Is anything wrong with India’s famed IT sector? That’s not a bad question to ask if you have been recently tracking the results of top IT companies, who. one after one without exception, have turned in sub-par results, disappointing everyone and the markets. TCS, Infosys, Wipro and HCL all fell short of analyst expectations, not for the first time in recent quarters.
A volatile currency and weak business environment in sectors such as retail and oil have been mentioned as the culprits. Of course, there is no denying that they have played a huge part. But, amid all this, it has been easy to temporarily forget the huge shift taking place in the underlying plot, a story that is far more important. The Indian IT industry, obviously, is no exception.
The emerging technologies are largely what go by the acronym SMAC, short for social, mobile, analytics and cloud. At its core is the cloud, which is essentially about making available computing resources to customers using the Internet.
Cloud is disrupting the enterprise software and hardware industry by being easy to scale up, and also cost-effective. As cloud firm salesforce.com says in its Web site, “Where in the past, people would run applications or programs from software downloaded on a physical computer or server in their building, cloud computing allows people access the same kinds of applications through the Internet.” It is a completely new and compelling way of consuming IT services. And, that is exactly the problem for Indian IT services companies!
As a serial IT services entrepreneur puts it, ``In a cloud environment, hardware is provided as platform as a service. This reduces the infrastructure maintenance needs, and, hence, infrastructure services will reduce.”
He says, “The software development itself has lot more robust and cheaper platforms with huge mobile capability.” In an increasingly iffy world growth phase, with pressure to reduce cost while being agile, it isn’t tough to figure out why cloud works.
That’s why, with demand generally down, mid-range clients in the U.S. who don’t have huge legacy systems to maintain, are starting to prefer cloud-based systems.
Market intelligence firm ISG recently reported global sourcing slowing down in the first quarter of 2015. Its report said commercial outsourcing contract with an annual value of $5 million or more fell 18 per cent, “well below the average of $6 billion in first quarters since 2006, and one of the slowest first quarters in the last decade.”
Further, it foresaw “an explosion of new technologies and delivery models that will spur competition and falling prices not seen since the early 2000s.” Pricing has already been impacted, its analyst was quoted in that report as saying, because of technologies such as automation, robotics and cloud. This, the analyst said, “is creating substantial opportunity but also substantial risk.”
So, what caused India’s IT industry to be more than a $100 billion annual exporter is just about two decades will not necessarily help it navigate the digital world. The serial entrepreneur points to a huge difference in the development model itself: “The factory-based model for application development is dying.” Instead, he says, “a new model is developing which is heavy on front-end interface development, which is largely customer premises-oriented, and the back-end is predominantly connecting middleware for multiple systems.” The middleware is a sort of tissue that connects different types of systems.
IT companies wanting to succeed in the emerging digital game have to get used to new ways of doing things. This includes delivering on-demand software – so revenues can’t be assumed to neatly fit the quarterly cycles. It could be unpredictable. But, more than that, they would need talent that has high technology skills, which means they can’t be playing a cost-arbitrage game that involves recruiting a lot of people.
Peter Scumacher, Chief Executive of Germany-headquartered Value Leadership Group, says, “While Indian IT services firms like to think of themselves as being tech-savvy, customers are looking for the Indian firms to develop a deeper and more comprehensive understanding of the business implications.” So, he says, “Indian IT services firms need to figure out how they are going to position themselves in this changing landscape, and what the unique value is that they can deliver to their customers.”
Gartner’s Research VP & Invest Analyst Sandra Notardonato says, “Incremental spending in IT services is around digital business. We are seeing it in consulting and other discretionary areas such as implementation and application development. This should be more an opportunity for the India-based companies that have the service offering to address.”
There might be some anxiety over how in the interim period margins might take a beating, what with deal sizes reducing. But in the long-run, there is still a huge opportunity, as a report by BNP Paribas toward the end of last year pointed out.
The report mentioned a few reasons why India’s IT industry could succeed in the new era. One reason is that there is still more time to adapt. Also, client relationships matter even more in a disruptive market. But, more importantly, IT biggies are serious about their SMAC strategies. They are no way going to dismiss start-ups – Infosys and Wipro each have a $100 million fund to invest in start-ups. Tatas have the Innovation Labs. They are also getting serious about automation. Infosys just recently bought automation and machine learning company Panaya for $200 million. They won’t mind a few quarters of sub-par results but they can’t afford to miss the long-term picture.
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