To say 2017 was a tumultuous year for India’s $154-billion information technology (IT) outsourcing industry will be an understatement.
It was specially tumultuous for Infosys Ltd, India’s second largest software services company, which saw the departure in the August of Vishal Sikka, its first non-founder chief executive officer (CEO), after three years in the job.
Sikka left after a protracted battle between the board and some founders over corporate governance issues, paving the way for the return of co-founder Nandan Nilekani as non-executive chairman.
Job layoffs rattled the sector as India’s five largest companies, along with Cognizant Technology Solutions Corp., which together employ nearly one-third of the total information technology (IT) industry workforce of 3.9 million, saw a net reduction of 4,157 people in their headcount in April-September from the year-ago period.
These six companies had added 59,940 people in the first half of 2016-17.
US President Donald Trump’s protectionist measures made Indian companies hire more locals in their biggest market, dashing the hopes of young Indian engineers of getting their passports stamped with an American visa.
Finally, IT companies continued to struggle for growth, primarily because of their inability to get more business from digital, the fuzzy word that clubs revenue from areas classified as social, mobile, analytics, cloud computing and Internet of Things.
Digital accounts for less than one-fourth of an Indian IT firm’s revenue, considerably less than Accenture Plc., which claimed that 55% of business in the November quarter came from selling these new technology solutions.
Understandably, for the first time, Accenture will outpace Tata Consultancy Services Ltd, Infosys, Wipro Ltd and Nasdaq-listed Cognizant in revenue growth in 2017-18.
Five IT firms returned Rs43,770 crore to shareholders through share buybacks, cheering shareholders at a few companies.
Wipro’s stock gained 32.2% in calendar year 2017, outpacing the BSE IT index’s 10.8% rise.
One bright spot was the smooth change of guard at TCS.
Rajesh Gopinathan, who took over as CEO in February after his predecessor Natarajan Chandrasekaran was appointed chairman of Tata Sons Ltd, the group holding company, has until now steered the company ably.
TCS has retained all senior executives and even business continued uninterrupted, reflecting in the company winning a $2.25 billion outsourcing contract over nine years, the largest ever bagged by an Indian company, from television ratings measurement company Nielsen.
So what does 2018 holds for the industry?
Most companies, save for Infosys, are expected to grow faster in 2018-19 than in the current fiscal year and in 2016-17, according to multiple executives across the largest IT companies.
Make no mistake: structural challenges remain as the rise of cloud computing, along with a push towards automation and artificial intelligence platforms, means companies now earn less for the same scope of work done in the past.
Still, strong economic growth in the US has made decision makers at the largest Fortune 1000 companies spend more on technology, which will translate into more business for outsourcing companies.
Even so, as more commoditized outsourcing projects continue to be awarded at lower prices, profitability of these companies will remain under stress.
One important cost lever available to companies is to keep a tab on employee costs, which account for over half of their total operating expenses.
For this reason, more layoffs should be expected in FY19.
Infosys, under CEO Salil Parekh, who took over on 2 January, will be in the spotlight. Infosys, after growing faster than TCS for two straight years, will end the current fiscal year behind its larger Mumbai-based rival.
In the year ahead, Infosys will surely expand its board after three members, including chairman R. Seshasayee, resigned in August.
Years of underperformance at Wipro means it runs the risk of losing the position of the country’s third largest IT company to HCL Technologies Ltd, which has grown at a faster clip in the recent past.
Agreed, Wipro boss Abidali Neemuchwala has committed to steering the company back to industry-matching growth numbers by March 2018. For now, Wipro, which does not provide an annual revenue forecast, is expected to grow at-best 5% in the current fiscal year.
HCL Technologies expects to end with 12.2% growth. This translates to a $268 million difference between the two companies when they start the financial year in April—a gap that will be closed if HCL improves upon Wipro’s growth by 3.42% in FY19. Not impossible, for sure.
Finally, both by design and accident, six of the 10 largest IT companies, including TCS, Infosys, Wipro, HCL Technologies, Mindtree Ltd and Zensar Ltd, have appointed CEOs during the past 24 months (after January 2016). Sanjay Jalona took over as CEO of Larsen and Toubro Infotech Ltd, only 30 months back, in August 2015. This is the only time when so many companies in the industry have relatively new leaders at the helm around the same time. As decisions made by a CEO take 18-24 to come to fruition, 2018 marks a year when the performance of each of these companies (and their leaders) will be under scrutiny.