Rewind 2020: A shape shift in technology consumption

In a rollercoaster year that will be remembered for the Covid-19 crisis, publicly listed stocks are racing to new heights in the United States of America (US). The mood there is significant for India’s IT services market, as it gets nearly 80% of its revenue from the US.

The Nasdaq Composite Index, which was at 8,945.9 on December 30, 2019, plummeted to 6,860.6 in late March. It closed on December 29, 2020, at 12,850.2! In the same period, the NYSE Composite Index descended from 13,876.15 to 8,777.3 in March 2020 before surging to 14,397.9 on Tuesday. Few describe the mechanics of American stock markets better than Scott Galloway, professor of marketing at NYU’s Stern School of Business, whose 2017 book, The Four, examined Amazon, Apple, Facebook and Google.

“A firm’s valuation is a function of its numbers and narrative,” notes Galloway in his latest book, Post Corona: From Crisis to Opportunity. “Right now, size can feed a narrative not just about how a company will survive the crisis, but how it will thrive in the post-corona world.”

Scarily, he writes, while American firms deemed ‘innovators’ are getting a valuation that reflects cash-flow estimates 10 years from now, weak companies (mostly non-tech) are getting slaughtered, making the innovator-firms even stronger.

In this backdrop, the central question staring India’s IT companies is the quality of client-wins in their portfolio, and the ability of the customers to generate revenue—hopefully profits—in the face of competition from the Apples, Googles and Amazons of the world.

Indian IT’s industry mix has hardly changed in decades. It is principally dependent on financial services, retail, and communications, followed by energy and utilities.

Deals are back, but…

Unsurprisingly, there is a digital transformation narrative feeding the tech-stocks rally in India too. 

The Bombay Stock Exchange (BSE) Sensex closed at 47,613 yesterday, and the BSE Information Technology Index has soared to 24,303—both are lifetime highs. The low points in March were 25,981.24 for BSE Sensex and 11,563.9 for the BSE IT Index after India’s government announced a three-month lockdown. 

While the lockdowns brought business to a standstill, Indian IT moved to remote operations en masse in a matter of weeks. In this recovery phase, Indian IT firms announced multi-billion dollar deals with enterprises in the US and Continental Europe. “Enterprise clients have reacted with a rush to finish business-critical projects, and anything to facilitate ‘Work From Home’ (WFH),” says an IT veteran to TechCircle on the condition of anonymity.

In normal circumstances, enterprises in the US divide the technology budgets between their internal IT organisations, sub-contractors, offshore captive centres, and vendors like India’s IT system integrators. In the past three quarters, the enterprises have leaned almost entirely on the system integrators, while ramping up projects in their captive units. And Indian IT firms proved to be peerless globally while migrating to WFH operations.

Infosys won large deals (worth more than $50 million each in total contract value) to the tune of $3.15 billion in the quarter ending September 2020. The deal momentum will be crucial in improving its utilisation rate of its 240,000 employees with greater onus on offshore delivery. The figure was at 83.6% in the September 2020 ending quarter.

However, in the headline deals won by Infosys during the year, namely Vanguard in the US and Daimler in Germany, the enterprises have transitioned their employees to Infosys. This means more on-site costs. The Bengaluru headquartered company stated in a press release that it has integrated more than 16,000 on-site employees through other such partnerships in recent years. 

In the case of Vanguard, with which Infosys now has a cloud-based recordkeeping platform, 1,300 roles got transitioned to the IT firm’s books. Similarly, Wipro’s recent win of the $700-million Metro AG deal entailed a transition of 1,300 employees.

“What matters in the coming quarters is whether the IT companies are winning ‘run the organisation’ deals or ‘change the organisation’ deals,” says the IT veteran, adding that the latter marks actual digital transformation wins with enterprises.

In 2020, new transformational business wasn’t visible to system integrators, even as the large IT firms demonstrated resilience amid the global pandemic. Sample the ISG Index, which tracks mega deals. For the first three quarters of calendar year 2020, the value of ‘managed services’ deals fell by 6.3% compared to a year ago. However, the ‘as-a-service’ deals rose by 14.8% for the same period, according to ISG, a technology research firm.

For the September-ending quarter though, ‘managed services’ surpassed expectations despite the Covid overhang, “up 10% quarter-over-quarter due to increased activity in mega-deals, contract restructurings (up 50+%), BFSI (up 50+%) and industry-specific BPO (up 90+%),” stated the ISG Index.

Still, the ‘as-a-service’ (or cloud-based) deals have been on the rise in the past three years. That’s where the action is.

Emerging breed

Nothing catalysed the consumerisation of enterprise technologies in 2020 faster than video communications.

Zoom Video, with annual revenues of $623 million last year, made an appearance on the ISG Index’s ‘The Booming 15’. In April, as the pandemic brought the world to a standstill, Zoom Video clocked 300 million daily meeting participants (free and paid), compared to 10 million daily meeting participants in December 2019!

By October, Microsoft Teams was seeing daily consumption of 5 billion video-call minutes. Google Meet was clocking 7.5 video-call minutes a day, thanks to 235 million participants. Cisco, a pioneer in video communications technologies, said its Webex had nearly 600 million participants in September, though that was offset by declines in its unified communications and telePresence end-points businesses.

Happily, Zoom’s as-a-service approach saw its third quarter revenue in 2020 grow by a staggering 367% year over year. It tracks two customer trends—one, those that generate more than $100,000 in 12-months revenue. This accounted for 18% of its third-quarter revenue. And two, clients with more than 10 employees. Over 360,000 of its 433,700 customers with more than 10 employees each got added in 2020! This segment contributes 62% of Zoom’s revenue.

The likes of Zoom are growing new volumes-led segments like education, while Microsoft is taking enterprise solutions to sectors like healthcare. These industries are ripe for digital transformation globally as their IT infrastructure gets ramped up. What wasn’t clear in the 2020 narrative was whether Indian IT firms have grasped the sheer size and value of this emerging breed of clients as they get more and more digitised every month. That may be the next frontier for digital transformation.