HCL Trends Indicate a Change in the Tide for Outsourcing

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Technology outsourcing may be in the midst of a sea change if the September quarter numbers from HCL are anything to go by. The focus in the traditional business model was purely on cutting costs. Margin expansion and revenue growth is now taking center stage alongside profit margins in the investor’s list of priorities. The old model that was solely built on saving time, automating and reducing running costs is no longer relevant to the current times. Industry insiders like Wipro and Infosys will need to update to remain in the game.

The profitable deals within HCL

HCL has been riding a wave of new contracts and profits for the past several quarters. In the last quarter alone, deals worth over $1 billion were signed by HCL. With the total contract value for the past few quarters remaining this high, the robust deals and the process is under scrutiny from the industry.

There are however industry experts who think that the sequential growth of 3.5% in dollar revenue is below expectations. The robust deals, an increasing focus on the margin expansion and the changing business mix with stronger operating metrics in the company is more consequential than the growth percentage alone.

HCL in the era of new outsourcing models

The performance of HCL technologies is suggesting that the newer model of outsourcing they have adopted works better than the traditional one thus far relied on. This inference is the result of the numbers in the last quarter, there was an 8% growth in infrastructure as against a growth of only 1.1% in the application services. The application services can be safely called the core of the institution. Angel Broking investigated the growth and said that apart from IMS, the revenue growth was at an abysmal 1% sequentially.

The business mix within the technology company is also changing with the time. The fixed price projects and managed services accounted for nearly 53.1% of the total revenue while time and material contracts accounted for only 46.9%. This change is also attributed to clients who want larger, bundled deals with infrastructure management and application maintenance. The competitive companies in the same segment as HCL might not be able to offer similar contracts to clients. HCL is therefore the first company to capitalize on the trend.

With transformational deals worth over $1 billion in the last segment alone from nine clients, the company is in an enviable position. The service vertical of IMS is one of the fastest growing in the market according to analysts. Despite the fast growth, HCL technologies has been on par for the most part with its peers in the industry. The only bone of contention is the slow growth in the software service business that is the core of the company over the past few quarters.

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