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When The Going Gets Tough, The Tough Spend On S&M

When you look at the financial performance of the four largest Indian oriented IT service providers (IOSPs) over the last four years, it becomes evident that there is a direct correlation between the level of topline growth they achieve and their expenditure on sales and marketing (S&M)…with EBIT margins benefiting from the strong topline growth.

Let’s look at a few data points.

COMPARISON OF EXPENDITURE ON SALES & MARKETING AS A PROPORTION OF REVENUE: TCS, COGNIZANT, INFOSYS, WIPRO

  FY 2014 FY 2013 FY 2012 FY 2011
Revenue growth in US$        
TCS 16.2% 13.7% 24.2% 29.1%
Cognizant* 20.4% 20.0% 33.3% 40.1%
Infosys 11.5% 5.8% 15.8% 23.6%
Wipro 6.4% 5.0% 13.4% 18.9%
EBIT Margin        
TCS 29.1% 27.0% 27.6% 28.1%
Cognizant 19.0% 18.5% 18.6% 18.8%
Infosys 24.0% 25.8% 28.8% 29.5%
Wipro 22.6% 20.7% 20.8% 22.7%
SG&A as % of Revenues        
TCS 18.28% 19.15% 18.24% 17.19%
Cognizant 19.54% 21.20% 21.86% 21.17%
Infosys 11.86% 11.52% 12.34% 12.66%
Wipro 12.35% 12.71% 11.73% 11.92%
G&A as % of Revenues        
Infosys 6.64% 6.48% 7.11% 7.16%
Wipro 5.51% 6.11% 6.06% 6.54%
S&M as % of Revenues        
Infosys 5.22% 5.04% 5.23% 5.50%
Wipro 6.84% 6.60% 5.67% 5.38%
NH estimate of S&M as % of Revenues        
TCS 11.3% 12.2% 11.1% 11.7%
Cognizant 12.5% 14.2% 16.6% 15.6%

N.B. TCS, Wipro and Infosys fiscal years (FYs) end March 31; FY 2014 ended March 31, 2014. Cognizant reports in calendar years, so we have used CYs 2010 to 2013 as nearest comparison years.

As TCS and Cognizant do not break down SG&A expenditure into S&M and G&A outlays, I have done some guestimates based on rough comparisons. If we take Infosys’ expenditure on G&A in FYs 2011-2012 (7.16% and 7.11%) as an indicator of what TCS and Cognizant might have spent, then estimate their G&A spend at a steady 7% in FYs 2013 and 2014,  then we get something like our estimates above.

Taking these estimates and looking at the actual topline increase in the last four years, the picture becomes very clear.

COMPARISON OF EXPENDITURE ON SALES & MARKETING AND REVENUE GROWTH: TCS, COGNIZANT, INFOSYS, WIPRO

  S&M as % of Revenue Revs FY 11 (CGZT: CY 10) Revs FY 14 (CGZT: CY 13) CAAGR
TCS 11% to 12% (est) 8,187 13,442 18.0%
Cognizant 12.5% to 16.5% (est) 4,592 8,843 24.4%
Infosys 5% to 5.5% 6,041 8,249 10.9%
Wipro 5.4% to 6.8% 5,221 6,618 8.2%

Now there are some simplifications and estimates in what is essentially a back of the envelope job and it ignores any contribution from acquisitive growth. But the least acquisitive of these four companies during this period has been TCS.

Infosys and Wipro have now begun to loosen their S&M purse strings – and are perhaps encouraged by a better year in FY14. But they are both still a long way behind in their expenditure on S&M. Another back of the envelope guestimate says that TCS spent three and a half times as much on S&M as Infosys in FY 2014; Cognizant spent two and a half times as much.

Where have we seen the sales investments being most effective in recent years by the larger IOSPs? 

A lot of growth in FYs 11 to 13 came from the vendors account mining their very largest accounts (a reflection of where the wider market opportunities lay). And here Wipro, with just three $100m+ clients in FY 2011, was very much in catch up mode. In FY 2012, Cognizant overtook Wipro to the number three spot of the IOSPs, and generated $200m more in revenue. Looking at just their top 10 clients, we estimate that from them in that year, Cognizant generated an additional $306m; Wipro generated an additional $140m. Moreover, the difference in revenue contribution from their top 10 clients was $536m, whereas the global revenue difference between the two firms was just $200m. So it was all about the Top Ten.

Since FY 2011 Wipro has grown from three to ten $100m+ clients, so there has been tremendous progress in the last three years with its very largest accounts. But account mining in Wipro’s next tranche of its client base has not been as strong. Both Infosys and Wipro continue with initiatives to strengthen their client engagement model.

We are now seeing, as well as stronger client engagement, more evidence today of very effective sales hunting by some large IOSPs, with their scalps including some impressive large new logo wins. HCL has been particularly aggressive, ousting incumbents in some major IT infrastructure management renewals. Buoyed by some recent wins, Wipro is also gaining confidence in going after new accounts.

In summary, cutting back on S&M is an understandable, albeit kneejerk, reaction by some vendors when they have had a disappointing quarter. And I am still seeing this as a reaction in places, including at some of the smaller IOSPs. But, particularly when a vendor is looking to expand in a geography where it is relatively immature, or when it is trying to go to market with an enhanced portfolio, this is a reaction that smacks of lack of confidence and of boldness.

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