Sheth, who is also an independent director on the board of Wipro Ltd, says top Indian information technology (IT) firms need to adapt to shifts in the outsourcing landscape to ensure relevance and survival, given that clients such as General Electric Co. are also increasingly becoming competitors with their investments in the area of industrial Internet. He declined to offer specific comments on Wipro.
In an interview, Sheth spoke about the changing landscape of the Indian IT industry, the challenges and opportunities that lie ahead for the industry, outsider chief executives and what top companies like Tata Consultancy Services Ltd and Infosys need to do to avoid disruption from tech-savvy clients. Edited excerpts:
As someone who observes the industry, what do you think is happening with Indian IT right now?
I believe there are two challenges right now. One, the rising salaries. The escalation in wages is going to create a huge pressure on margins. My view is that the industry has to automate—meaning, making employees more efficient and reducing redundancy. It is inevitable. As wages rise, you have to add more value to the work that workers do. Routine work can be taken over by the Internet and web technologies.
The other interesting challenge is that Indian IT companies must learn to bid for very large contracts. At one time, we thought that a $10 million contract is wonderful, then we moved up to $100 million aspiration. Today, most big Indian IT services companies are thinking whether they can bid for contracts that are $1 billion and above. That is the new benchmark.
So what’s next for the Indian IT industry?
Indian IT industry needs to segment itself. Right now, all the five majors compete with each other in all the verticals. More and more Indian IT companies will start to specialize—by saying I cannot manage all of the things, so I need to focus on the industry where I will be the dominant player. That means they will become more domain-centric. My theory—the rule of three—says that in each industry, three companies will dominate.
Big companies that are US- and Europe-based will begin to exit low-end business because it is not profitable for them. To me, the Indian IT industry has two ways to go. One, go back to the basic infrastructure and that’s the business the big boys don’t want to do anymore. The other one is to get into the newer age that is mostly cloud computing, mobility and that’s where they need to go.
Does the industry face the threat of becoming redundant with non-tech companies getting into tech, and clients becoming competitors?
Indian IT industry comes from the IT perspective which is getting commoditized and what is needed is domain expertise. The General Electric concept about industrial Internet is a very big concept and a major growth platform where the Indian IT companies may or may not be able to migrate. They don’t have the competency which is a domain expertise as you need to understand the operational nitty-gritty of that industry. So that’s really the big issue.
There is a trend also that just as there was massive outsourcing, there may be insourcing back again. In that case, clients may become competitors in some cases. The higher valued services, specially in the BPO (business process outsourcing) space such as accounting, legal services and medical services, will be all done by specialists. So the EYs and KPMGs of the world are themselves capturing that market, not IT companies—they have large manpower, which is domain-centric and they can do the IT. That is one of the biggest dangers for the IT industry.
Do you think Indian IT companies have become too big and too complacent to take bold risks?
I don’t think too big is an issue here. They are all relatively dwarfs compared with, say, IBM or Accenture. I think we are measuring the industry by headcount. We need to measure them by revenue size. Our only company that has crossed $10 billion mark is TCS. My view is that we are still not as big as we think.
I do believe that to become bigger—because scale does matter in this business, to get efficiency, productivity, labour mobility—the industry needs to consolidate. And here, I don’t think foreign acquisition is likely. It is more likely that Indian companies will merge with each other and they must do so.
Is there a lack of innovative talent at the leadership level in top Indian IT companies?
The key point is that this is no longer a start-up industry. It’s had an illustrious spectacular growth. The world admires India grew so well in 25-30 years. We have done very well; but like all successful industries, you run into some bad habits.
First is denial of new realities. Second, arrogance. Indian industries thought because of easy victories in the past...it’s like low-hanging fruits of the past, now the fruits will be much higher and you will have to learn how to climb to reach those fruits. Third, complacency. Indian IT industry has become relatively comfortable with what they do.
The Indian IT industry would need a tougher, imaginative leadership that is much more into the next generation of thinking as opposed to legacy thinking because getting to the next level of business will be a lot harder despite the market growth.
So as Infosys took a relatively bold bet with an outsider like Vishal Sikka, do we need more such leaders?
I am not at all fond of outsiders coming in. Getting outsiders helps but, most often, in new businesses only. My view is that there may be insiders who may not be the immediate successors.
For example, GE did that with Jack Welch; he was a junior person. We did it at Whirlpool, where I was the adviser, with David Whitwam, a relatively younger person who was picked up from inside.
In many other industries, it has been an outside board member who has been given the responsibility to be the CEO because board members are outsider-insiders and they are very important because you need the transition.
True outsiders have no idea about the culture and what is good value. If they are smart, then they will first understand and listen to people rather than impose their views.