The technology services industry saw a good run during the course of the pandemic, delivery from remote locations even for newer technologies gained acceptance from customers. In tandem, as demand from customers rose, the war for talent too intensified. Though the industry has gone through these cycles of crests and troughs for talent, former Cognizant vice-chairman Francisco D’Souza said this cycle is fundamentally different from past ones. He currently runs Recognise, a growth fund that invests in tech services companies. Excerpts:
The industry is going through yet another cycle of a fight for talent. How different is it from the time you helmed Cognizant?
This cycle is fundamentally different from past cycles. While there may be on the surface, some similarities, I would say that the playbook on attrition and retention of the past is not necessarily going to work going forward. The conventional wisdom about the current levels of attrition in the industry is that we had a COVID-induced shock to demand because COVID accelerated digital transformation around the world.
We transacted more online, shopped more online, banked more online, and even did more of our healthcare online. So there was an acceleration in demand. And at the same time, at least early in the pandemic, during the time of great uncertainty, firms in the industry pulled back on supply because the future was relatively uncertain. So they scaled back hiring plans.
So the conventional wisdom [tells us] there was supply demand imbalance—where demand increased, perhaps unexpectedly, supply didn’t grow as fast. This led to this wage inflation, which is leading to high levels of attrition. That view, obviously correct at the surface, tends to oversimplify things and fails to recognise some important trends.
The first is that there are very clear signs that there seems to be a fundamental frustration in the relationship between employees and employers that goes beyond compensation.
I saw some research that was done by AON India, that as many as 90% of employees who resigned in recent times from companies were offered extremely lucrative counter offers by their existing employers. But only 35% chose to stay back. So what happened to the rest of them? Why did they still move on despite compensation being essentially neutralised? There’s something else going on here. If you look at the technology services industry, it’s important to understand that over the last 40 years or so, the nature of work that technology services firms are doing has changed fundamentally because the role of technology has changed. A few decades ago, technology was a back-office enabler for most businesses. Therefore, the work of an IT services business was very algorithmic and procedural. We wrote functional design, technical design and code and did unit testing. We had quality systems where checkers checked the work that people did, and then there were checkers who checked the work of the checkers.
But today as technology has become a more fundamental enabler of businesses, it is the product of most businesses. The work of an IT services business is becoming much more creative and heuristic and much less algorithmic. This has made work much more intrinsically interesting. That means how you configure the workplace and your culture, how you attract, retain and motivate people is fundamentally different. Organisational cultures that were built in the world where work was more algorithmic, need to evolve dramatically for the world where work is much more creative. I think this mismatch of culture between the work of today and the work of the past is something really to keep in mind. This is one of the fundamental drivers of attrition that we see today.
When do you think this cycle will end?
No one has a crystal ball to gaze into. But, there’s a macro and a micro aspect to this. On the macro side, I don’t think that the supply demand imbalance will be addressed for a long period of time. There is going to continue to be a shortage of software engineers until 2030. And even if industry productivity goes up, even if technologies like low code/no code make an impact on the world, we still think that there’s going to be a significant shortage of software engineers. I’m using the term software engineers but it’s probably not entirely accurate. Because, today, the technology industry requires many other skills like designers and data scientists.
If you look at that entire pool, there’s going to be a shortage until at least 2030. At the micro level, over the next 18 months or so we’ll start to see some cooling off, because on the one side, the industry has inducted a lot of new talent from universities over the last 12 months. So there’s a lot of new talent that will come into the industry and that talent will become productive over the coming months. And that should ease the supply side of the equation.
On the demand side, we are already in a period of economic volatility – of high inflation and where geopolitics are trickier than they’ve been at least in my working career. So given those things, it’s reasonable to expect that that’ll have some impact on demand.
Companies claim they are cracking the digital business. What does ‘digital’ mean to you?
Digital was a term we apply to things for convenience. In the very early days of the trend shift, we talked about the SMAC stack (social mobile analytics and cloud) about 9-10 years ago.
In those days, SMAC seemed to embody the core newer technologies. But if you step back for a minute today, you know much later, I think digital as a concept is sort of not a particularly helpful or useful construct in the industry. I think the critical issue for firms is to say, ‘Are you keeping up with the pace of innovation that’s going on in the marketplace in the technology marketplace?’.
It has always been the case that technology services businesses need to adapt their service portfolio based on what’s happening in the underlying technology ecosystem. As new technologies emerge, you need to build the service offerings around those newer technologies so that you continue to remain relevant to the customer.
What’s different today, is that pace of innovation is happening at a rate that we’ve never seen before in human history. While a decade ago, we were talking about SMAC, today, we’re talking about IoT, artificial intelligence, machine learning, self-driving cars, 5G, and more. This is happening over and over and over again at a pace that we’ve never seen before.
I think the important metric for a technology services business is not what percent of the revenue is digital because one can define digital in many different ways. The important metric for a firm is to say, what percent of your services are coming from technologies or service offerings that you’ve launched in the last 5-7 years? How current are you staying with the most recent technology trends? If 90% of your business is coming from technologies and services that are over a decade old, that’s probably a sign that you’re headed towards some version of obsolescence.
That’s why at Cognizant, we adopted the three-horizon model. We were very focussed on making sure our portfolio of service offerings was well balanced across horizons one, two, and three, so that we always had a view of having one foot in the present and one foot in the future.
Companies are no more talking about offshoring, onsite etc, but about setting up development units wherever it matters – either for economic reasons or for customer servicing. Is this a difference in only semantics or has there been a structural change?
I do think that things have changed structurally in a better way. I view this in the decade, let’s say between 1990 and the 2000s or 2010, we were in the phase of globalization 1.0 or 2.0. We’ve now entered globalization 3.0 which has been accelerated by the pandemic. The pandemic taught that working in a distributed way is feasible, viable, possible, and actually, in many cases, not only just as effective, but sometimes even more effective than being physically together. Now, that’s not to say that being physically together doesn’t have its role in the world. We need to be together to innovate and to collaborate. At the end of the day, human beings are social animals and we want to be together to interact with each other at a social level. So physical place, clearly has its role.
But we’ve learned that remote work is far more possible. So I do think that, we will go back to the old model of having large groups of people concentrated in large, physical locations in a few parts of the world. I think that while some of those things will still exist, it’ll be replaced by a much more distributed hub and spoke model. So, we will have sort of big hubs maybe with physical locations in those big hubs, but talent distributed all over the world that collaborates.
India has a significant population of technology professionals, almost 20% of the world’s software engineers. If the software talent pool in India is growing 10% I don’t think it’s growing 10% in other parts of the world. So, over time, India is going to take share. But having said that, there’s still great talent all over the world. What this new, highly distributed way of working allows us to do is to use technology to extend our tentacles into places that historically would have been hard to get to smaller talent pools in the context of India, the so-called Tier-2 and Tier-4 cities. I do not like that nomenclature, but that’s what the industry has been using. But in the rest of the world, smaller talent pools, in physical locations that might not have been viable when you had to build an office , now one can do that virtually. One of our investments at Recognize is a business called Torc that is using an incredibly sophisticated platform to orchestrate freelancers and gig workers around the world. The network of talent that we have in Torc is literally all over the world— people from South Africa, to Scandinavia, from India to San Francisco, wherever it is, we have talent on the platform that can connect with work. I think that’s a sort of the future of work here.
Now that technologies considered ‘digital’ have been around for close to a decade, and large firms have consistently made acquisitions to add to their offerings, are such firms taking a lion’s share of the market?
I would argue the opposite is true. As long as I’ve been in the industry and as long as I can see going forward, this industry is going to be highly fragmented. This is not an industry that lends itself to significant consolidation. The biggest firms in the industry have low single-digit market share. This has always been an industry where there has been a rich ecosystem of firms and therefore there will be opportunities for big firms and for small firms.
The technology landscape today is far more fragmented than it’s ever been. If you go back to the last generation of technology, there were a few big technology stacks that dominated the technology landscape. You could probably count them on one hand. Today, the average technology backbone of a large client is highly fragmented because of innovation. A large healthcare company in Silicon Valley was telling me yesterday that they were working with small AI companies to take really interesting AI technologies and incorporate those into their offerings to their clients. Specialisation has become important and so, there’s an opportunity to build a new generation of technology services businesses that are highly specialised around particular technologies, around particular ecosystems, and around particular business problems. That is actually what we’re doing. It recognizes the thesis that because we have this new generation of technologies and innovation happening at a pace that we’ve never seen before, there is an opportunity to build highly specialised technology services businesses. At Recognize we’re trying to identify what those opportunities are and find great management teams and great companies to back in each of those areas. If anything, the landscape going forward is going to favour specialisation.
As a fund, what made you choose technology services as an area of focus, and not products and the like?
The technology services industry has terrific wind in its sails and that the fundamentals of the industry are strong and will continue to be strong for a long period of time, driven by things we’ve talked about already— shortage of talent for the foreseeable future, significant amount of technology innovation which requires technology services businesses to implement. There is a need for speed and specialisation in the technology services industry. We like these fundamentals.
Any particular kinds of companies focussed on specific technologies?
Torc is a platform that is orchestrating technology gig workers around the world and specifically solving the problem of bringing that workforce to the large enterprise. Interestingly, out of the 25 to 26 million software engineers, the estimate is that 7 to 8 million are part-time workers. So, gig workers and part-time workers are a significant portion of the global technology workforce. The mainstream technology industry has not tapped into that workforce in a systematic way in the past.
You have to tap into that workforce, whether you are in IT services business or a client. If you don’t, you are ignoring 7-8 million people out of a total pool of about 25 million. It is an important workforce, and Torc is in the middle of orchestrating that. We are seeing tremendous traction there.
The second investment we have made is in a business called SpringML. SpringML is a data and AI/ML focussed business that does custom development on hyper ecosystems particularly around Google Cloud. The third business we have invested in is Ciklum. It is a digital engineering business with workforce in Eastern Europe and clients in Western Europe. So, as digital transformation continues to accelerate, Ciklum is right in the middle of making that digital transformation a reality for clients, mostly in Western Europe at the moment. Then finally, a business called AST in the Oracle Cloud space. The business is focussed on running, operating and migrating Oracle applications on to Oracle Cloud.
We have identified a set of themes that we want to invest against. We are looking for the best companies in each of those theme areas and looking for the best management teams and companies that we can find. We want to be able to provide them with more capital but also operating experience that can help them to grow and scale the business faster than they might be able to do otherwise. On the point of themes, at the macro level, for example, we are looking for technology services businesses and tech-enabled BPO type of businesses. Then underneath that we’ve looked at particular areas. For example, we’re looking at healthcare as a vertical theme. We think there’s a lot of opportunity there. We are looking at embedded R&D as another theme where we would like to make an investment. When we continue to look at the data and analytics space, we think there are lots of opportunities to invest there. Those are just three examples.
