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Business News/ Opinion / India’s IT sector needs risk preference of a young person
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India’s IT sector needs risk preference of a young person

A human being approaching 65 or 70 is likely to be at a point where he or she is beginning to consider the interests of the next generation, and the risk preference becomes naturally subdued

If IT and BPO services revenues are going to be lost to automation and artificial intelligence, it is time for these firms to look for pastures anew in hardware, software products, and in risky acquisitions.Premium
If IT and BPO services revenues are going to be lost to automation and artificial intelligence, it is time for these firms to look for pastures anew in hardware, software products, and in risky acquisitions.

Mint carried two stories last week on the board and the leadership at Infosys Ltd. One was an interview with the company’s non-executive chairman, in which the gentleman in question said that there isn’t more than one power centre at the firm. The other was an article on the chief executive’s pay and how it is linked to the firm’s long-term performance.

In an earlier column on the changing nature of contracts at services firms, I had introduced the concept of agency costs and how the inefficiency of contracts between shareholding ‘owners’ and management was addressed in the last century by structuring pay packages for senior management that aligned their compensation to the company’s fortunes—either through the use of stock options which mimicked share prices at the firm, or through other variable pay methods that aligned compensation with performance. In that column, I had also pointed out that prevailing economic circumstances in the IT services industry have led to some firms reneging on employment contracts even before new employees have a chance to start work. I came to the conclusion that the changing nature of employee contracts might see services firms become simply platforms where buyers and sellers collaborate with one another.

I am often consulted by equity analysts who bring their institutional investor clientele to meetings wanting to know how the IT industry in India is going to respond to the rather tumultuous changes that now beset the industry. The more organized among the equity analysts explain their analyses using two vectors—one cyclical and the other seasonal. The first attempts to encompass a variety of factors including technological change, while the second addresses the short-term impact on marketplace demand— factors like the US presidential elections. These firms also spend time analysing macroeconomic factors such as the job growth in technology-oriented jobs worldwide in an attempt to provide greater insight to their clientele.

There are also in-depth analyses made by the professional managers at services firms. Their credibility with clients, their track record at other firms or at their own, their persona and ability to lead are all dissected, as well as their ability to wrest client work and top talent from each other.

There is, however, another factor at work that most people don’t fully recognize, one that I point out to equity analysts and their clientele every time I have the opportunity. It is so obvious that most of us just ignore it. It is simply this: look to the owner! Their age, family status, and past behaviour are in fact the best predictors of how these firms will react to tumultuous times for the sector.

Many Indian firms—and services firms are no exception—are promoter-led and driven. Promoters still hold or control the lion’s share of the stock—well north of 51% in some cases. At a firm where one individual or a small group holds the majority of the shares, it is only natural that their level of control over the board and professionally-hired management is immense. Even outside India, I have been associated with firms where the promoter or chairman owns just about 10%, but has virtual control of the board and of contracts with senior management at the firm.

Let me make it clear that I’m not calling into question the integrity of any of these individuals. I have met and interacted with many of them over the years and have always come away deeply impressed by how upright and transparent they are. One of these gentlemen, in particular, is someone who makes me feel like I need to stand up when he enters the room—so great is his personal humility and integrity.

All I’m saying is that even these upright individuals are only human. As they age, they worry about the same things as us when it comes to themselves and their families. Questions like “how do I maintain and preserve my wealth?" and “how do I pass it on to the next generation?" must surely enter their minds when they make strategic decisions at the companies they own. We are at an inflection point in the services industry where high-risk “bet the company" strategies are the need of the hour. If IT and BPO services revenues are going to be lost to automation and artificial intelligence, it is time for these firms to look for pastures anew in hardware, software products, and in risky acquisitions.

These moves call for the risk preference of a young person. At the age of 30 or 35, I might be more tempted by high-risk, high-reward type of opportunities, and will place my bets in high-risk ventures, since I know somewhere deep inside that I will be able to compensate later in life for any of these ventures if they turn out to be the wrong fork in the road. But a human being approaching 65 or 70 is likely to be at a point where he or she is beginning to consider the interests of the next generation, and the risk preference becomes naturally subdued. Just look at the investment portfolio of any 70-year-old person; it is much more likely to have more cash and fixed deposits than investments in risky shares or in start-up businesses. I know mine would.

No wonder then that most of our services firms are sitting on large hoards of cash and seem unwilling to deploy them.

Siddharth Pai is a world-renowned technology consultant who has personally led over $20 billion in complex, first-of-a-kind outsourcing transactions.

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Published: 11 Oct 2016, 12:36 AM IST
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