The view from India's services giants - digital transformation appetite is still strong, but there's a new reality taking shape
- Organizations are still looking to accelerate their digital transformation benefits, but with the turbulent macro-economic environment, cost take-out is increasingly on the agenda.
Three of India’s top services giants have turned in decent numbers in recent days, but all are casting a wary eye at the wider macro-economic environment and how US and European customers are likely to react in terms of their spending plans over the coming months.
At HCL, CEO C. Vijayakumar is upbeat:
At this moment, we see every client continuing to accelerate their digital transformation journey. The digital transformation journey serves two objectives - they definitely provide significant business benefits, while also simplifying the tech landscape and reducing the operating costs. So depending on the nature of deals, we see continuing acceleration in the sweet spot that we are playing in, where digital transformation is delivering significant business outcomes while also reducing the operating cost. It's the Venn diagram of these two, which is really the powerful driver for our growth. Be it in applications, data modernization, hybrid cloud, digital engineering, all of these have this sweet spot of the Venn diagram that I talked about and we stand to gain from these investments through this business cycle.
He concedes that clients are making tougher choices:
There is some prioritization of the spends and they all recognize, I mean, all our clients recognize that some of the transformation projects, especially around operating model change and things like that, which is where we've been phenomenally successful over the last 18 months, they are believing that there is no going back. The operating model has certain velocity of changes to be delivered for their business and right now we don't see any change in the velocity of the change work that we're doing for our customers.
Looking ahead, we remain very positive of our near-term growth. Our confidence is generated by our strong bookings and pipeline numbers across every segment. While there are variables in the external world and those have an impact to our clients' business, during such times, we narrow down to those clients, markets and opportunities and work out a strategy that is mutually beneficial.
Over at Infosys, according to CEO Salil Parekh, the client base is also looking ahead:
We've seen in our pipeline a good focus on cost programs and on growth programs and there are clients in different sectors at different intensity looking at both of those. So the conversation depends more on the context of the client is in. We feel that given these two engines that we have, we are somewhat well prepared for the evolving macro-environment…The deal wins I think represent the strength that we have on both sides of the capabilities, on digital and on core automation. So what we are seeing today is we have the ability to be appropriate for clients depending on what macro they are facing and as the overall macro evolves we have both sides, let's say, ready for that. And there, my sense is, we have a differentiation from our peers with this approach.
But he added that the next few months will determine how things play out for the rest of the year:
We didn't see any project cancellations in the quarter. We saw some slowness in discretionary spend within [certain] macro segments…For example, in hi-tech, we saw that. We saw some in telco. We had mentioned last quarter, in mortgages within Financial Services and parts of retail industry…Today, what we are seeing is, within our large deals pipeline, there is a large number of programs, which are cost-related and we see our own core services growing. What it shows us is, there is an interest from clients on both some elements of digital and now also on elements of cost. The budget cycle -- this is the quarter in which we will start to get a sense for the calendar year budget. So it's not something that we have within our grasp from the previous quarter. Within the next few months, we'll start to see that.
It’s a similar scenario at Wipro where CEO Thierry Delaporte warns:
We are no longer in the same market and condition that we were nine months ago or 12 months ago. That's a reality.
In speaking to our clients every day, we're seeing a change in the level of optimism as business around the world are dealing with inflation pressure, with geopolitical turmoil, with energy crisis, also rising interest rates, almost every major economy is experiencing economic deceleration…The reality is that I think we all are connected with the market news. And it's quite interesting to see every single day what’s happening in the whole world macro-environment, whether it's what's happening in Ukraine, what's happening with the oil, energy, what's happening with market conditions in America or in most of the countries. I think people see that, people hear that, and there is a certain evolution of the climate that is certainly the confirmation that we have [that] the market has changed. The market share conditions has changed.
But the big question, he goes on, is whether this context going to impact the sectors in which Wipro operates? On this point, he doesn't have an answer yet:
Frankly speaking, I am not sure. That’s why I see a certain level of uncertainty today. There's a bit of uncertainty because, in talking to clients, they all are assuming that at some point in time, this will have some implications for them. It would be naive on our side to not hear what they're saying.
For now though, bookings are still strong, he adds, pointing to the signing of 11 deals worth a total of $725 million in recent months, adding:
The business is good. I mean, we've been growing well over the last quarters. We've been performing well on bookings. So there's no sign on our side of any particular slowdown, except that the market has changed, except that there are a certain environment of uncertainty that is impacting our clients.
And that perception varies from industry sector to industry sector, he notes
We are obviously observing the evolution of the market, industry-by-industry, and certainly everyone has different kind of challenges. I believe actually the banking sector should be holding pretty well - it’s a sector that is used to adjusting rapidly to market changes, but also it's an industry where a lot of efforts will have to be done around driving simplification, alignment, streamlining and compliance , important topics for banks going forward.
Now a sector that has been growing tremendously over the last year and certainly is slowing down is technologies. If you look at large tech, look at what they're doing, hiring has been slowing down and sometimes they are even reducing headcount. And I think there's this perceivably more slowdown to expect in this industry going forward. Another one where I could potentially see a potential slowdown if the economy worsens, is a sector like retail
As of today, our pipeline has, what I would say is, a well-balanced mix of transformation growth and cost takeouts engagements. Now, this mix may change in the coming quarters based on external conditions...but we expect continued strong demand for our comprehensive portfolio of services.
We know that technology, in good times and bad, has become the underlying success factor for any business. Regardless of what the problem is, increasingly, technology is the solution. I believe we are better positioned than ever before to help our clients tap into the true power of technology, whether that's to drive growth and transformation, or manage cost or build a sustainable future.
For now, business keeps coming in. But with the wider economic and political turbulence, all services firms are sensible to keep a cautious eye on events. As all three firms above noted, cost management and cost take-out are likely to rise up the decision drivers more than ever, but it’s encouraging to hear that, to date, the appetite for digital transformation is holding up.