X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Infosys: Making the right moves - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Sep 7, 2002

    Infosys: Making the right moves

    As IT services organisations in India face a point of inflection from where life is going to be a lot tougher. Some like Infosys are already talking about making life difficult for global IT services majors. Though, it will take quite some time before Infosys’ presence become anything comparable to the IT services majors like IBM (US$ 8 bn in revenues from services). But Infosys is certainly dreaming big.

    Infosys has identified outsourcing, systems integration and IT consulting as growth opportunities. This is where the big money really is. Global IT companies have traditionally dominated these competencies.

    Corporates in the west have most of mission critical applications running on legacy systems. The task of keeping these systems up and running is daunting and more importantly, expensive. Companies are increasingly finding it more beneficial to completely outsource their IT requirements to IT services companies. While there are qualitative benefits in terms of reduced time to solutions, better availability of skill sets and disaster recovery, the real catch lies in the quantitative benefits.

    Unlike IT projects, which results in improved efficiency of operation and reduced cost of operations over a period of time, the impact of outsourcing is almost immediate. Corporates like Tata Chemicals no longer need to maintain an IT department. They have completely outsourced their IT requirements to TCS. To put things into perspective, many of the mega corporates in the US have IT departments that are larger than most Indian software majors. Thus, the saving potential just in terms of manpower costs is immense. The savings is not only in terms employee costs, there is substantial saving in terms of infrastructure cost also. The corporates do not need to have huge information technology divisions, which are expensive to set up and maintain.

    IT outsourcing: The gamut
    Datacenter Management Consulting Services
    Managed services Consulting and implementation
    System administration IT process consulting
    Network administration Hosting portfolio analysis
    Database administration Helpdesk consulting and implementation
    Security management  
    Service desk / Incident management Hosting Services
    Vendor management Enterprise hosting
    Desktop management Web hosting through partners
    Application Management  
    Operations management Disaster Recovery Services (DR)
    Execution of batch jobs DRP implementation, testing and recovery
    Production support Continuity services

    Source: Infosys

    While the benefits of outsourcing are crystal clear, the biggest impediment is the fact not everybody is comfortable with the idea of outsourcing mission critical operations. Organisations need to be very comfortable with security of information in the hands of the IT vendor. Added to this is the issue that since the scale of operations is very comprehensive, not many are going to change vendors’ everyday. The business continuity of the vendors is a must. Therefore, corporates are likely to outsource from organisations that are better known.

    From the vendors’ perspective, economy of scale is important. To manage operations virtually the companies need to have huge bandwidth availability. Infrastructure like data centres also has to be large. This would mean that gradually the business would become capital intensive. Thus, only large IT companies like Infosys are likely to benefit from the emerging opportunities. Another barrier to entry is the availability of skill sets. Only the top rung software companies are capable of providing end to end IT services (from consulting to maintenance). Many companies do not have infrastructure like data centres to address this kind of market.

    Infosys’ foray into the IT outsourcing space has begun by taking over the management of applications for two of its clients. According to one of agreements, the company will provide 24x7 support to mission critical applications for a financial services company from India. According to Gartner, the IT outsourcing market in North America will grow from US$ 101 bn in 2000 to US$ 160 bn by 2005. This translates to a CAGR of 10%. Outsourcing contracts are typically very large in size. They run into hundreds of millions of dollars and many times are over a billion dollars. Also, these contracts run into several years giving the IT services companies’ strong revenue visibility.

    Infosys is positioning itself in the consulting segment, which is at the highest end of the software value chain. Not only will this help the company get higher billing rates but will also give it an opportunity to work far more closely with the top management of client companies. E-consulting is expected to be one of the fastest growing segments in the IT sector. According to IDC (International Data Corp), spending on E-consulting is expected to grow at a CAGR of 58% over the next three years. The market for E-consulting will be US$ 78 bn by 2003, up from US$ 7.8 bn in 1998. Infosys earned 4% of its revenues from consulting in FY02.

    IT Consulting: Infosys dominates
    Revenues (Rs m) FY01 FY02 Change
    Infosys 931 1,094 17.4%
    % Contribution 4.9% 4.2%  
    Sector* 2,280 3,560 56.1%
    % Contribution 1.1% 1.5%  
    Market share 40.8% 30.7%  
    *Source: Nasscom

    However, the barrier to entry is extremely high in the consulting segment. Firstly, Infosys is a relatively unknown brand, especially when it comes to the IT consulting segment. Secondly, traditionally, it has been the business consulting companies that have created an IT road map for clients. Thus, when an IT company comes up with a business road map clients are likely to be a bit apprehensive. Further, considering the stakes involved are extremely high, getting business is certainly not going to be easy.

    In the end, “The issue is not technology. The issue is whether an organisation can apply new technology”. But for apply technology sot that it complements business even IT companies need to do a lot of homework. A sound technological background and excellent execution skills does not guarantee understanding of a business domain. Without this knowledge, it would be almost impossible to deliver. Thus, the next step for Infosys will be to steadily strengthen understanding of various industries and build domain expertise.

    Infosys has till date stood out amongst others due to its fleet footedness, people management skills and execution skills. The IT spending of clients has driven the previous business focus areas like Y2K and e-commerce. If Infosys’ foray into IT consulting is a success, this time the company will direct its clients IT spend. It will add another feather to its cap and that is its vision.

     

     

    Equitymaster requests your view! Post a comment on "Infosys: Making the right moves". Click here!

      
     

    More Views on News

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Infosys: A Flat End to FY17 (Quarterly Results Update - Detailed)

    Apr 13, 2017

    Infosys ends FY17 with a 7% QoQ fall in net profit for the March quarter.

    Infosys: A Decent Quarter (Quarterly Results Update - Detailed)

    Jan 13, 2017

    Infosys has reported a 0.2% QoQ decrease in the topline and an increase of 4.6% QoQ in the bottomline for the quarter ended December 2016.

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    INFOSYS LTD SHARE PRICE


    Aug 22, 2017 (Close)

    TRACK INFOSYS LTD

    • Track your investment in INFOSYS LTD with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks

    INFOSYS LTD - IBM COMPARISON

    Compare Company With Charts

    COMPARE INFOSYS LTD WITH

    MARKET STATS