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What Amazon’s rise portends for TCS, Infosys and Wipro

LiveMint logoLiveMint 23-05-2017 Varun Sood

Bengaluru: One morning in October 2015, a senior executive at Wipro Ltd, was leaving home when he heard news that was disturbing enough for him, a veteran road-warrior, to leave his laptop charger behind. He had just been told by his team in the US that Best Buy, the American electronics retailer, was shutting down 30 stores.

Wipro handled several technology processes for the retailer, including testing software and rolling out enterprise application planning software and store inventory management applications. The decision to close stores meant less business for India’s third largest software company. Wipro got business of around $70 million from Best Buy.

“The retail industry is fighting its own battle for survival because of e-commerce companies such as Amazon,” the executive said in an informal conversation in October 2015.

Now, after a year and a half, this’s even more true.

In the year ended 31 March 2017, TCS, Infosys and Wipro saw at least a 20% reduction in the business they got from Wal-Mart Stores Inc, Best Buy Co. Inc., Target Corp., Sears Holdings Corp., and Wm Morrison Supermarkets Plc, according to executives familiar with the development.

In May, while announcing results for the three months ended on 31 March, TCS chief executive officer (CEO) Rajesh Gopinathan, Infosys CEO Vishal Sikka and Wipro CEO Abidali Neemuchwala, spoke about weak demand from retail clients on account of “structural changes” witnessed by the retail industry.

Retail companies typically spend 2-3% of their total sales on technology, including outsourcing. Over the last few years, large retail firms have been cutting back on their spending on application development or managing back-end infrastructure, focusing on new-age solutions, such as data analytics platforms. Indian IT firms are rarely the beneficiaries.

TCS, Wipro, and Infosys do not disclose business from retail clients but estimates suggest that this is around $1.3 billion, $500 million, and $700 million a year, respectively. That’s a bit: for TCS, which counts seven of the largest 10 US-based retail companies as its clients, retail and packaged consumer product companies account for the second biggest chunk of business, after banks and insurers.

While the CEOs of the three companies didn’t dwell on the “structural changes” in retail, four executives at the companies who spoke on condition of anonymity laid them out.

First, more people, globally, are switching to e-commerce , forcing big box retailers to shut down stores.

Best Buy, which saw its stores peak at 1,503 in 2013, ended December 2016 with 1,026 stores. Expectedly, the electronics retailer outsourced less than $50 million in business to Wipro in the year ended March 2017.

Two, more retail companies such as Wal-Mart and Target are cutting their dependence on outsourcing companies and looking to do more work themselves, through their captive centres.

“Retail companies are realising that they have become technology companies,” said one of the four, a TCS executive.

“Smaller teams operating out of captives; automation tools; and ability to connect with start-ups focused on newer technologies is making most of them reconsider why they need IT services companies”

Target said that the decision to “in-source” more engineering and technology was not on account of economic challenges but because the retail giant saw more benefit in doing the work itself.

“For close to two years now, Target has been sharpening priorities within technology and transforming how our tech team works—moving to a product model from a project model. As part of this, we have shifted the majority of our engineering workforce to internal team members while relying on fewer contractors,” said a spokesperson for Target. “We have hired more than 1,000 engineers in the US and India within the last two years, and our technology performance and results have improved as we’ve made this shift”.

“Like any major technology player, we take a holistic look at our projects and the mix of teams who work on them—this includes full-time employees, contractors, consultants, and any hybrid there-of,” said a spokesperson for Wal-Mart.

Emails sent to Best Buy, Sears Holdings, and Wm Morrison Supermarkets seeking comment went unanswered. TCS and Infosys declined to offer a comment for this piece, saying that the companies as a policy do not comment on client specific details. An email sent to Wipro seeking comment did not elicit any response.

Insourcing is a clear trend, said an expert.

“We see many clients (across industries) revisiting their sourcing arrangements. This is driven by the fundamental operating model shift from technologies such as artificial intelligence or machine learning or robotics to work more “agile” which in the optimal scenario requires co-located, cross functional teams,” said Ralf Dreischmeier, London-based head of technology practice at The Boston Consulting Group.

“Clients across industries recognize that in order to become a digital leader you need to build world class in-house engineering capabilities and work closely with the broader digital ecosystem which includes tech start-ups as well as the large tech players,” he added.

The worry is that other sectors could take a leaf out of retail’s playbook. The banking and financial services business, which accounts for roughly 40% of the revenue of largest Indian IT firms, is already in the throes of change, with start-up fintech companies disrupting incumbents.

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