Digital deals to offset decline in traditional services: Mindtree

Mindtree, the mid-tier information technology (IT) services company, is eyeing higher growth this financial year, on the back of higher-value digital technology contracts and increased profitability from acquired subsidiaries. 

The Bengaluru-headquartered company says its revenue from digital technology has already started offsetting the decline in the traditional IT services business. Of its Rs 5,236 crore turnover in 2016-17,nearly 40 per cent was from digital technology-based services. The company added five $1- million clients, to 111 last year and looks forward to bigger deals of between $10 mn and $20 mn as the digital technology services segment becomes mature. 

As digital deals are “more value-based” and services can be delivered through lesser on-site presence, Rostow Ravanan, chief executive officer, said more of these would help in improving of profitability. 

“The challenge we had until recently was that traditional services had a lot of pricing pressure because of customers’ budgets being under trouble. The offset of that by digital taking over had not happened. Now, we are beginning to see that (happen),” he told Business Standard. 

Indian IT service companies have seen a major shift in technology in recent years. More clients in the US and Europe, their first and second largest markets, want services to be delivered using digital technologies such as cloud. 

This had resulted in a decline of traditional services such as maintenance of software that involved higher cost for businesses and were typically on long-term contracts. Digital technology such as cloud and artificial intelligence have transformed the model through two major changes, outcome-based projects and cost reduction. 

Ravanan said Mindtree could run the digital technology services through a “10 people on-site and 100 people offshore” model, resulting in better utilisation on-site. 

Global analysts say collaborative technologies have made it possible to solve problems from offshore. Complicated projects such as digital transformation of an organisation’s processes might need more on-site presence of high-skill engineers. Mindtree has taken steps to improve profitability of subsidiaries Bluefin, an SAP implementation service provider, and Magnet360, a Salesforce partner. The company expects improvement in margins of these two entities to help overall profitability.  

“One of the largest things (that has impacted margins) is lower profitability from both of our acquired entities, Bluefin and Magnet360. Both have very specific actions that we have implemented in some cases. We have made more progress in some cases and less in others,” said Ravanan. 

“While we believe revenue growth bounce-back could be possible in FY18, margin turnaround could remain an uphill task. Improving margins at Bluefin and Magnet would remain a focused margin lever for FY18,” said Madhu Babu, IT analyst  at brokerage firm Prabhudas Lilladher. He says some digital projects still have a higher onsite cost.