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Sales and profits of both smaller tier two Indian IT players — those with less than $500 million in annual revenue — and tier one giants like Tata Consultancy Services (TCS) and Wipro — are both way up over the past 18 months. But, the valuations of tier two companies were off sharply compared to the big guys, according to new research from Martin Wolf M&A Advisors, a company that consults with tech companies about their merger and acquisition options.

For the period from January 1, 2011 till August 1, 2012, the valuation for the big Indian IT providers fell 15.6 percent compared to a 24.9 percent fall-off in valuations for the tier two companies, according to the MW IT Index India Edition which looks at 36 Indian IT service providers — which make money  implementing technology for businesses — in both camps. For that same period, sales for tier one players rose 33.5 percent compared to 38.4 percent for the tier two players. Profit for the top-tier IT providers was up a healthy 43.4 percent compared to a healthier 78 percent for their tier two counterparts.

For Indian IT players, safety in size

Those sales and profit numbers, recounted in a Times of India story last week, are deceiving, said consultancy founder Martin Wolf.  In his view, the tier two players have their work cut out for them if they want to stay relevant in a tough economy because the slower-growing-but-bigger tier one providers are better positioned. They have deeper management, bigger IP portfolios and sport more expertise across vertical industries, he said.

Martin Wolf, founder of Martin Wolf M&A Advisors

The smaller players are running out of runway for easy growth — it’s easier to grow off a small base. They will be increasingly challenged by the slowing Indian economy while the bigger players work more outside India. TCS, for example, got 53 percent of its revenue from the U.S. compared to 7.1 percent from India for its first quarter. The smaller players are more focused and dependent on the flagging domestic market, Wolf said.

In Wolf’s opinion — and remember he’s in the M&A business —  is that the Indian IT giants will have to do dramatic deals — along the lines of IBM’s $3.5 billion buyout of PwC Consulting a decade ago,  in order to keep competitive with companies like, well like IBM Global Services.

The big get bigger, as the small struggle to do the same

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According to Wipro’s  press release, Wipro iStructure services draw on:

Wipro’s global data center infrastructure and deep expertise managing mission-critical IT systems to deliver compute, storage, recovery, network, security and other services in an automated, consumption-based model.  [iStructure services] will be the foundation for … a broad set of infrastructure, application and business process outsourcing solutions in an ‘as-a-service’ model.

Wipro is essentially expanding multi-tenant virtual server hosting that it rolled out last year to existing customers across the U.S., Europe and India, said Michael Wilczak, senior vice president of strategy data center services for Wipro Technologies, in a statement.

Update: The platform uses VCE V-blocks comprising Cisco servers, EMC storage and VMware virtualization as well as Wipro’s proprietary portal and CA’s Automation Suite for Cloud, a Wipro spokesman said via email.

The top Indian IT service providers are on a roll. Recent Gartner research found that the five biggest players – Tata Consultancy Services, Infosys, Cognizant, Wipro, HCL Technologies, together grew 23.8 percent in 2011 compared to a more down-to-earth 7.7 percent growth rate for the global IT services market as a whole.

Wipro, like its competitors, is moving up the value chain, said Marty Wolf, founder of Martinwolf M&A Advisors. ”Wipro started out as a distributor then became a VAR then a service provider but services are hard to scale,” he said. “Now Wipro is wrapping solutions around services and infrastructure and releasing it all back to people on a monthly by-seat basis, which is where everyone — Oracle, Microsoft, Amazon, Verizon, and IBM are doing. They’ll all get their share of accounts based on what they bring to the table”

As enterprise accounts start moving more workloads to cloud services, many will seek out business-focused, rather than public, IaaSes, which still spook some IT shops. Still, hurdles remain. As I reported yesterday, concerns over data sovereignty are keeping multi-national companies from putting much of their data in clouds that straddle national boundaries.

Feature photo courtesy of Flickr user Dennis Vu Photography for Unleashed Media

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TCS House, headquarters of Tata Consultancy Services

The debate is over when it comes to cloud deployment. That decision — to move — has been made and it’s time to talk about other things, according to Dr. Gautam Shroff, VP of Tata Consultancy Services and the head of the TCS Innovation Lab in Delhi.

In a recent interview with GigaOM, Shroff shared what he sees from his vantage point at Tata, the giant global IT services and consulting company.  And it is global: Mumbai-based TCS fields 214,000 IT consultants in 42 countries — including 17 U.S. offices — and 19 Innovation Labs.  TCS is the largest of the Indian IT services behemoths and the 16th largest in the world with just over $9 billion in revenue in 2011, according to Gartner research. That figure represents a near 30 percent growth rate over the previous year.

1. The “should we should go to the cloud” discussion is over — move on

“The cloud story is a little old now. People have figured out what they need to do and where they need to go with the whole private and public cloud discussion,” Shroff said. But remember, the motivator is not cost — it’s speed, agility and accessibility of locally distributed applications using the public cloud, he said.

2. Big data remains big

If you don’t think so, just look at what’s happened in the vendor community. Teradata bought Aster, EMC bought Greenplum, IBM brought Netezza. There’s a reason for that: They’re all looking at the challenge big data poses to the traditional business intelligence stack, Shroff said. New tools are needed as companies realize they need to analyze data from the outside — from social networks etc. — along with their internal supply chain data. The challenge lies in the middle of those data types. Data mining has been used for 20 years or more but not optimally because before now the data wasn’t widely available, except maybe in retail. Now it is.

3. Social media needs to come in-house

Company employee portals are doing a little bit with social media but should be doing a lot more. Tata itself has a social media platform — a sort of internal Facebook/Twitter-like platform for community building and learning. “We want to marry this with our e-mail world seamlessly” so posts have all the connotations needed for people to understand the context, he said. Toward that end, Tata is building Knome which supports user Q&A, debates, shared media, and “Twitter-style” status messages.That enables ad hoc groups to form and disband as needed to get projects done.

Tata has deployed 100,000 people on the Knome framework in the past three or four years.

4. The commercial world needs to tap academic research better

Innovation is not coming from enterprise IT, it’s happening in the consumer realm and in academia. University research has a lot to offer and companies need to better exploit that resource, Shroff said. TCS, for example, works with Stanford University researchers on the analytics and database sides. “We need to bridge the gap between what’s written in the books and what’s happening in products,” he said.

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While saving money is a common reason cited for moving IT to the cloud, it is really not the overriding driver at all for most companies, according to new research.

What’s more important than cost savings for companies — at least in the U.S. and Asia-Pacific regions — is the ability to standardize their software and business processes across the company, according to a new survey of 600 large companies by Tata Consultancy Services, the $8 billion IT service provider. In Europe and Latin America, the primary rationale was the ability to ramp systems up and down faster.

According to the survey:

The factors driving companies to launch entirely new applications in the cloud are quite different – to institute new business processes and launch new technology-dependent products and services.

The results confirm at least one bit of conventional wisdom — that European companies lag their U.S. counterparts in cloud adoption. Among U.S. respondents, 19 percent of their total applications run in the cloud compared to 12 percent in Europe. But both regions lag Asia and Latin America in adoption — at least in percentage of applications now running in the cloud: 28 percent for Asia and 39 percent for Europe Latin America.

However, companies in all regions expect their cloud usage to grow dramatically by 2014. For example, U.S. companies expect that 34 percent of their total applications will be cloud-based in two years. European repondents said they expect cloud applications to hit 25 percent in that period. But Asia and Latin America will keep up the pace, with Asia-Pacific companies expect to hit the 52 percent mark and Latin America 54 percent in 2014.

One of the reasons companies typically cite for moving to the cloud is that they’re able to move such IT budgets to an operational expense (OPEX) that can be spread out over the course of deployment as opposed to a larger, up-front capital expense. OPEX is far easier to get approved but, in terms of actual cost, there can be a point after which the cloud cost can exceed the capital expense. After five years paying a cloud provider for storing data — and also paying the networking charges for accessing that data — in some cases it may actually make sense to go with an on-premise solution. Companies need to do this math up front to determine which model works for them.

But, as Tata’s results show, cloud computing is big now, even if it’s not the  panacea for bloated budgets. Actual adoption likely will ramp up significantly as companies get comfortable with the model and better understand how and when to use it, and what it might cost.

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I did meet some terrific people and companies, however — in New Delhi my dinner host turned out to be an F|R subscriber! — and you’ll be hearing more about many of them over the next few days. But before I go back to nursing my jet lag, let me leave you with this Thought of The Day, from a rather unexpected source.

One city I visited was Kolkata (previously called Calcutta), to see an outpost of IT-outsourcing specialist, Tata Consultancy Services (TCS), one of India’s top 10 publicly traded companies, and an operating unit of the famous Tata Group. On our way to TCS, we made a stop in town, at the mission of the late Mother Teresa.

“Mother,” as the nuns still refer to her, died in 1997, but her writings and missives are displayed throughout the public areas of the place. Some of them strike very universal, non-religious themes. This is a woman who, by her own choosing, took on big, largely non-abating challenges (in her case, poverty) in an ambitious effort to change the world as she saw it. She even founded a new order to do it (the Catholic Church thought she was nuts and forced her to venture out on her own).

No surprise then, that Mother Teresa’s writings reveal an individual who was perpetually tired, often discouraged, and who felt very much alone. (Sound familiar?) Yet she persevered. And controversial as she has become since her death, I found these words, on her own sense of failure and how she overcame it, to be comforting:

Within me everything is cold. It is only that blind faith that carries me through. [This] smile is a big cloak which covers a multitude of pains in this darkness. [But] do not allow yourself to be disheartened by any failure, as long as you have done your best.
Later, addressing her 4,500 “employees” in the Missionaries of Charity she concluded:
What I can do, you cannot. What you can do, I cannot. But together we can do something beautiful…

Mother Teresa must’ve been a great leader in her own way — her 57-year-old operation now spans 133 countries. And I think she could’ve been writing of just about any entrepreneur’s state of mind with the words above, and so here’s your…

Thought of The Day: Even Mother Teresa, a soon-to-be-saint, felt discouraged by the challenges of breaking the mold. Heck! So don’t beat yourself up if you have a bad day, founders. You can’t do this alone. When it gets “dark,” enlist help and carry on.

Now off I go to nap. I hope everyone has been well, and busy.

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