Quarterly Trends Report

Q1 2022: “red hot” market for digital transformation services

  • Public Equity
  • TMT
  • North America

From remote working to shifting consumer demands, the COVID-19 pandemic has accelerated digital technology adoption across myriad businesses and industries. Software engineering and system integrator experts interviewed by Third Bridge Forum are observing a huge surge in demand for digital solutions that help businesses optimise their operations and enhance their client interactions. Insights on Epam Systems, Globant and Cognizant indicate where the industry is facing some of its most significant challenges and opportunities. 

Epam Systems is a “true brand name” in Eastern Europe, with half of its development  workforce in Ukraine, Russia and Belarus. Unsurprisingly a grinding conflict in Ukraine is certain to impact the ability to do business and attract talent in the region. Indeed, Eastern Europe is a major hub for high-margin software engineering talent, and, in a worst-case scenario, up to 50% of the company’s revenue could be at risk, a former VP at Epam said.

The specialist was, however, positive about the company’s July 2021 acquisition of Core, which they said helps it to compete with incumbents such as Accenture. However, the company would benefit from establishing its own IP to generate “labour-free income” through, for example, licensing. “I’m definitely on the product side and I would like to see them developing in that direction,” the expert said. Rather than simply reacting to client demand, Epam should create additional demand, we were told. 

Although IT budgets are generally increasing, we heard that they are flat or “pointing downwards” across the financial services sector, where experts have observed a shift to insourcing. Epam has a diverse client base, including healthcare, which we learned is “strongly picking up” as more technology-based solutions are rolled out. The specialist added that there is “true growth potential” in the government sector but also warned that without pivoting to a product-focused business model the firm could hit a “natural cap” to its growth.

Globant is another industry player. Here, a former divisional leader at the company told us they expect the market to remain “red hot” over the next 12-18 months. They noted there is pent-up demand for work but not enough candidates with the requisite skills, adding that “there’s actually business being left on the table”. For a “super-staffing” company like Globant, being able to replenish headcount is crucial for continued growth. We also heard that Globant depends on “half a dozen” clients for a significant portion of its revenue and that its growth could plateau if market demand flattens in the years ahead. While the company might be tempted to increase its prices in such a scenario, this could create an opening for other players to “steal its thunder”. 

Gradually the company is diversifying its revenue as it becomes increasingly apparent that businesses are seeking solutions that help them generate additional revenue as well as reduce costs. “Speed to market, quality of the team, track record, experience is much more valid in the world we’re living in,” they said. There is also a growing consensus that to maximise outcomes, communicating and collaborating with business leaders, not just IT teams, is key. Globant is getting deeper into ERP, business optimisation and change management while also ramping up its approach to accountability and governance.

Meanwhile, a former divisional leader at systems integrator Cognizant told us the company is repositioning into margin-accretive services such as DevOps and software engineering – areas that we were told drive faster paths to innovation. The specialist noted that with budgets constrained, CTOs/CIOs have come to expect more bang for their buck when it comes to digital transformation. COVID-19 has increased the need for agile development that results in incremental value rather than lengthy implementation timeframes.

The expert believes Cognizant’s positioning vis-a-vis incumbent players has been slipping, not helped by the fact it is “somewhere between a cost-competitive player vs a digital service provider”. As a system integrator, the company serves cost-conscious clients with legacy systems as well as those seeking highly skilled digital transformation work. The expert sees the need for the company to “push towards one side or the other” over the next 1-3 years and questioned whether it would be able to successfully displace the incumbents on a digital level.

Like the former Globant director, this expert also highlighted a tough climate for talent acquisition thanks to the Great Resignation and the Russia-Ukraine conflict. The specialist expects pressure on wage inflation in markets such as India and LATAM as the global talent pool continues to dry up.  

Financial services, healthcare and insurance are the areas where we were told Cognizant’s market share is eroding. However, the expert believes the company can turn the tide by focusing on digital-led growth. “This time it may come more from acquisitions, in my opinion, but at least I think there is potential for reversal, otherwise they stand to lose too much in these three verticals that are huge contributors to the top line.” Manufacturing, energy and utilities are where the expert sees the most room for growth and potential to unseat market leaders. “I think those two areas are what I would definitely watch out for in terms of just outpacing historical growth and maybe even the industry, system integrator, growth itself.”

Technology is playing a fundamental role in the world’s response to COVID-19. While this has boosted demand for software engineering, the challenges facing some of the key players suggests their business models and strategy needs to be regeared. Experts are seeing major demand for more bespoke digital solutions, but the battle for top talent remains a major obstacle to growth.

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The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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