Cloud business a double-edged sword for IT companies, say analysts

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None of the Indian IT services players would be disclosing their cloud revenue numbers as yet, though they have been quite vocal in the recent past about plans to strengthen their portfolios in the segment. Analysts are worried over the aggressive manner in which IT services companies are growing their cloud portfolios. They have observed that the very objective behind moving to cloud by the clients is to reduce costs, but this may affect their profitability.

Cloud itself is not a low-margin business, but it is cannibalising some of the traditional infrastructure and application businesses, and as such, its potential as an additional revenue driver for IT services firms is limited, say analysts.

“A lot of the cloud business that IT majors talk about is part of their digital offerings. Revenues from such offerings come to around 5-10 per cent of the total revenues for these firms. But given that the whole shift to cloud is towards reducing spends for clients, the pricing has to be competitively matched,” said Pareekh Jain, senior vice-president, HfS Research.

Apart from global majors such as IBM, Accenture and Capgemini, Indian players such as TCS and Infosys are most favourably places in the cloud services space. In the June quarter, 60 per cent of Accenture’s overall revenues came from digital, cloud and security services, which the company terms as “new” business. 

For French IT outsourcing services major Capgemini, the share of digital and cloud businesses stood at 45 per cent in the June quarter. When compared with this, Indian IT firms have lesser exposure to the digital side of the business.

TCS, for example, derives 25 per cent of its overall revenues from the digital services. In case of top Indian IT services providers, analysts say, cloud constitutes a major chunk of their digital offering. Most of these vendors basically help the clients migrate their businesses to cloud and manage the process.

According to a Bloomberg report, the $270-billion outsourcing industry is moving rapidly towards cloud, creating headwinds for incumbent vendors. Public-cloud companies such as Amazon, Microsoft and Google are seeing mega benefits coming from this migration as they also provide cloud as a service.

“When IT providers help their clients switch to cloud services like Amazon or Microsoft, they gain from the migration business but are still losing the long-term infrastructure management business as in case of HCL Technologies,” said a leading IT analyst.

“The biggest chunk of our digital revenues is actually coming from cloud transmission projects, which primarily come in a fair bit of fixed price,” Ravi Kumar S, president and deputy COO of Infosys, told analysts during the company’s earnings call in the June quarter. Infosys derives 28 per cent of its revenues from the digital segment, largely driven by cloud services and data analytics. Both TCS and Infosys have been talking about their extensive investments towards cloud resources both in software and sales.
Cautious Expansion
  • Cloud is a high-margin business but it is cannibalising a few of the traditional infrastructure and application businesses provided by IT industry
  • As IT companies help their clients switch to cloud services platform, they lose the long-term infrastructure management business