Indian IT firms turn attention to smaller clients

August 09, 2008

Consider this. Revenue accruing from the top clients (topmost, top 5 and top 10) for the top five Indian IT firms by revenue -- Tata Consultancy Services (TCS), Infosys Technologies, Wipro Technologies, Satyam Computer Services, and HCL Technologies -- dropped by anywhere between 0.2 per cent and 4 per cent over the last two quarters (Jan-March '08 and April-June '08).

The top clients were not able to ramp up their business since a majority are from the BFSI segment. While the US accounts for anywhere between 40-60 per cent of their revenues, the BFSI segment (which is bearing the brunt of the sub-prime crisis) accounts for up to 40 per cent of the revenues. However, mining smaller clients requires great attention and management focus. But the top-tier firms' management tends to focus their bandwidth on clients that can return higher revenues, so the focus is almost always on large global 500-type firms, note analysts.

Analysts feel the IT firms need to have a wide dispersion of clients as well as service lines to help them tide over the recessionary phase. The trend appears to have gathered momentum. N Chandrasekaran, COO and Executive Director, TCS, says: “If you look at our client metrics over the last eight quarters, you will see a systematic ramp-up in our $1 million, $5 million and $10 million clients. When you grow in large numbers, obviously we are migrating them also and in turn we are becoming a full service player. When we had a hit in the financial sector we were able to cope due to the growth in this client segment.”

A few quarters back, the Satyam management too had said that focus should be on mining smaller ($1 million - $5 million) clients and engaging with these customers in their growth. In case of Satyam, dependency on top clients has been diminishing over a few quarters. Ram Maynapati, President Satyam Computer Systems, told this paper: "Our top customer changes from quarter to quarter. Each quarter we take revenue from every customer and put them in the descending quarter and see which customer has contributed the most. This means we are less dependent on the top customers for growth. This also shows the diversity of the business."

Sudin Apte, senior analyst and country head (India), Forrester, believes that the large IT firms are consciously broadening their cross-selling opportunity within the smaller clients. “Some of the firms are doing this extensively. They have been able to take the $1 million clients to the $5 million bracket. But more than the clients, it is the vertical exposure. If 60 per cent of the company’s revenue comes from BFSI and that has been impacted, it will show on balance sheets of Indian firms,” he says.

“Indian IT firms would have been better off garnering more large traditional outsourcing type contracts. These would have provided annuity type revenue and therefore more resilience during a recession,” explains Siddharth Pai, Partner and Managing Director, TPI India. Indian IT firms also need to move away from discretionary-based projects. “If they continue doing this work, these firms will be vulnerable to seasonal fluctuations. Even if these firms are winning the long-term annuity contracts they are very small,” says an analyst who did not wish to be quoted. For instance, in the case of Infosys, around 14 clients account for around $50 million annually. But of these 14, just two clients are on annuity basis.Avinash Vashishta, CEO Tholons Advisory India, concurs: “The slowdown might turn away but the problem of seasonal fluctuations will continue. Besides, customers are looking at partnering with providers who can do multi-functional services.”

Source: Business Standard