Editor’s note: HCL Technologies, the Indian-based outsourcing firm that is rapidly expanding its presence in Cary, will grow revenues 10 percent year-over-year this quarter despite increasing competition and a strong dollar, projects Technology Business Research Analyst Jennifer Hamel. Just a year ago, HCL announced plans to add 1,237 jobs in Cary.

HAMPTON, N.H. – HCLT’s bet on R&D outsourcing services continues to pay off, mitigating the drag of currency headwinds and application services slowdown

HCLT’s 2Q15 performance shows continued progression in the company’s shift to a higher-value services mix, with double-digit expansion in R&D outsourcing, BPO and infrastructure management services offsetting flat applications services revenue. Currency fluctuation remains a challenge to revenue growth and margins as it does with most IT services vendors.

However, continued investment in client co-innovation centers, Internet of Things (IoT) capabilities and industry-oriented IP improved HCLT’s differentiation in areas such as engineering and R&D services, enabling the company to outperform peers such as Infosys (5.8%) and Wipro (6.3%) and match TCS (9.3%) in overall year-to-year revenue growth.

Upselling transformation services in engagements while pursuing client opportunities will enable HCLT to generate 9.8% year-to-year growth in 3Q15.

Organic expansion of digital marketing services capabilities enables HCLT to expand client wallet share, but may not be fast enough to compete with global peers for new clients

Similar to peers across the IT services industry, HCLT builds out digital marketing capabilities to capture engagement opportunities around enhancing the customer experience. At its Financial Services North America Focus Day in April, HCLT laid out a four-part “High-Touch, High-Tech” digital services approach that began with “engaging,” or crafting the user experience around the client’s established brand.

Creative design is a new area for HCLT, which built its reputation around delivering low-cost integration and outsourcing services, leading the company to hire experts with experience in traditional digital agencies such as SapientNitro and Digitas. HCLT now has an in-house creative team of approximately 60 employees, and in July the company announced plans to expand the team.

Enhancing design capabilities positions HCLT better for digital marketing services opportunities arising from existing client engagements. Long-time clients such as Deutsche Bank and Aegon entrusted HCLT with their digital transformation agenda by investing in solution co-development centers with the company. However, organic expansion will not provide the scale to compete with global vendors IBM, Accenture and Deloitte for new design clients.

We expect India-centric peers Cognizant, Wipro and Infosys that use acquisitions and more aggressive cross-training measures, will catch up to global vendors’ creative design capabilities faster than HCLT, compounding the competitive pressures.

HCLT looks to repeat its winning Europe formula in Australia, but with a faster transition to transformational services

HCLT’s narrower global footprint compared to peers such as IBM and TCS hinders its ability to diversify revenue into APAC. As a result, the company takes a targeted approach to pursuing engagements outside its core markets, focusing on more mature countries such as Japan and Australia. HCLT has five local offices in Australia, catering to clients in the financial, retail, telecom and government domains. On its 1Q15 earnings call, HCLT noted Australia as a fast-growing region for ITO services, echoing the company’s approach to entering the Europe market a few years ago.

HCLT appears to be shifting its messaging in Australia from cost-reducing outsourcing to business outcomes-focused transformation faster than it did in Europe, using thought leadership and case studies around areas such as digital commerce and analytics to establish its expertise in the region’s IT transformation needs.

Though TBR believes HCLT will continue to use its low-cost advantage to win IT outsourcing deals, showcasing its digital transformation capabilities early will enable it to expand client engagements through cross-selling more quickly, a necessary tactic to differentiate from competitors such as Cognizant and Accenture that use a C&SI-led approach in the region.

(C) TBR