Infosys | Sector Overview

IT SERVICES

sector Overview:

Globalisation has transformed the IT sector with more and more companies following India’s lead and offering low-cost, high-value outsourcing services. Even the established US-based firms are now realising the opportunities from out-sourcing and off-shoring. As such, Infosys and other Indian IT service providers such as Tata Consulting Services and Wipro now face high-powered competition from the likes of IBM, EDS, CSC and Accenture as they all establish their own initiatives and add tens of thousands of new hires in India, China, Eastern Europe, Russia, Latin America and elsewhere.

However this is a challenging market where credentials and track record are key and India, with a 20 year head start on the others, is playing the pivotal role. Revenue among the top 100 outsourcing companies grew by nearly 20% in 2006 to more than $170bn. Given its size and government commitment, in the future the importance of countries such as China cannot be ignored but it will take a while for them to catch up with the lead that has been established in Bangalore.

However, as competition intensifies in the increasingly flat world that has been created from globalisation of IT services, so also does the prospect of a period of global merger and acquisition. Companies like IBM, EDS and Accenture are all wooing Indian vendors and many of these firms are more profitable than the multinational companies. So many multinational players have all invested in India to lower their costs and raise their margins. The Indian firms, meanwhile, are making selective acquisitions and are about to open large development centres in the US to compete more directly with the multinationals. To many on the outside of this increasingly complex sector, it seems the out-sourcers are now themselves doing the out-sourcing.

ONES WE ARE WATCHING

IBM
IBM Global Services has long held a reputation for innovation, but has so far been unable to match the agility of Infosys in translating this into growth and profitability. With revenues of over $48bn, it dwarfs Infosys but revenue growth and net margins are lower. However, IBM is expanding its presence in India to help its delivery model to become competitive over time. If the competitive dynamics of the sector come to favour firms which create intellectual property rather than just have low cost resources, given its historically high levels of investment in R&D, IBM may gain further advantages The key challenge for IBM is therefore to leverage this investment in IP into operational performance.

Accenture
A similar story applies to Accenture. With revenues of over $21bn and revenue growth in 2007 of 18% it is larger and potentially growing as fast as Infosys but net income is only around 5 to 6%. However, with Accenture Technology Labs now up and running in the US, France and India, and one of the largest consulting arms in the sector, the company now has a significant focus on innovation and is expanding and enhancing its Global Delivery Network by, among other things, increasing activities in systems integration, application outsourcing, business process outsourcing and technology consulting areas, opening new facilities and recruiting actively in key locations.

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