Mid-tier IT firms outperform industry goliaths

Fall in attrition: Check.

Net employee addition: Check.

Sequential rise in deal pipeline: Check

These are some of the key indicators which are making industry insiders and analysts back the idea that mid-tier firms are outperforming their larger rivals in the $227 billion information technology services sector.

That sets up the smaller guys well at a time when industry watchers are worried if IT clients would curtail spending on digital services amid predictions of a global recession.

“The net hiring number (for mid-tier firms) is better than large peers. Hiring was good last quarter and they are planning to add more people in the coming quarter. Given the sectors and niches these players are playing in, they have not seen any impact (of the slowdown) yet,” said Pareekh Jain, an IT expert and the founder of Pareekh Consulting.

“Order book of most mid-tier companies has not declined as compared to dip in the order book for all tier-I companies on a sequential basis. Moreover, mid-tiers seem to be managing attrition better,” Jain pointed out.

During the April-June period, Mindtree’s net employee addition number remained robust at 4,700, with a plan to hire 5,000 freshers this year. It also reported its highest-ever orderbook of $570 million. Similarly, L&T Infotech added 2,118 people on a net basis in the first quarter against an average of 2,600 in the last four quarters.

Among engineering services companies, Tata Elxsi revealed the most bullish employee hiring outlook. It planned to take its headcount to 15,000 people in FY23, up from its current strength of 10,000 employees.

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L&T Technology Services planned to hire around 3,000 fresh engineering graduates this fiscal year. During the first quarter, Persistent Systems added 3,000 employees and reported its highest-ever total contract value of $394 million. Persistent Systems and L&T Technology Services are on the cusp of achieving a $1 billion annual revenue run rate in the ongoing financial year.

Smaller exposure to Europe and lower dependency on large deals might also augur well for mid-tier companies going ahead.

Unlike the industry goliaths, most mid-tier firms focus on bagging several short-tenure digital deals rather than chasing large transformational ones. As any slowdown hurts large deals, mid-tier companies are likely to be immune from such risks.

“Europe contributes less in revenue terms for most mid-tier companies. So, they get the advantage of the dollar strengthening against the rupee as compared to large peers. Moreover, as far as large deals are concerned, mid-tier companies don’t have much play there,” said Jain.

Strengths and weaknesses

Despite slowdown fears and all that recession talk, most mid-tier companies have given a strong revenue outlook for the current financial year.

So, what’s helping them?

Mid-tier firms have worked hard in recent times to improve their agility. They are also offering more specialised services and zooming in on areas that matter. This, in turn, is making more global clients warm up to them.

“When we look at the demand for digital services, it continues to be strong. Also, we see sequential growth in all our existing customers,” said Venkatraman Narayanan, the managing director and financial chief of Happiest Minds Technologies, which also raised its annual revenue outlook to 25 per cent from 20 per cent earlier.

Coforge is another mid-tier firm that raised its revenue forecast.

To be sure, mid-tier IT firms face some challenges too.

“Currently, these companies sit pretty but things can change very rapidly,” said a hiring expert who did not want to be quoted due to fear of losing clients. “We have seen in a downturn, mid-tier companies usually face higher risks due to client concentration and higher dependence on certain verticals. So, pockets of weakness can derail the growth story.”