By Rajiv Rao
July 27, 2016
As their world is becoming increasingly disrupted by the cloud and artificial intelligence, Indian outfits will have to evolve into something higher up the value chain to survive.
Technology, or ways to implement it, was once transformed by labour due to Indian firms, but now labour is largely and rapidly being made irrelevant by new technology. (Image: Infosys)
In a few decades, the world witnessed the beginning of a large disruption in the arena of IT services pioneered by Indian companies, such as Infosys and TCS, where cheap but skilled technology labour in India was relied upon to fashion technology solutions for US and European companies.
These users are taking SaaS to a new level, improving the business of delivering IT services -- and in moving IT support and change management from a cost center to a proactive IT knowledge asset.
It is ironic that after mushrooming into a $140bn industry, the very businesses that architected this major shift in how global firms devised and managed their technology solutions are now facing a profound existential threat to themselves, thanks to a new round of disruptors that have further altered the same cost and location advantages that once fueled these Indian companies.
In other words, technology, or ways to implement it, was once transformed by labour due to Indian firms, but now labour is largely and rapidly being made irrelevant by new technology.
It may be an overstatement to say "the party is over" -- but not by much. Look at the revenue growth graph in this Financial Times article (by Simon Mundy in July) to understand the magnitude and speed of change. In 2011, revenue growth in dollar terms for Indian IT firms collectively was around a robust 28 percent. Today, it has plummeted to 5 percent. That pretty much says it all.
UBS analysts, quoted in this paper, said that what are now becoming regular, below-consensus estimates are not so much because of anemic or fickle markets but because of increasing pressure on legacy systems that make up a staggering 85 percent to 90 percent of total revenue today.
Other observers felt that even reduced guidance that many of the industry front-runners have issued will not reach their targets by the year-end.
Financial Times quoted SAP transplant and current Infosys CEO Vishal Sikka as saying in the company's 2015-16 annual report: "Our context has fundamentally and irreversibly changed and we cannot go back to the approaches and methods of the past. The world as we know it has been transformed."
Damn right it has! The question is: will these companies be able to transform fast enough before they face an ignominious end of the kind suffered by companies like Kodak?
The world of a CTO presiding over every technology-related decision in a company is over. No longer are they and their teams the lynchpins of a business' tech backbone, architecting elaborate solutions for different departments like sales, marketing, and operations. Today, a marketing head or a sales head is more inclined to be responsible for running campaigns with off-the-shelf, plug -and-play software, thanks to the Software-as-a-Service (SaaS) phenomenon.
The old-era need to hire people to install, update, deploy, and customize software has evaporated overnight for the most part. Ditto for the need to hire armies of engineers to maintain on-site datacentres, as Amazon and Microsoft offer the same at an incomparable level of scale, cost efficiency, and flexibility.
Now, with the shift to digital services and cloud computing, more companies view IT as integral to the transformation of their overall business. They're looking for higher-value services and more innovation than Indian IT companies have traditionally provided.
This brings us to the next point regarding employee size and capability.
As clients scour the landscape for better value, Indian outfits will no longer need to, or be able to, afford the gargantuan work forces that they currently struggle with, with a large pool at the bottom of the hierarchical pyramid. The good news is they may no longer have to manage churn and keep employees on the bench. The bad news is they may find the prospect of competing in this 'higher-value' world much more difficult.
This is not to say that they aren't trying. Infosys, for instance, is training 80,000 employees in 'design thinking' -- where the aim is to play more of a consulting role that involves system design rather than just implementation. TCS has similarly made a big push into digital and says that at least 10 percent of income now comes from there, but this apparently has been difficult to verify. All in all, it is a big 'if' surrounding IT services' ability to transform themselves into a more sleek consulting entity before it's too late (large scale organisational transformation such as these are almost impossible to pull off, especially if you are a slave to the stock market).
Even if they remain in their current form for some time, the fact is Indian labour has become pricey. Bloomberg highlights The Economist as far back as 2013 quoting an IT executive who admitted "the total cost of its employees in India used to be about 80 percent less than in America; now the gap is 30 percent to 40 percent and narrowing fast." That was then. Today, that gap has narrowed even further.
Some Indian firms used to excel in remote management, but the rise of IaaS (Infrastructure as a Service) has eliminated that. It also means that you no longer have to worry about optimizing your servers for data retrieval or protecting them against breaches.
Then, there's the highly-commoditized world of call centres, which are being transformed by machine learning and artificial intelligence. Already under attack for poor service, these businesses stand no chance of surviving the double onslaught of cheaper centres, such as those in the Philippines, where a lot of Indian business has migrated.
Even bread and butter businesses -- such as renewing existing clients -- have become vulnerable. Pravin Rao, chief operating officer for Infosys, is quoted in the Financial Timespiece as saying, "Earlier, anything from $300m to $500m over five to 10 years was possible, but today the large deal size is typically $100m to $150m for three to five years." Plus, now those deals only arrive in chunks -- and that, too, in dribs and drabs, after hitting performance metrics.
GLOBAL POLITICS
In these turbulent times, the last thing Indian IT needs is volatility in a region that is the second-largest font of business. Nasscom, the industry trade body, has characteristically dubbed the impact as 'mixed' (probably in order to keep morale up) but admitted that the outlook is quite "clearly negative in the short term and harder to discern in the longer term".
Not only is the UK the second-largest source of revenue, it is, as the Financial Times piece points out, the gateway to Europe, serving the region out of London. Now, that sort of labour mobility will be severely threatened, and establishing separate beachheads in the continent will be a costly exercise that Indian outfits may not be able to afford. As it is, the slump in the British Pound may render many of their existing contracts a 'losing proposition' as they stand, reported the paper.
If Brexit wasn't bad, the existing hostility and rising costs associated with visas will be bound to have an impact. Indian companies suffered a rash of bad publicity from scenarios where they were hired to replace exiting US workers after being trained by them.
One of the most damaging developments has been a $1.8tn tax and spending bill, which was signed into law by US President Barack Obama. It allowed the doubling of the visa fee on H1B (to $4,000) and L1 work visas (to $4,500) for companies who had at least 50 employees as well as 50 percent of people on their rosters who are in the US on these visas. You can be assured that it will just get tougher, not easier, for Indian firms to get their Indian engineers into the US.
OTHER INNOVATION
The biggest threat in this new era of democratizing software is not a large competitor but the small, specialized firm that puts out a ground-breaking CRM app, or a supply chain one. These days, with the ability to plug and play a disparate world of apps for different departments, all the CTO and her or his team needs to do is to play the role of systems integrator.
While that trend is only increasing, there is another, equally debilitating threat arriving from another flank. Observers say that Indian companies -- while scrambling to hone new areas of business in digital, AI, and big data -- are simply unable to keep pace with the level of innovation being churned out by peers in the US in the same departments.
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