Wipro: Is financial performance consistent with its strategy?
In our earlier paper, we explored the evolution of Wipro’ growth strategy across five eras starting 1994. We outlined the strategic choices that Wipro has made in transitioning from being a conglomerate to a leading global IT services firm. These choices included a shift from being an India-focused IT hardware business to a global IT services firm. Wipro deployed an acquisition-led strategy for expanding its portfolio, building domain capability, and growing in newer geographical markets. We also observed that Wipro had invested a significant amount of organizational energy to enhance its customer engagement, with a promise of delivering greater value.
During the period starting 2018 (Era V), it launched a big bets programme, increased focus on big deals and building talent at scale. It also undertook a large-scale organisation transformation programme. We did, however, discover that Wipro’s growth strategy did not help Wipro maintain its lead from Era I (1994 to 2000) and Era II (2001-2006) to Eras III to V. Wipro has ended up being the slowest growing firm since 2007.
In this paper, we explore in detail, Wipro’s growth as well as profit performance. If Wipro was successful in implementing a higher value-adding strategy, it should reflect in profitability and greater shareholder value.
Wipro’s Relative Growth Performance[1] [2] [3]
The Big-4 (TCS, Infosys, HCL and Wipro) have grown from employing 0.14 million people at the end of March 2005 to 1.4 million people at the end of March 2023. Among the Big-4, Wipro has grown at the slowest pace, ceding the number 3 position to HCL Technologies 2018-19. TCS has built on its initial advantage and continues to be the biggest Indian IT services firm for the last 25 years.
Early Growth Years (Era I and II): Infosys leads the growth tables with Wipro and then both slow down
Wipro, whose 78-year journey spanned multiple business lines over time, was bigger than Infosys in the IT services space in 1997-98 but ended up being smaller by 2000-01. It, however, grew faster than HCL in most years from 1998 to 2013. Chart 1 below provides a summary of revenue growth between 1998-2023, organised around five growth eras.
Chart 1: Big-4 Sales Growth Performance
While Infosys, followed by Wipro, grew faster than TCS and HCL between 1998 to 2006, both grew at rates slower than HCL between 2007 and 2010 – a period during which HCL became the leading growth player. HCL has been the fastest growing firm (except during 2010-17) and Wipro the slowest growing firm since 2007.
At the end of 2010, Wipro and HCL together were about the same size as TCS. TCS continued to build its growth momentum and crossed the USD 10 billion mark in revenue during 2012. Infosys, HCL and Wipro achieved USD 10 billion in sales in 2017, 2021 and 2022, respectively – much later than TCS.
The Last Decade: Challenge of Double-digit Growth
During the last 6 years (2017-23), HCL and Infosys have achieved significantly higher growth in sales at 21.7% and 21.3%, respectively, compared with TCS and Wipro. Wipro has grown slower than its Indian peers even as the market growth has been slowing down.
Rethinking Growth: From ‘War for Talent’ to ‘War on Talent’
While we saw the Big-4 and all other IT firms compete for recruiting people during 2021-22, they are now rethinking their growth strategy in less than a year. TCS, HCL and Infosys have started restructuring their operations during the first two quarters of the fiscal year 2023-24 and have started reducing their employee base. In all, they have reduced their staff by about 25,000 people.
Organisation restructuring is taking place after hyper-growth during 2021-22 and higher than 20% attrition during 2021-22 and 2022-23. During the first two quarters of the last fiscal, the attrition rate has declined, but it is still above 15%.
Wipro started the organisation restructuring process during 2022-23 itself and it has continued to shrink its employee base.
Wipro’s Sales Performance
In this section we assess Wipro’s sales performance to identify its drivers and see if it can put itself on a higher growth trajectory.
Drivers of Sales Growth: Volume or Value Play?
As mentioned in the introduction to this paper, Wipro, like all other IT majors, has been trying to improve its customer engagement and create greater value for its customers. However, we observe that Wipro and other IT majors have followed a volume-led strategy, i.e., growth in sales was driven by growth in employee base and not sales per employee. As seen in Chart 2 below, the sales at big four have grown, between 2013 to 2017, by USD 13,329 million from growth in employee base and just by USD 1,292 by growth in sales per employee. During the last 5 years (2017 to 2023), the contribution from growth (USD 27,380 million) in employee base is twice that in the earlier five years and the contribution from sales per employee has become negative at USD 891 million (Chart 2).
Chart 2: Drivers of Sales – Big-4
Wipro has not faired any better. During the last six years, Wipro too has grown by driving growth in its employee base. While the increased employee base has contributed USD 3,958 million to its sales, the lower revenue per employee has caused sales to drop by USD 502 million (Chart 3).
Chart 3: Drivers of Sales – Wipro
Our observation about the industry pursuing a volume-led strategy, in a way, is contrary to the narrative that they have moved up the value chain and are doing much higher value-adding work than in the past. In our earlier paper, we too have documented that Wipro had moved to selling productized services and solutions. A firm that has improved its value contribution for its customers should be able to realise higher sales per employee over time. We do not see that in the last decade’s performance.
Our hypothesis is that the large Indian firms are consciously driving growth through volume. Given that all the firms have focused on increasing the level of business from existing customers, it is possible that they are leveraging their relationship only for building volume and consequently are not pricing for value, even if they are creating and delivering greater value. It is also possible that the incremental value is too small to be priced. Or the market is just too competitive.
Chart 4 below suggests that Wipro’s sales per employee have not improved, even with better utilisation. In fact, they have declined from a peak of USD 50,883 in 2015 to USD 43,436 in 2023. The reduction in sales per employee also suggests that the gains from productivity too are being passed on to its customers.
Chart 4: Sales Performance and Employee Utilisation
Another factor that supports are hypothesis about volume-based strategy is that all the big firms have been hiring and training people ahead of demand, which has reflected in across-the-board lower utilisation for years. For example, Wipro’s gross utilisation, including trainees, has rarely crossed 75%. On the other hand, Infosys crossed 80% level only during 2018, which fell to a low of 77.1% during 2023. TCS has stopped reporting its utilisation level since 2016. HCL too has stopped reporting the number since 2019, though its earlier performance was better than its peers.
Drivers of Sales Growth: Customer Base and Employees per Customer
One of the most important ways to evaluate a strategy is to assess the effectiveness of spend required for growing sales. If a firm is driving growth through volume, we expect it to realise economies of scale for its sales and marketing expenditure. Similarly, if an expenditure is expected to create and deliver value, we must see a higher gross margin. As mentioned earlier, Wipro has been successful in retaining customers and getting repeat business consistently. We do see that in growth in sales as well as average number of employees per active customer for Wipro (Chart 5 and 6).
Chart 5: Customer Base and Sales per Customer
While it has been successful in building a large base of customers during the post-GFC period, it has experienced a significant decline in active customers between 2018 and 2021, though it did manage to grow the level of deployment (number of people) per active customer during the same period, implying that its strategy of focusing on large clients is possibly paying off.
Chart 6: Sales per Customer and Employees per Customer
The last fiscal has turned out to be an exception, where the company has experienced a decline in deployment per active customer too (Chart 6) – it is also the year where Wipro saw a significant increase in its smaller (sales > USD 1 million but less than USD 3 million) client base.
Looking ahead, we will now need to see if Wipro is able to build scale through greater deployment per account, which was the driver of sales between 2018 and 2022. If it is not able to achieve that, the company will have to either further slowdown employee base expansion or work to raise value for existing clients and increased sales per person.
Effectiveness of Marketing and Sales Effort and Spend
Coming to the assessment of sales and marketing spend, Wipro’s sales and marketing cost per active client is going up at the same rate as the sales per active client. While the CAGR for sales per employee was 2% during the last decade, the sales and marketing cost was growing at a CAGR of 1.9%. Wipro spent USD 3,023 per employee during 2022-23, which is marginally lower than USD 3,050 it spent during 2013, implying that Wipro has not realised any economies of scale (Table 1). In fact, Wipro’s sales and marketing cost per employee had grown between 2013 to 2017 to USD 3,466 – period where its employees per customer had fallen. That is, it costs Wipro about USD 3,000 for getting work for each of its employees – even when it has built strong customer relationships and a large customer base. Wipro did grow its customer base and sales per active customer, but through increased employees per active customer.
Chart 7: Sales per Customer and Selling Cost per Customer
In summary, Wipro’s market strategy has been effective only to a limited extent. Table 1 below highlights the areas that Wipro must focus on for driving future growth, which are higher sales per employee, improving effectiveness of its market spend and improving deployment with an existing client – in that order.
Table 1: Effectiveness of Marketing and Sales Expenditure
Evolution of Service Portfolio
Wipro’s service portfolio has evolved over the years and consequently the company has reorganized its reporting structure too. It is, therefore, not easy to compare the portfolio composition across years. We have tried to realign the reporting structure to the current reporting structure to see if there has been a major shift that has helped Wipro increase the proportion of value-adding services in its portfolio. While we recognise that alignment involves judgement, Table 2 suggests that there has not been a significant shift in the composition of Wipro’s portfolio. The last reorganization seems to suggest that Analytics and AI portfolio is now sitting with iDeas as well as iCore service lines.
Table 2: Evolving Services Portfolio
An analysis of Wipro’s portfolio by domain (Table 3 below) suggests that there has been a significant shift in favour of banking and financial services, health, and consumer, retail, and transport. It is highly likely that a proportion of business from the global media sector is now classified as consumer.
The biggest gain is in the BFSI or Finance Solutions segment, the segment that contributes a lower share for TCS, Infosys as well as HCL, and all three firms have reduced their exposure to the segment over the years.
Given that we do not have information about employees in each segment, we cannot assess the value of this shift. However, we do know that the contracts with financial services firms carry higher risk, as their own business is risky. We also know that they are one of the biggest spenders on technology and transaction processing services. In addition, the BFSI sector needs a large amount of investment for transforming the existing systems and getting them ready for the digital age.
The question, therefore, is whether Wipro has built the capability to help the global financial sector firms realise the value that evolving digital technologies, including AI, offer for them?
Table 3: Proportion of Sales by Industry/Sector Domain
Nature of Pricing and Service Delivery Contracts
The risk sharing arrangement is an important determinant of revenue as well as profitability of a contract. In a fixed price contract, the responsibility to manage costs is with the supplier and, therefore, any productivity related gains remain with the supplier. It is possible that the supplier passes on a proportion of these gains to buyer over time and accepts lower increase in margins. For example, a firm that follows a volume-led strategy would share higher proportion of gains with the customer, particularly if it is operating in a competitive market.
Wipro, like other large IT services firms, has seen the share of fixed price contracts go up across years. Table 4 below suggests that ~60% of its contracts are now fixed price contracts, though down from the peak ratio of 63.1% during 2019-20. While TCS and Infosys have stopped reporting the number on this parameter, HCL too has experienced a decline in fixed price contracts from a peak to 68.4% in December 2020 to 63.6% during March 2022. HCL has not been reporting these numbers since March 2022. It implies that the Big-4 and their customers are possibly rethinking their risk-sharing arrangements in the post-covid period.
Table 4: Nature of Pricing and Delivery Contracts
Given that the most important imperative for the IT Services business is delivering cost efficiency through the global delivery, it is natural that the service providers are collaborating with their clients to move work to low-cost offshore centres in India and elsewhere. Wipro has experienced a continuous increase in the share of offshore revenue. TCS, Infosys and HCL have not been reporting these numbers for many years, though. If India is to emerge as a bigger player in the technology services value-chain, the Indian firms will need to move greater amount of work to India and other low-cost centres.
As the work moves offshore, we expect the realisation per employee to come down, which is another reason for sales per employee to have not grown over the years. We do see a negative correlation between the share of offshore revenue and the sales per employee for Wipro.
Chart 8: Relationship between Share of Offshore Revenue and Sales per Employee
A delivery and a pricing model that involves greater share of fixed-price or gain-sharing contracts with greater proportion of offshore work, is a win-win model for both the parties in an environment where economic growth is expected to slow down, and we are experiencing a wide-ranging technology transformation.
In summary, we see that Wipro’s growth has been driven by increased employee base. Even if it has been providing greater value-added services and solutions, it has not been able to price them for value.
Let us now review Wipro’s cost and profit performance in greater detail.
Cost Performance
Wipro’s cost performance reflects the choices of an industry that has been building capacity ahead of demand and has not been able to pass on the cost increases to its customers. As discussed earlier, the effectiveness of sales and marketing spend has either been stagnant or improved only marginally. Coming to cost of service, the situation is not different. The cost of service per employee has grown faster than the average sales per employee, except for HCL. Economies of scale are visible in general and administrative (G&A) cost to an extent for Infosys. HCL and TCS do not report the G&A cost separately, it is included in selling and marketing costs for these two companies.
Table 5: Cost per Employee and Scale of Operations
Shareholder Value
The decline in sales and cost performance for Wipro and the other big firms, has caused their profit performance too to decline. HCL has proved to be an exception, but only to a limited extent.
Wipro’s gross as well as operating profit per employee have fallen the most during the last decade, as it has either realised only limited economies of scale in all the key cost heads or has passed on the gains to its customers.
Table 6: Profit Performance
Consequently, the shareholder performance metrics, reflected in DuPont chart are also showing a declining trend, i.e., net margin as well as return on equity have declined.
Chart 9: Margin and Asset Utilisation
Chart 10: Leverage and Return on Equity
Wipro’s return on shareholders’ equity has fallen from about 20% to 15%. The Indian stock market does seem to recognise the challenges Wipro faces and consequently it has not rewarded the company through P-E multiple expansion.
All the gains for Wipro, during the last decade, have come through growth in earnings.
In summary, we observe that Wipro’s financial performance has been consistent with a volume-led strategy and not so much with a value-led strategy that the company has been pursuing. One of the possible reasons for its choice of strategy not reflecting in performance is that the market is competitive and all the big firms that it competes with are delivering similar customer outcomes. Wipro can potentially do better if it can execute its customer engagement programme better than in the past, along with its reorganised offering in form of FullStride Cloud, Enterprise Futuring, Engineering Edge, and Consulting.
Notes
[1] All the large companies have reported their operating performance metrics, number of people, utilisation, attrition, etc. However, sometimes it is difficult to draw definitive conclusions, as the basis of reporting may not be consistent across years or companies. Our insights are, therefore, based on broad direction of their performance.
[2] Wipro had reorganised itself during 2012-13 and has since become an IT services and products firm, after demerging its consumer care and lighting business. IT products revenue is now less than 1% of its total revenue, down from about 10% during 2013-14. In this article, we review Wipro’s performance for last 10 years, given that it has become a pure play IT services firm only after the demerger.
[3] We don’t have detailed and comparable data for last 25 years hence we are limiting our study period to the last decade. All the data in the paper is sourced from Wipro’s Annual and Quarterly Reports and Presentations. The comparative data for all other companies too has been sourced from their respective reports.
