Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India IT Services
The myth of the benefits of the "mega account" - mega
accounts may not necessarily bring in mega benefits
US$100MM+ account sizes are becoming mainstream in Indian IT: Indian
IT companies such as TCS/Infosys/Cognizant have demonstrated the ability to
notch up US$100MM+ running accounts on the back of (a) better relationship
management and domain depth (Cognizant), (b) proper account management
structures that emphasize multi-tiered relationships (Infosys), and (c) fullservice selling (TCS). Infosys leads the sector in this respect, in our view.
The idea of cultivating “mega-accounts” has therefore acquired enhanced
appeal: Clearly, the game now moves to developing “mega accounts”, which
we define as account sizes exceeding US$250MM annually. On the face of it, a
US$250MM+ account is a strategic relationship in which the vendor is tied in
with the client at the upper echelons across divisions, e.g. COO, CMO, CFO,
CRO (chief risk officer), in addition to the CEO. It amounts to a critical
partnership that exercises leverage due to its (a) reference value and critical
domain depth, (b) favorable client economics with size/scale, and (c) scale
allowing much great offshoreability than the company average (20:80 by onsite:
offshore effort versus co. average of 30:70).
Yet, mega accounts have their issues and limitations: A US$250MM p.a
relationship substantially offshore is the equivalent of a legacy annual
US$700MM contract (which has not moved offshore). We find that there are not
too many global IT services relationships of that size, even for the likes of
Accenture and IBM.
Of three mega accounts > US$450MM in Indian IT, two accrue for reasons of
ownership (BT for Tech Mahindra and HP for Mphasis) while the third (Citi
with TCS) has become a mega account thanks to TCS’s buyout of Citi’s India
BPO captive (eServe). Also, clients’ reluctance to depend too much on any
single vendor as well as multi-vendor sourcing strategies naturally limit the
development of mega-accounts. Apart from the problem of revenue
concentration for the vendor, few mega accounts can organically scale upwards
of US$250MM. The return on endeavoring to organically cultivate accounts of
such a size does not seem high enough. Vendors might be investing
disproportionately in terms of time and resources to achieve this. More so, this is
true of emerging markets where account scale is lower than in US/Europe.
Indian IT firms must find the right balance between “hunting” (new
business or scaling up sub-scale accounts) and mega account development:
It is not surprising that Cognizant/TCS, who lead on revenue growth, manage
this balance the best without leaning too much on farming (as Infosys tends to
do) or hunting (HCLT). Accounts that are hunted today (new) or are sub-scale
are those that are prime for farming tomorrow. Business from new clients is
typically only 3-4% of revenues in a year – this can grow four-fold to 12-15% in
3-4 years’ time. Likewise, new clients over a four-year period cumulatively
contribute to as much as 30-35% of revenues in year five, underscoring the
importance of solid hunting for the future. Also, with some of the largest
accounts in Indian IT under potential pressure (BT, Citi), an excessivel y
farming-focused strategy is less productive in the long term. Conversely,
HCLT’s undue hunting emphasis limits its sustainable profitability. In short, a
mega account-driven strategy does not necessarily bring mega benefits. Getting
the balance right is critical, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India IT Services
The myth of the benefits of the "mega account" - mega
accounts may not necessarily bring in mega benefits
US$100MM+ account sizes are becoming mainstream in Indian IT: Indian
IT companies such as TCS/Infosys/Cognizant have demonstrated the ability to
notch up US$100MM+ running accounts on the back of (a) better relationship
management and domain depth (Cognizant), (b) proper account management
structures that emphasize multi-tiered relationships (Infosys), and (c) fullservice selling (TCS). Infosys leads the sector in this respect, in our view.
The idea of cultivating “mega-accounts” has therefore acquired enhanced
appeal: Clearly, the game now moves to developing “mega accounts”, which
we define as account sizes exceeding US$250MM annually. On the face of it, a
US$250MM+ account is a strategic relationship in which the vendor is tied in
with the client at the upper echelons across divisions, e.g. COO, CMO, CFO,
CRO (chief risk officer), in addition to the CEO. It amounts to a critical
partnership that exercises leverage due to its (a) reference value and critical
domain depth, (b) favorable client economics with size/scale, and (c) scale
allowing much great offshoreability than the company average (20:80 by onsite:
offshore effort versus co. average of 30:70).
Yet, mega accounts have their issues and limitations: A US$250MM p.a
relationship substantially offshore is the equivalent of a legacy annual
US$700MM contract (which has not moved offshore). We find that there are not
too many global IT services relationships of that size, even for the likes of
Accenture and IBM.
Of three mega accounts > US$450MM in Indian IT, two accrue for reasons of
ownership (BT for Tech Mahindra and HP for Mphasis) while the third (Citi
with TCS) has become a mega account thanks to TCS’s buyout of Citi’s India
BPO captive (eServe). Also, clients’ reluctance to depend too much on any
single vendor as well as multi-vendor sourcing strategies naturally limit the
development of mega-accounts. Apart from the problem of revenue
concentration for the vendor, few mega accounts can organically scale upwards
of US$250MM. The return on endeavoring to organically cultivate accounts of
such a size does not seem high enough. Vendors might be investing
disproportionately in terms of time and resources to achieve this. More so, this is
true of emerging markets where account scale is lower than in US/Europe.
Indian IT firms must find the right balance between “hunting” (new
business or scaling up sub-scale accounts) and mega account development:
It is not surprising that Cognizant/TCS, who lead on revenue growth, manage
this balance the best without leaning too much on farming (as Infosys tends to
do) or hunting (HCLT). Accounts that are hunted today (new) or are sub-scale
are those that are prime for farming tomorrow. Business from new clients is
typically only 3-4% of revenues in a year – this can grow four-fold to 12-15% in
3-4 years’ time. Likewise, new clients over a four-year period cumulatively
contribute to as much as 30-35% of revenues in year five, underscoring the
importance of solid hunting for the future. Also, with some of the largest
accounts in Indian IT under potential pressure (BT, Citi), an excessivel y
farming-focused strategy is less productive in the long term. Conversely,
HCLT’s undue hunting emphasis limits its sustainable profitability. In short, a
mega account-driven strategy does not necessarily bring mega benefits. Getting
the balance right is critical, in our view.
No comments:
Post a Comment