Cloud and Tech News
Earlier this month, more than two decades after it was founded by a string of mergers, Atos Se, the French technology services firm, decided to carve out its profitable big data and cyber security division from its mainstay IT infrastructure business.
Atos will oversee the legacy business, which ended with €5.4 billion in revenue last year while the fast-growing, digital business, with €4.9 billion in revenue will be clubbed under a new company, Evidian.
Atos is not the first technology services firm that has been forced to restructure its business.
In 2017, Computer Sciences Corp. and Hewlett-Packard Enterprises’ agreed to merge and form a new company, DXC Technology Co. It had $25.4 billion in revenue.
In November last year, International Business Machines Corp. spun out its technology support and services business and put it under Kyndryl Holdings Inc., which ended with $19.1 billion in revenue in the year ended December 2020. IBM would have a $51 billion business, comprising cloud computing and artificial intelligence.
All these companies were forced to rejig their business as they struggled to grow.
Revenue at Atos declined for three straight years before the split. IT services revenue at IBM peaked at about $35 billion in 2011 and since then, it declined every year during the last decade.
For much of the history of the outsourcing industry, homegrown technology giants like Tata Consultancy Services Ltd, Infosys Ltd and Wipro Ltd, were questioned if they could compete against the likes of Hewlett-Packard and IBM. To their credit, Indian services giants have triumphed over these entrenched technology firms.
But the tech nous of domestic IT services again faces a new adversary in the ever-changing technology landscape.
Splits at both Atos and IBM have five lessons for homegrown technology services firms.
First, there is no turning back from the embrace of cloud computing and data analytics. Even if selling solutions in these areas leads to cannibalizing of legacy infrastructure maintenance businesses, Indian technology firms don’t really have much of an alternative.
Put simply, there is no logic in acquiring ERP or enterprise resource planning-focused firms that only offer a boost to revenue.
Second, it is time the IT firms start disclosing revenue from the fast-growing business segments which are broadly dubbed “digital”.
Sample this: In 2019, Atos claimed that 40% of its business was from areas like cloud computing and cyber security. Atos claimed that the share of digital increased to 46% in 2020, and to 51% last year.
A faster-growing “digital” business at Atos should have offset the decline in the traditional infrastructure or customer support business and in turn, saved the company from splitting itself.
But that was not to be.
Like Atos, homegrown IT firms claim more than half of their overall revenue is from selling solutions in the area of cloud computing, data analytics, and other platforms. But none of them share what constitutes this fuzzy digital business.
This brings to a related point that trying to continue to make a living from selling infrastructure services becomes only much harder. Indian IT firms need to double down on all things, analytics, mobile, cloud and cyber-security.
Fourth, IT firms cannot focus on growth alone. Profitability is equally important.
Kyndryl ended last year with $18.5 billion in revenue. Still, its market cap was only $2.4 billion, as of 28 June.
A bugbear for investors is the $2.3 billion loss.
Indian technology services companies enjoy a premium over their western peers on account of higher profitability. Mumbai-headquartered TCS, which ended with $25.7 billion in revenue last year, is valued at $155 billion. This is primarily on account of its industry-leading operating margin of 25.3%.
Finally, IBM’s breakup serves a lesson, especially for HCL Technologies Ltd and Persistent Systems Ltd.
In the early 90s, IBM’s then boss, Lou Gerstner bet that offering services to its customers would generate more revenue and give boost sales of its products. IBM, which until then was into hardware, forayed into services. The company did well for some time but soon hit a wall as it lost focus. Mainframe computers got ambushed by the personal computers while the lumbering tech giant was left twiddling its thumbs on how to upgrade its other product lines.
The temptation to sell products in addition to its mainstay services made both HCL and Persistent buy some of these old products from IBM and other product firms. Now both HCL and Persistent are struggling to grow their products business. Still, both continue to pour, what a few analysts call, throwing good money into bad business.
The big boys of Indian IT have steered well through the last three decades. But they need to be more agile to avoid facing the ignominy of separations made by their larger western peers.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Your email address will not be published. Required fields are marked *