TCS, Wipro turn to mid-market clients as AI erodes demand from large customers

Big IT is going small: Tata Consultancy Services Ltd (TCS) and Wipro Ltd are turning to mid-sized clients as artificial intelligence (AI) erodes demand from their Fortune 500 customers, setting the stage for a margin-sapping price war with mid-tier rivals that have long focused on clients with annual revenue of less than $5 billion.

TCS, India's largest information technology (IT) services provider, is looking to sell its offerings to governments, while Wipro, the country’s fourth-largest IT services firm, is targeting smaller companies undertaking broader AI-led technology transformations to grow its business.

With this, TCS and Wipro join Accenture Plc, Cognizant Technology Solutions Corp. and HCL Technologies Ltd in sharpening their focus on mid-market clients. While Accenture, Cognizant and HCLTech have set up dedicated business units to target this segment, TCS and Wipro have so far only announced plans to step up their focus on such customers.

This push suggests that homegrown IT services firms are looking at expanding their base beyond their traditional Fortune 500 clients, which make up for most of their revenue. This comes as AI tools pose an existential threat to IT services firms by automating a significant share of the work they traditionally handle.

New growth engine

On 8 October, Mumbai-based TCS's management called mid-market companies a new growth engine for the company.

“Lastly, we are creating new growth engines for the future. We are expanding into adjacencies, such as data centre services, increasing our offerings for GCCs and the mid-market segments, strengthening our presence in areas such as ServiceNow, Public Services, and Sovereign Cloud,” said Samir Seksaria, chief financial officer of TCS, during the company’s post-earnings analyst call.

While TCS has been selling its IT offerings to these mid-sized companies, this is the first time the management called it a growth engine.

Wipro's management echoed similar sentiments a week later.

“Beyond large enterprises, we also see strong traction in deal wins and pipeline in the mid-market segment. These organizations understand that AI can be a force multiplier in scaling capabilities and redefining their competitive landscape,” said Srini Pallia, chief executive of Wipro, during the company’s post-earnings conference call on 16 October.

Pallia added that Wipro is working with a consumer company to establish a global capability centre (GCC) in India while modernising their technology. GCCs are in-house technology centres of companies that are traditionally clients of Indian information technology firms.

“Through this engagement, we will scale engineering and technology operations to support ERP modernization, cloud-native platforms, and AI capabilities for our client. Outcome will drive innovation, improve engineering productivity, and strengthen global delivery model for our client,” Pallia added.

Margins under pressure

While this could widen the client base of large IT firms, it means tougher competition for both the larger players and their mid-sized rivals.

“Mid-sized client accounts typically carry thinner operating margins, which is one of the key reasons mid-tier IT services firms trail their larger peers on profitability. That large-caps are now actively pursuing these accounts is itself telling, as it reflects slowing growth in their core large-account book, where AI-led productivity gains are compressing billable effort,” said Shubham Dalia, analyst at Ashika Institutional Equities.

To be sure, mid-market companies form the core client base of mid-sized IT services firms, making the entry of larger rivals another competitive challenge for companies that generate $1-5 billion in annual revenue.

While TCS and Wipro are able to generate 17-25% in operating margins, mid-sized IT services companies including Coforge Ltd, Mphasis Ltd, and Persistent Systems Ltd manage 14-16%.

“The challenge with targeting mid-market is that it requires a very different approach than the enterprise segment. Essentially, it's a low margin but scale play and you can only achieve success with a platform-based approach. These providers will find themselves competing with smaller firms which offer low-cost services on one end and SaaS platforms on another end,” said Ashutosh Sharma, vice-president and research director at Forrester Research.

Growth amid a slowdown

Over the past six months, the two companies have joined a growing list of large IT firms seeking to tap business opportunities among mid-market clients.

A third expert said the move comes against a challenging business outlook.

“Growth in mid-market is an opportunity for services companies to target as it is an untapped market, particularly for the large providers. With muted growth, pricing and growth pressures, providers are actively looking for new avenues of growth,” said Namratha Dharshan, chief business leader for India Research at ISG.

TCS, HCLTech, and Wipro ended the September quarter with $7.64 billion, $3.72 billion, and $2.61 billion in revenue.