BackIndian IT at inflection point
Bosses at IT firms are shaking up the way the companies have traditionally operated amid challenges of cloud computing and new-age digital technologies, coupled with mounting pressure from clients for greater efficiencies and lower costs
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Bengaluru: For T.K. Kurien, the 57-year-old boss of Wipro Ltd, running India’s third largest software services exporter is becoming more challenging with every passing day.
“There is this huge change…the way clients are buying technology, the impact it is having on the way we have traditionally worked," Kurien said in a recent interview.
Kurien, who is based out of Bengaluru, spent just 13 of the 90 days in the quarter ended September in India—the most he has spent travelling in a quarter since taking over as Wipro’s chief executive officer (CEO) in February 2011. He spent most of the time in meetings with executives at Wipro’s 1,000-odd clients, trying to understand their technology needs and how the company could help them become more efficient.
Vishal Sikka, boss of Infosys Ltd, Wipro’s cross-city rival in Bengaluru, is more eloquent in his description of the way technology is impacting India’s $146 billion software services industry.
“I believe that the traditional model of IT (information technology) services is dying," Sikka has said repeatedly in the 15 months since taking over in August 2014 as the first non-founder CEO of Infosys, the 34-year-old firm set up by N.R. Narayana Murthy and six friends in 1981.
“This is the biggest phase of technology disruption I am seeing," said Natarajan Chandrasekaran, CEO of Mumbai-based Tata Consultancy Services Ltd (TCS).
The change and disruption Kurien, Sikka and Chandrasekaran—who helm companies that together employ more than 650,000 engineers and posted over $30 billion in revenue for the year ended March 2015—are referring to is the way commoditized IT deals are changing.
Historically, engineers at Indian IT vendors traditionally managed the computer infrastructure of clients and wrote codes for some of the largest banks, including Citigroup Inc. and retailers, such as Wal-Mart Stores Inc.
With the advent of cloud computing—in which clients buy computing power and services over the Internet from a third party—almost all IT vendors have rapidly built up their capabilities to offer these shared services or tied up with cloud service providers such as Amazon.com Inc. and Microsoft Corp.
Indian IT vendors have also started deploying small teams to evaluate the potential of some of the disruptive technologies—TCS and Infosys, for example, are looking to build applications around blockchain technology, which is essentially an electronic system currently being used by crypto currencies, including Bitcoin and Ripple, and helps in authenticating transactions.
These investments come at a time when banks and other financial firms—their customers—are looking at the use of disruptive technology, including blockchain technology, to cut settlement times and lower costs tied to international payments.
At the same time, IT vendors are being forced to bring in elements of disruptive technology in their service offerings, promising to offer greater efficiencies for their clients, and introducing new approaches, including user-centric approach of Design Thinking in their engagements with clients.
IT vendors themselves are cutting their dependence on engineers and increasing their focus on non-linear growth—which means growth in revenue is not linked to growth in the number of employees—by automating a lot of traditional tasks. Finally, most software services exporters realize that not all technology innovations can come from within the organization and they need to partner with start-ups, thereby enabling them to take the technologies of some of these start-ups to their clients.
“We are seeing a big shift in adopting the culture of innovation from Silicon Valley and the rest of the world," said Ray Wang, founder of Constellation Research, a technology research and advisory firm. “There is a big push to remake the IT services firm as a strategic partner on co-innovation and co-creation."
“It is becoming a challenge," laughs Kurien. “How do you balance it all and, at the same time, keep recording higher growth rates?"
Growth in the short-term is not just a challenge for Wipro but even for firms like TCS. Wipro hardly recorded any growth in the first quarter April-June period of this fiscal year and TCS, too, grew at just 3.5% in US dollar terms in the first quarter and 3% in the second quarter period.
This has worried a few analysts, who believe TCS may actually struggle to grow at over 10% in US dollar terms and less than 12-14% in constant currency terms, as projected by software services industry lobby group Nasscom, during the fiscal year ending March 2016.
“We have to live and re-calibrate to what you call is the ‘new normal’ growth rates—growing at 13-15% annually. I don’t think any Indian IT firm is even factoring a 20% annual growth in the next two-three years," said a senior executive at TCS, who declined to be named as he is not authorized to speak with the media. “But, certainly, as more digital contracts come up, and new investments are being made (by all IT firms), one can again look to clock growth of 15%-plus in three-four years’ time".
As the Indian IT industry approaches an inflection point, the bosses at these companies are shaking up the way the firms have traditionally operated and make each of their firms future-ready—and, thereby, aim to post higher growth rates in the future—by investing in new-age technologies.
“Infosys, Wipro and others were all behind about three years ago. They suddenly got religion and are working furiously to catch up (with their global peers). They (Indian IT firms) still have to keep the old business going, but the shift to the front end of design and strategy is happening and the Indian IT services firms are now seen as more strategic than where they were three years ago," said Wang of Constellation Research.
One of the ways the three poster boys of the Indian IT industry are making themselves future-ready is by re-skilling their existing workforce to learn competencies in these new-age technologies. Infosys has already made 54,000 of its existing workforce attend day-long classes in “design thinking", the user-centric approach which has helped the company win more than $100 million deals and helped its engineer write better codes.
Wipro is in the midst of re-educating its workforce on new languages, while TCS aims to train more than 100,000 of its engineers in this fiscal year in cloud computing, machine learning and other areas of digital technologies.
And again, the early results are encouraging. Since Sikka took over in August last year, Infosys is a more confident, 180,000-strong company now than it has been for some time. Rivals are seeing a more aggressive Infosys when IT vendors are making pitches to clients, even if the company is winning new business at the expense of margins.
It was not a surprise when Infosys’s sequential growth outpaced TCS for the second successive quarter in the July-September period; the last time Infosys’s revenue growth was higher than TCS for the first two quarters in a row was in the April-June and July-September quarters of 2008.
This renewed optimism is explained by a series of steps taken by Sikka. Sikka first won the trust of his employees and, eventually, brought down attrition rates. It was no easy task. Infosys was haemorrhaging talent, with one in five employees leaving the company between April and June last year. Now, Infosys has the lowest attrition rate among the Big Three IT firms.
Sikka then put his trusted lieutenants in important roles, went for a management and organizational restructuring earlier this year, and started to marshal his team to win the confidence of clients. It helped that in the April-June period, it recorded 4.5% sequential revenue growth in US dollar terms, and 6% in the second quarter.
Agreed, Infosys has warned of a softer third and fourth quarters. Still, most analysts believe that the investments being made by Sikka should help transform Infosys into a $20 billion next-generation IT services firm by 2020.
Not for nothing, both Sikka and Kurien believe that Infosys and Wipro should see the “first meaningful impact" of automation on the company’s results by the start of fiscal year 2017. This truly would be a big step in Indian IT’s embrace of non-linear growth.
“The catch-up mode India-centric vendors continue to operate in places greater pressure on their abilities to balance innovation and sales growth," said Bozhidar Hristov, an analyst at US-based technology research firm TBRI. “Recent investments in ‘new’ technologies illustrate their aspirations to depart from their status of low-cost outsourcers."
At the $15.5 billion TCS, the single biggest challenge ahead of Chandrasekaran is to find ways to generate close to $2.5 billion in new business this year, if the country’s largest software exporter expects to outpace the average growth of 12-14% Nasscom has forecast for the IT services industry in FY16.
It is an onerous task as companies across the world are pressing their IT vendors for cost savings and there is intense pricing pressure for deals that are coming for re-bids.
“TCS clearly has reached a point where generating more business from some of its largest clients is nearing saturation," said the head of research at a domestic brokerage who spoke on condition of anonymity. “Some of its largest clients bring in more than $700 million in annual revenues. How do you continue growing with such large accounts?"
TCS itself is trying different approaches to keep up with higher growth rates. The Mumbai-based firm introduced its artificial intelligence (AI) platform, Ignio, which identifies, diagnoses and learns from issues in the IT infrastructure and automates basic technology work, thereby doing away with the need for engineers.
TCS set up a new business unit called Digitate dedicated to its recently launched Ignio platform and other next-generation products, and believes it has the potential to become a multi-billion-dollar business. The move makes TCS the second IT firm globally to carve out a separate unit focused on products using disruptive technologies; International Business Machines Corp. (IBM) set up IBM Watson, an AI supercomputer system, last year.
“TBRI expects TCS’s Ignio AI platform to impact revenue growth positively in the next 12 months as the platform will play a core role in process automation within the company’s infrastructure services unit. Ignio had a sixfold increase in paid pilot client projects, from three to 18, in the past six months," said Amy McLaughlin, another analyst at US-based research firm TBRI.
Chandrasekaran for now declined to share by when Digitate can become a billion-dollar business for TCS. However, executives at TCS believe that Digitate should become a $1 billion annual business by 2019-20.
Infosys and Wipro, in addition to investing in these new-age technologies, are also giving a fillip to its client mining or ability to generate more business from their existing clients, through a clutch of measures. This has started showing early benefits. Infosys managed to increase business from its top 10 clients in April-June by 5.7% from the January-March period; during the second quarter, too, the share of business from its top 10 clients was the same as in the first quarter.
Although Wipro’s two largest clients outsourced less work to the IT vendor, the company managed to increase business from its next eight largest clients by 2.8% during the July-September period.
Two of the biggest challenges ahead of Indian IT firms remain in areas where all of them are renewing their focus—re-skilling the existing workforce and how many IT firms are able to monetize their new products and platform offerings.
“Talent management, including both training and re-skilling existing employees, will remain a key investment initiative as the development and delivery of new technologies require different skillsets compared with legacy outsourcing services," said McLaughlin of TBRI.
As more outsourcing deals have elements of digital technologies, Indian IT vendors need to evolve from back-end outsourcing firms to “thought leaders", says Wang of Constellation Research. “They have to change how they engage with customers by being proactive in solution design vs reactive, and they can do this by hiring more digital artisans."
According to Thomas Reuner, managing director of IT outsourcing research at HfS Research, supporting clients in their digital transformation requires broad investments in skills and capabilities.
“Indian providers remain selective, if not coy, following the likes of Accenture (Plc) and IBM in their investment strategies," said Reuner. “The likes of IBM and Accenture have broader and deeper industrialized vertical assets while Indian providers are more selective in terms of verticals and assets. Hence, there are no simple answers as to the winning strategies. Much will come down to balancing transformational capabilities and commoditized delivery of services. Crucial will be devising new governance and management approaches to help clients in their digital transformation."
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