Mid-tier IT firms have a dependency issue. A significant share of their revenue comes from just a few clients. For firms such as Hexaware, Mindtree and L&T Infotech, the top 10 clients contribute more than 40 percent of revenue.
And this is an issue, point out analysts and executives, for these companies who are now looking to de-risk their portfolio to drive the next level of growth. However, resource constraint, niche value proposition and competition are key challenges they need to overcome, analysts said.
R Srikrishna, CEO, Hexaware, said in a recent interaction that the company is investing in client acquisitions to de-risk its portfolio, given its high concentration of top clients. The company gets close to 45 percent of its revenue from top 10 clients.
L&T Infotech has been able to bring down their concentration from over 50 percent in 2017 to 43 percent now in top 10 clients. Unlike earlier, the company is no longer dependent on a single client for a major share of revenue. In Q1 FY16, the company got 15 percent of its revenue from a single client, which is no longer the case.
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For Mindtree, close to 28.9 percent of revenues come from just one client - Microsoft. The company's top 10 clients contribute close to 50 percent.
In contrast, top IT firm Infosys gets only 19.2 percent of revenue from its top 10 clients. Its peer Wipro gets around 19.6 percent of its revenue from top 10 customers. Both less than the 40 percent that top mid-tier IT firms are drawing.
Pareekh Jain, founder of IT consultancy firm Pareekh Consulting, said reducing the dependency is important if mid-tier firms want to reach the next level of growth. “Right now (majority of) mid-tier IT companies get 50-60 percent of their revenues from their top clients,” he said.
The next level of growth these companies are striving to reach, he said, can only come from non-top clients and by focusing on fewer sectors/geographies and capabilities to create value for customers.
However, this is easier said than done, and poses multiple challenges, pointed out analysts.
Firstly, expanding your portfolio needs resources, which could be a constraint for a mid-tier IT firm. Be it expanding the delivery footprint or improving sales, mid-tier IT firms have their limitations and are unable to do it in scale.
This brings us to point two -- their strategy that focuses on creating niche capabilities and investing in them. For instance, KPIT Technologies de-merged to focus only on its niche offering, automotive software engineering, to gain leadership position. Coforge, formerly NIIT Technologies, focuses on three key verticals: banking and financial services, insurance, and travel and transportation.
When Debashis Chatterjee joined Mindtree as CEO in August 2019, he said the company would focus on four key verticals, geographies and service lines for growth.
This focus has paid off for these firms so far but to grow further, companies have to identify and invest in more capabilities, analysts added.
Thirdly, competition is stiff and the pandemic has not helped. The pandemic has hit some more than the others. For Coforge and Mindtree, travel verticals account for a significant share, which has come down at the back of pandemic. Chatterjee said during an earnings call that it would take several quarters for the growth to come back to pre-COVID-19 levels.
So what are these firms doing to get the growth back?
Jain pointed out that L&T Technology Services has put in a differentiated strategy for its top clients and also for those lower down the scale.Chatterjee of Mindtree said the company will continue to prune its non-profitable clients and at the same time mine their top existing clients, and look at others down the value chain as well. In the recent earnings call, Chatterjee said, “If you look at the next 10, 20 client accounts that we have, we have been putting a very specific plan in terms of account mining so that we can grow those accounts as well.”