R&D expenses of top IT services firms stagnate in last 10 years

At a time when the Information Technology (IT) sector braves the AI threat, the research and development engine of the industry has not fired up.

An analysis of the R&D expenses of the top-tier IT firms over the last 10 years shows these spends have risen marginally year-on-year, but have stagnated at 0.5-1.2 per cent of revenue. TCS and HCL Tech spend more on R&D (as a per cent of revenue) compared to Infosys and Wipro, data shows.

TCS has reported R&D and innovation expenditure of ₹2,751 crore (1.1 per cent of revenue) in FY24, up from ₹2,500 crore in FY23, but unchanged in terms of per cent of revenue terms. In fact, TCS’ R&D spends have been capped at 1.2 per cent since FY16, and was 0.96 during FY15.

HCL Tech spent between 1.1-1.3 per cent of revenue on R&D between FY20 and FY23, with marginal increases in each of the years. Prior to FY20, HCL’s R&D expense was 0.6-1.0 per cent of revenue. HCL Tech’s R&D expense for FY23 was ₹552 crore.    

R&D spend at Infosys stood at ₹655 crore in FY23, comprising 0.5 per cent of revenue, and this has remained more or less the same going back till FY17. Infosys spent a higher 1.3 per cent of revenue under this head in FY15.

Wipro’s data shows inconsistency in R&D spends. The IT major spent 0.57 per cent of revenue in FY15 and this went up to 0.78 per cent in FY20 and was at 0.40 per cent (Rs 367 crore) in FY23.

“IT firms stand at a juncture where investing in R&D, incubating newer products and upskilling and reskilling the workforce are crucial,” Ramkumar Ramamoorthy, partner at tech advisory firm Catalincs, said. If IT companies don’t increase their innovation quotient through R&D and related investments, the gap between leaders and laggards will widen, he added.

Analysts also note that the majority of expenses at IT services firms go into talent costs for executing projects, but this culture may need a rethink given structural shifts in technology.

R&D spending did not yield the desired outcomes for Indian IT services in the 1990, 2000 and 2014 era when companies experimented with software products and platforms, and that made the sector cautious, Gaurav Vasu, founder and CEO of IT research firm UnearthInsight, notes. “IT firms tend to focus on mergers and acquisitions or partner with product firms to go deeper into any new technology,” he adds.

Globally, IT services giant Accenture spent 2 per cent of revenue ($1.3 billion) on R&D in the fiscal year ended August 2023. 

On the other hand, with products as core offerings, global big tech majors Microsoft, Amazon, Meta and Alphabet (Google) have spent 11-28 per cent of revenue on R&D in their most recent fiscal years. 

Overall, the private sector’s contribution to India’ gross R&D expenditure (GERD) ranks low. Unlike advanced economies where more than 70 per cent of the contribution to GERD comes from the private sector, in India, the private sector’s contribution to GERD is less than 40 per cent.

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