
business-continuity
plan
(BCP),
due
to
enhanced
remote
working scenario, IT departments will play a larger role in future BCPs and will need help
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from IT service providers to develop and sustain a viable BCP.
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