BUSINESS

Changing face of tech spending and Indian IT

Last week, India’s big three IT firms — TCS, Infosys and Wipro — exuded optimism on the demand environment and IT spending even as research firm Gartner cut its global tech spending forecast for calendar year 2015.

Gartner pegs 2015 spending to grow 2.4 per cent to $3.8 trillion (tempered from its previous forecast of 3.9 per cent). Within the overall pie, IT services are expected to rise by 2.5 per cent to $981 billion, which is lower than 4.1 per cent projection the firm made in the last quarter.

The firm expects a subdued demand for software support services through 2018 in the backdrop of lower growth rate for enterprise software.

A slowdown in enterprise software means that the over $100 billion Indian IT services industry, which has thrived from traditional bread-and-butter business like application development and maintenance and infrastructure management, will now have to look at newer avenues for growth as clients move towards digital technologies to cut cost.

In a research note last month, foreign brokerage BNP Paribas said the cloud component in new deals in infrastructure management space has now increased to over 25 per cent versus less than 10 per cent earlier, thereby, reducing deal sizes.

Indian firms need to make quick inroads in ‘buzzword’ areas such as social media, mobility, analytics and cloud (SMAC) segments.

To be sure, Indian firms have been thinking on these lines and set up separate digital units.

TCS expects digital spends to rise and expects the segment to generate high margins and bring $3-5 billion in incremental revenue in the next three years. Infosys, under its first non-founder CEO Vishal Sikka, is embracing new age technologies such as artificial intelligence (software that mimics the way that natural intelligence functions) and use of automation, which would enable it to hit annual revenue growth of 15-18 per cent in the coming years. Wipro, Tech Mahindra and other mid-cap firms are also realigning towards digital needs of their clients.

Analysts reckon that a stronger U.S. economy and corporate margins indicate IT services spending shifting away from largely cost-cutting to more discretionary projects or higher proportion of ‘change-the-business’.

Therefore, IT firms should look at non-linear revenue model or in other words de-link between revenue and employee growth.

Not only this, the firms should also be open to work with the start-up ecosystem and collaborate with firms providing cloud offerings.

Besides setting up separate digital units, a few IT firms have set aside funds to acquire start-ups. Wipro has a $100-million fund, while Infosys last week expanded its $100-million fund five-fold to $500 million, which it would use to invest in start-ups in the fields of artificial intelligence, automation and next-generation technologies.

“Companies hire niche talent for these units at typically thrice the salaries of other employees with similar experience, have separate HR policies for them, and also house them in different premises or subsidiaries. While companies need to compete with established global product companies in India and some 3,100 start-ups for this talent, they enjoy a strong brand in campuses and prospective employees understand they are being hired for superior roles,” said BNP Paribas.

Despite the efforts taken towards SMAC, it just contributes just 8-10 per cent of overall revenue and deal sizes tend to be smaller in these areas. Nevertheless, industry lobby Nasscom expects SMAC to be a $1 trillion opportunity in the next eight years.

“The sourcing industry is balancing on the precipice of a major inflection point,” according to John Keppel, partner and President of Information Services Group, a firm which tracks outsourcing trends.

Competition

“Competition is heating up, not only between western-heritage multinationals, India-heritage firms and niche players, but from cloud providers as they join the fray, particularly in the infrastructure services area.

“Although that may drive down unit costs, the industry also has huge growth opportunities, as digitization continues to transform the way work is done, with particularly strong growth expected in applications. Overall, prospects for the industry are quite strong.”

The investments in SMAC will take time to bear fruit, however the outcome for Indian IT vendors will depend on how well they position themselves in the shift in spending towards the digital technologies.

sanjay.v@thehindu.co.in



Indian firms need to make quick inroads in “buzzword” areas such as social media, mobility, analytics and cloud (SMAC) segments. To be sure, they have been thinking on these lines and set up separate digital units.



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