Indian tech companies should get into quick adaptation mode
PremiumA global recession will hurt and they must not miss demand shifts
The quarterly earnings season for India’s outsourcing firms has begun on a cautiously optimistic note. Tata Consultancy Services (TCS), its largest software exporter, reported better-than-expected growth of 8% in net income. Its operating margin, which had slumped to a 7-year low of 23% in the quarter to June, rose by 1 percentage point as it dialled down hiring.
From here on, it may get challenging. European clients, which typically account for a quarter to a third of Indian firms’ sales, are almost certain to cut their tech budgets, at least until the war in Ukraine ends and energy supplies normalize. The more important US market may also disappoint as the Federal Reserve slows that economy to tame inflation. Some American companies might still look to infotech to shed costs as they hunker down for a recession. However, the pandemic-era splurge is now in the rearview mirror for Indian vendors. The coders they could hire easily during covid lockdowns are getting restless with a lack of career progression since the reopening of the global economy. TCS’s attrition rate last quarter was more than 21%.
All these are transient problems for an industry that came into its own at the start of the millennium. Today, India’s publicly traded software exporters garner more than $100 billion in revenue, employ 2 million people and have a market capitalization of nearly $350 billion. TCS alone is more valuable than IBM Corp. But size has come at the expense of agility. The outsourcing industry is about helping global companies reduce friction at work, something that consulting firms have been doing better of late.
Managed tightly, Indian IT firms still have a strong labour-cost advantage on large-scale enterprise software (think SAP etc). But the locus of demand is moving away from implementing these to cloud-based workflow automation, offered by ServiceNow, Atlassian and others. German startup Celonis, a ‘process mining’ pioneer, claims to help customers “fix inefficiencies they can’t see." Salesforce, which owns the business productivity tool Slack, had a third of SAP’s revenue in 2017. Now it’s just 12% smaller. Shopify commanded a 19% share last year in digital-commerce software, against Oracle’s 6%. In implementing new-age IT platforms, the Indian outsourcing players are lagging the likes of Accenture and Deloitte Consulting.
In 2015, Accenture acquired Cloud Sherpas, a small outfit of 1,100 employees of which 500 were Salesforce implementation consultants. Seven years later, cloud is a $26 billion business for Accenture, growing at 48% annually. Indian outsourcing firms have also ramped up cloud-based offerings, but are struggling to build scale in popular new technologies like the human-resource management system offered by Workday.
Tech is now a big part of what consulting firms do. Which is why they’re getting into the nuts and bolts of their clients’ operations—or at least boosting their capability to do so. McKinsey & Co, which in recent years has acquired more than 20 tech-related companies, hired Jacky Wright, previously Microsoft’s chief digital officer, as its first-ever chief technology and platform officer last month. Deloitte is aggressively recruiting coders and investing in training them on new technologies.
As the dividing line between business and tech blurs at global corporations, Indian software vendors risk falling further behind their consulting rivals. Outsourcing firms are comfortable talking to the in-house tech czars at large corporate clients. But when it comes to deciding priorities, functional heads are increasingly calling the shots. And they don’t speak the language of tech.
A related trend is the rise of citizen developers—non-IT professionals coming up with automation applications for their teams using so-called low-code platforms such as Appian.
Mind you, Salesforce and Workday implementation may not offer a ticket out of a global recession next year: The new IT players are also worried about demand. But at least they’re more plugged into the future of work—flexible, digital and often remote —than their traditional enterprise-software rivals. Top-tier Indian outsourcing firms should by now have built billion-dollar franchises around implementing these newer platforms. To get back into the game, they will need meaty acquisitions and a hard look at the state of work in their own firms, starting with freshers’ pay that has been stuck for nearly two decades at around ₹350,000 ($4,250) a year.
India’s Mint reported last week that entry-level positions in the Indian IT industry may be slashed by 20% in the financial year that will start next April. That might give the outsourcing firms a little breather on profit margins. But too much focus on the current slowdown may be unhealthy. It’s the future they need to confront—and make bold bets on.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.
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