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IGATE Doubling Investment in IP to Develop ITOPS Positioning

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IGATE held its analyst conference in NYC.  The key message was the company is making initial steps down a new path, one that is directionally the same as before, but with a stronger focus on fewer initiatives. IGATE is increasing its investments in developing IP to support its positioning of offering integrated IT/Operations (ITOPs) services within outsourcing engagements to deliver value to clients.

IGATE’s acquisition of Patni in 2011 nearly quadrupled its annual revenues from ~$250m to $1bn. Patni brought in business in sectors such as insurance, manufacturing and retail, reducing IGATE’s heavy dependence on banking clients such as Royal Bank of Canada. IGATE’s full year 2013 revenues were up 7.2% to $1.15bn, and the company has been enjoying revenue growth of 10% in the last two quarters.

Key developments in the year at IGATE since the appointment of Ashok Vemuri as President and CEO include:

  • Increasing its investment in IP development, up from 3% to 6% of revenues. This means a committed $70m investment in IP development this year; the intention is to maintain its investment in IP at this level over the next three years
    - In March 2014, the company also announced a refinancing of its existing debt, which should lead to significant interest cost savings over time
  • Organizational restructuring into vertical-based BUs: IGATE has reorganized from geographic/ functional units into six verticals: banking & financial services (23% of revenues); insurance (20%); manufacturing (26.5%); healthcare/life sciences; retail/CPG; services. The company previously reported nine verticals: Vemuri describes this as evolving from being “Mile Wide, Inch Deep” to “Inch Wide Mile Deep”
    • As part of this process, key accounts have been identified and are now managed by a key account team
    • IGATE aspires to develop industry shared services utilities for key processes, where IGATE can deliver IP to clients and share the development and delivery costs across multiple clients. Initial plans for utility development include a reference data management utility developed with its client UBS, and a third party life insurance administration (3PA) utility. Additional utilities will be developed as resources and client interest is developed
  • A clearer definition of the ITOPS approach, offering, and use cases. The ITOPS engagement model provides a combined IT/operations engagement model priced and driven by outcomes, rather than inputs such as labor. Since IGATE introduced the ITOPS model it has sought to apply it to all engagements; however, uptake has been weaker than the company expected as clients have tended to remain conservative in engagement models. Based on the experience of the past few years, IGATE has identified where ITOPS has worked and how to pursue deals which would benefit from an ITOPS engagement. Key attributes of an ITOPS deal are that it:
    • Requires IT transformation to deliver savings and efficiency that pure labor arbitrage is unable to deliver. These types of engagements require domain specific IP to succeed hence the increased investment in developing that IP
    • Requires aligned organization to succeed, with delivery consolidation and standardization across silos managed from a single point of contact
    • Benefits from variable pricing
  • Increasing its investment in employee development: opening an education center in Pune, IGATE University, which is supported by contributions from several education institutions. IGATE sees that mid-career employees are most at risk in the traditional offshore model, due to atrophying of skills. IGATE University will attempt to address this issue and increase employee domain skills and reduce turnover rates
    • After several quarters of no headcount growth, the company has also increased its hiring rates in the last six months, and last quarter crossed the 30,000 mark
  • A rebranding this month intends (to quote from the press release) “to showcase the company in a recharged form with a refreshed vision, mission and core values”. The company wants to be admired for its technical capabilities, executional excellence and agility.

The offshore and IT services industry has been changing from one that was based on labor arbitrage to a supplier industry based on IP and delivery scale. The manufacturing industry was transformed decades ago from a vertically internalized industry to one with complex supply chains fed by highly efficient and differentiated vendors. Today’s service based industries are making the same transition. These include financial services, healthcare and pharmaceutical, retail, and professional services (all of which are IGATE focus industries).

Scale and efficiency go hand in hand to create value. IGATE’s focus on global clients makes it easier to justify large investments in IP and demonstrate large cost savings. For example, for one global investment bank, IGATE is consolidating 20 data platforms to just one. These engagements run for long periods (30 months scheduled for the data platforms) and require detailed technical knowledge of the platform to integrate the new platform, as well as enable new functionality.

The investment challenges are daunting to develop successful utilities. IGATE has doubled its investment allocation to 6% of revenues while targeting a careful rollout of utility initiatives. Many large BPO vendors are working on developing industry utilities in financial services right now; not all can succeed. Key levers to success include:

  • Time to market: success of any given utility will require significant market share (a minimum of 20%, and in some cases minimum of 40% market share), which means only one to three utilities can survive in a space
  • Market selection: barriers to entry for a utility rest on regulations, market infrastructure (e.g., securities exchanges, distribution networks), and industry structure (e.g., number of industry competitors among potential clients). All these barriers change by country or market
  • Service selection: defining the service scope (platform definition) will drive speed to market and client acceptance of the utility. To date, most BPO vendors attempting to create a utility have defined too broad a service set to place into the utility, and as a result utility acceptance has been very poor to date
  • Analytics: analytics, including benchmarking, is critical to proving out the value of the service. Most utilities to date have not provided benchmarking analytics. If clients can't measure the value of what they have bought, it becomes a challenge to retain clients or attract new clients.

IGATE is primarily targeting Continental European organizations for ITOPS engagements due to the European market’s relatively high need for technology refreshes and highly fragmented legacy operational delivery. EMEA overall currently represents just 16.5% of IGATE’s global revenues, but has been its fastest growing region for nearly a year, and IGATE recently secured two major wins here: a five-year $80m ITO contract with Orange Switzerland, in what is a vendor rationalization, and a five-year $35m ADM contract with Swedish insurance services group Länsförsäkringar Alliance which involves IGATE opening a delivery center in Stockholm to service the client.

This is a good time to go to market with its ITOPS approach. IGATE is focusing its IGATE approach on a few key engagement types (i.e., required IT transformation, variable operational volumes requiring variable pricing, and required organizational/platform alignment at large scale to drive client value) where it can make a large impact for clients. As IGATE increases its IP in ITOPS it will narrow the range of engagements (increasingly become an inch wide), but deliver greater value on those engagements (a mile deep). 

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