Indian IT: Back to the future

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Technology is changing the way companies, across industries, have done business. Eighty-nine per cent of companies from the Fortune 500 list of 2014 did not even exist in 1955.

In this race to remain relevant, the ingenuity of the present-day $150 billion Indian outsourcing sector, which put the country on the global software services map, is being put to the test.

The rise of the Internet in the past decade has led to a wider adoption of artificial intelligence, and allowed companies to rent out computing power by the hour.

This has upended the outsourcing companies’ model of deploying an army of engineers in low-wage countries to write software codes and manage technology infrastructure for their clients in the US and Europe.

Unsurprisingly, homegrown system integrators now face a perfect storm as growth slows, profits take a beating and many are saddled with a workforce running into hundreds of thousands.

So, is it all over for the outsourcing sector? Will an Infosys Ltd or a Wipro Ltd go the Kodak or Blackberry way, and fizzle out in the coming years?

Much to the chagrin of some commentators painting a doomsday scenario, this looks unlikely. Indian information technology (IT) giants concede that the current model is broken and needs to be fixed. Hence, it is heartening to see them press the refresh tab. The largest companies such as Tata Consultancy Services Ltd (TCS), Infosys, Wipro and Tech Mahindra Ltd are taking one step at a time to bring back technology to the core of their business and moving away from being a staffing agency of the past.

The external challenges ahead of these companies are well-documented.

The first challenge is from the wider embrace of artificial intelligence. Companies like IPSoft offer bots or virtual agents, which can engage with customers. This means the largest Fortune 500 companies do not need to rely on engineers to do mundane repeatable tasks such as providing customer support. Rise of cloud computing is another cause of worry. An Amazon Web Services, which rents out computing power by the hour, saves a Citibank or ExxonMobil from spending more on buying servers. At the same time, most customers are pressing their technology vendors to offer solutions beyond just rolling out enterprise resource planning applications or testing software. In this age of digital, most clients want IT vendors to deploy analytics platforms or write intelligent applications swiftly, which can make sensors installed on goods, across industries, work (this means tapping into Internet of Things technology).

Before we come to the preparedness of Indian IT companies, it is important to mention that one theme ignored by most commentators who pen obituaries on the outsourcing sector is that Indian companies are led by smart people.

TCS’s chief executive officer Natarajan Chandrasekaran, Wipro’s boss Abidali Neemuchwala and Tech Mahindra Ltd’s Chander Prakash Gurnani have been witness to the changes embraced by the sector since the early 1990s. Infosys’s boss Vishal Sikka needs no introduction. These leaders understand the opportunities and recognize the challenges; they realize that the future of the outsourcing sector is now governed by the technology advancements made by companies such as Google, Amazon, Facebook and Uber.

So, they are steering their companies to strengthening their solution offerings in open source technologies and pushing hard to make their existing workforce re-skill or learn newer technology languages. The largest companies are investing in building automation or data analytics or AI platforms. At the same time, Infosys and Wipro are also tapping newer technologies brought by start-ups, by setting up corporate venture arms, as it helps them sell disruptive technologies to Fortune 1000 clients.

It is encouraging again to see newer approaches such as design thinking being introduced as this essentially changes the DNA of these firms. Finally, Indian companies are building teams to build applications around newer technologies such as blockchain and industrial Internet.

Yet, despite these pockets of change, a more pressing challenge which all firms confront are a set of internal problems. These problems need to be addressed first because that will decide which companies do not get obsolete.

First, Indian IT companies are very insular and lack a diversified senior leadership team. Many have Indian CEOs based out of Palo Alto or Texas. Yet, none have a talent pool from other countries in their senior leadership team. Mumbai-based TCS, with $16.5 billion in annual revenue at the end of March 2016, does not have a single non-Indian to head any of its large service-line offerings.

This brings us to a second related theme of these companies not having any tech visionaries or advisers on the boards. Why say, does a company like TCS or Infosys not have Elon Musk, founder of the electric carmaker Tesla, as an adviser or board member? Technology firms can only expect at-best operational efficiencies if they continue to have leaders who have worked in legacy work. Only by bringing leaders who work or advise new-age companies on their boards can home grown IT firms achieve their ambition of becoming a next-generation services firm.

It is important to underline one of the reasons behind the scorching pace of growth posted by Nadaq-listed Cognizant Technology Solutions Ltd in the past decade. Cognizant always had a more diversified senior leadership team, and had a board with people formerly with the largest consulting firms.

The third shortcoming is that home-grown technology companies struggle to have access to innovation labs of companies such as Amazon or Facebook or Airbnb. Unless Indian companies start to work with engineers of these companies at what is called the testing phase of technology, outsourcing firms will forever continue to face the present day existential crisis.

Finally, save for Wipro in the past year, and Infosys and Tech Mahindra partially, Indian companies are still shying away from making small acquisitions. India’s five largest technology companies together spent $1.5 billion in buyouts in calendar year 2016 (TCS did not make a single buyout). These companies should wake up to the fact that buyouts in the tech space are no longer just for revenue; rather, these buyouts help companies with technologies and skill sets. Look at Accenture Plc., which spent more than $600 million in buyouts only in the September-November period.

Certainly, the road ahead won’t be easy for the outsourcing sector. The sector, which is staring at a less than 10% growth in the current year, may struggle at a slower clip in fiscal 2018, on account of macroeconomic uncertainties. As more countries like France and Germany head for elections, clarion calls for protectionism may rise. IT firms may have to hire more local people in these countries, thereby putting further pressure on wage costs.

To conclude, it will be disappointing to see Indian companies squander this opportunity brought by technology advancements. There is reason to be optimistic despite evidence for despair.