From TCS to Infosys, growth bumps in legacy business hit IT majors hard

IT services firms are witnessing a steady decline in their traditional or legacy business, while the digital services segment, which is on a growth trajectory, is yet to reach a scale to compensate for the fall.

In the June quarter of FY19, the top four IT services companies — Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies — saw a dip in their legacy business despite reporting faster growth in the digital segment.

IT giants derive more than 70 per cent of their revenues from the legacy business by offering application development, maintenance and testing services to global clients.  

Among the offshore-centric IT services firms, Cognizant was the only company which reported growth both in its legacy as well as digital services business.

“Around 60-70 per cent of the IT budget is spent in running the business or keeping the lights on. Only 20-30 per cent is spent on transforming the business. And, clients are looking at how to cut costs and reinvest in transformation,” said U B Pravin Rao, chief operating officer at Infosys.

In the April-June period, Infosys witnessed a one per cent decline in traditional business which accounted for around 72 per cent of its total earnings. In comparison, revenues from digital services grew 27 per cent, contributing 28 per cent of the total income.

Similarly, market leader TCS reported a two per cent decline in its traditional revenue on year-on-year basis, which constituted 75 per cent of its total business. However, the digital revenue, which accounted for 25 per cent of its total revenue, grew 46 per cent during this period.

Bengaluru-based Wipro also reported faster decline in its traditional revenue that dropped seven per cent in Q1. Traditional revenue constituted 72 per cent of the IT services topline during the quarter. In comparison, digital had a share of 28 per cent of the total revenue. For HCL Technologies, traditional revenues saw 8 per cent year-on-year drop while digital grew at a healthy 56 per cent.

“Domestic IT firms can't alone grow focussing on the digital side of business, at least for the next 3-5 years. For healthy revenue growth, they have to win more number of deals for the legacy business,” said Pareekh Jain, country managing director at HfS Research.

“They have to do portfolio alignment with regard to traditional and digital services. Companies need to have a separate strategy for both digital and traditional segments which will help them arrest the slide in growth seen in their legacy businesses,” he added.

Against this backdrop, companies are now devising new approaches to arrest the fall in traditional revenue apart from dealing with pricing pressure in this segment. For instance, Infosys is using automation and production improvement tools to drive growth in traditional business. Similarly, TCS is positioning itself well to outsmart competitors in winning large transformational deals. 

The Mumbai-based firm has won three mega deals worth $5.6 billion since December last year.

“Decline in legacy business is happening for last few quarters. So, the only way forward is to increase the digital pie. On the legacy side, how you bring efficiency through automation and how you structure the deal are becoming crucial for companies (to arrest the slide),” said Sanjeev Hota, assistant vice-president at brokerage Sharekhan.