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Rediff.com  » Business » IT services firms wake up to client leakage

IT services firms wake up to client leakage

November 19, 2018 12:38 IST

Despite higher gross additions, growth in overall customer base has been tepid for these companies, says Debasis Mohapatra.

Photograph: Vivek Prakash/Reuters
 

With digital services emerging as the next growth driver for information technology services firms, quality of revenue is taking precedence over quantity, leading to a fair amount of rationalisation of customers.

This trend is reflected in the active customer base of Indian IT services firms, which grew at a tepid pace for the last three years despite healthy additions of clients every quarter.

For instance, despite adding on an average 300 new clients every year, Infosys's active customer base at the end of 2017-18 (FY18) stood at 1,204, compared with 950 in 2015.

The same holds true for Wipro, which, despite adding 200 new clients every year for the last three years, only saw its client base grow to 1,248 in FY18, from 1,054 in 2015.

On an average, the pace of client leakage has also increased for these two IT firms over the years.

Even though Tata Consultancy Services (TCS) and HCL Technologies don't share their client numbers any more, industry experts believe the trend is similar for them.

'I don't consider customer leakage as a cause for concern unless the revenues take a major hit'

"Customer 'leakage' can happen due to many reasons such as a contract not being renewed or due to a conscious decision by the vendor not to pursue a specific client due to a revamped vertical or services strategy.

"So, I don't consider customer leakage as a cause for concern unless the revenues take a major hit," said Hansa Iyengar, senior analyst at Ovum Research.

She also said that client mining has emerged as the area of focus for most IT services firm.

"The focus for most vendors is to get closer to existing clients and if you look at client retention rates, they are in the high 90 per cent range.

"This is the right way to proceed as digital gains traction," Iyengar added.

Analysts also pointed out that most digital deals in the current market place are of a shorter duration.

Even the value of these contracts are lesser, compared to deals in the legacy business, leading to a churn in the customer base.

"As the services industry pivots to the digital space, projects are moving from legacy services to digital services.

"Often, clients utilise new business models and different vendors to deliver digital works, leading to shorter tenure of contracts," said Peter Bendor-Samuel, founder & chief executive officer of global research firm Everest group.

With change in the business model, Indian IT firms are eyeing more revenue from the digital services segment.

For instance, in the second quarter of the ongoing fiscal year, digital constituted 31 per cent of Infosys' total revenue of $2.92 billion, with a year-on-year growth of 33.5 per cent.

Similarly, TCS reported 60 per cent growth in digital services that accounted for 28 per cent to its total revenues of $5.215 billion.

For Wipro, digital business constituted 31.4 per cent of overall revenues of $2.04 billion in the September quarter.

'Focus should be on retention as greenfield opportunity in the IT industry is not that vast, compared to the consumer industry'

"Emergence of digital services is definitely turning IT deals into shorter-tenure contracts.

"This is leading to a lot of churn in the client base.

"It also indicates that though the sales engine is running with the acquisition of new clients, client mining doesn't seem to be keeping pace," said Pareekh Jain, an IT outsourcing advisor.

"Focus should be on retention as greenfield opportunity in the IT industry is not that vast, compared to the consumer industry," he added.

Lead image used only for representational purpose. 

Debasis Mohapatra in Bengaluru
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