Understanding IT sector

This depends on the kind of work. Typical food chain model – A Tier 1 would deliver in house what they consider “value-added” services and pass on the lower value services to a Tier 2. Likewise the Tier 2 would deliver in house “value” services from that and pass on mundane work to a Tier 3.

Additionally, it also depends on the capabilities and skillset in the org. If a certain Tier 1 has a large team of resources specializing in so called lesser value-added services and those same resources are delivering a larger portion of the service to the client, it makes operational sense to deliver the lesser value-added services from the same team. This drives operational leverage for the Tier 1.

This is applicable to the IT Services orgs. ER&D and other niche areas have a much more nuanced approach.

Typically a good scenario for IT is where the economy is affluent and clients have sufficient budgets. Or this can be external driven like COVID which drove a lot of the digital transformation in the last 2-3 years. A bad situation is where core business of the clients is where the main focus is, budgets are restrictive and typically IT spending gets cut first. Within IT spending, non-essential would get cut or rather delayed or put on the backburner. Essential spending like ER&D would not see as much cutting. If you observe all the listed IT Services companies’ concalls for the last 2-3 quarters, you will see such (not bad but cautious) commentary.

Number of clients is one important metric but not the most like volume and value for FMCG. You have to look at

1. Revenue per client (increasing means they are gaining higher wallet share from the client),
2. Onshore:offshore ratio (how much of the work is delivered remotely vs requiring physical in country presence with the client),
3. Contract type between fixed cost vs time & material costs (T&M allows for passing higher costs through),
4. Revenue by region (are they spread across the globe or concentrated in a country),
5. Revenue by customer concentration (how much of their revenue comes from Top 5, Top 10, Top 25 clients)
6. Attrition rate (typical Tier 1 companies have ~15% attrition. 1.5 years ago this was up to 30%, meaning every 3 years, the entire team base is new.)