IT services industry: We need to change the warning signs
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Bell Rock, also called Inchcape Rock, is situated 11 miles off the coast of North-Eastern Scotland. The Inchcape Rock, a 68-line ballad by Robert Southey, was written in the mid-1790s, and along with several other poems, was drilled into my long-term memory bank by the Jesuits in the mid-1970s. So effective were the kind Fathers’ methods that I can still recite snatches of the ballad were you to roust me late at night from my bed.
Southey told of the legend of a pirate named Sir Ralph the Rover, who in a fit of megalomania, cut off a floating buoy that carried a bell that warned mariners they were close to Bell Rock and might be shipwrecked. This contraption had been affixed to the Rock some centuries before by the Abbot of Aberbrothok, a town in Scotland that lies close to the Rock. The Inchcape Rock remains submerged for almost 20 hours each day and is only visible when the tide is at its lowest ebb. The buoy floated only when the Rock was submerged, which meant the bell affixed to it only rang when the rock was not visible and at its most dangerous. With characteristic poetic justice, by the end of the ballad, Southey has Sir Ralph run aground and die on Bell Rock.
Bell Rock now has a lighthouse standing on it that sends out a warning to mariners through its powerful bulbs and reflectors. The lighthouse itself was built not long after Southey’s ballad was published and given that it was built on a rock that is submerged most of the time, is a remarkable feat of structural engineering. Designed and built by the Scottish structural engineer Robert Stevenson, the lighthouse is considered one of the Seven Wonders of the Industrial Age, along with other better known structures such as the Hoover Dam and the Brooklyn Bridge. As we moved from medieval times into the Industrial Age, better technology was used on Bell Rock to accurately predict danger.
As I watched the announcements followed by the pronouncements this earnings season, it occurred to me that the lens through which we view the long-term performance of information technology (IT) services firms needs to change. The Industrial Age, which most IT services firms belong to, is now passé. Analysts and investors have so far rightly judged the performance of these firms by using Industrial Age metrics, such as growth in the number of employees, simply because these firms were “factories” whose sole line of work was increasing the number of people they could use to bill customers. In fact, there was talk just a couple of years ago that Tata Consultancy Services, the largest Indian heritage IT services firm, might even eclipse the Indian Railways as the world’s largest employer.
While many IT majors have been making hollow references for years about moving to “non-linear” models, where the growth in the number of employees is not directly linked to advances in revenue, their attachment to the cash generating parts of their now beleaguered business models was too great for them to change course ahead of dangerous waters. And analysts following the industry know this. So, it is not surprising that they go back again and again to the metrics they have always used, and employee growth is one of the most salient of these metrics.
For example, a recent story in Mint focused on how much employment has fallen at major IT companies, and how much more it is likely to fall during the rest of this year. Mint also pointed to stories that showed that other major companies are instead planning to increase hiring this year. Another story that made the news last week talked about how unionization is probably on the horizon, and specified that the National Democratic Labour Front as well as the Forum for IT Employees appear to be arming themselves to pick up the battle for labour rights on behalf of axed employees at IT services firms.
While journalists have a duty to report the facts as they see them, and to attempt to stay away from value judgments, this is not so with those who digest the news. Some ringside observers tend to get overwrought while looking at the fall in employment in the industry and are busy ringing the industry’s death knell, much like the devil did with the Inchcape Bell when Sir Ralph ran aground.
I suggest that we now start to look at such figures dispassionately, and realize that this sort of adjustment is natural in businesses that are changing. I would even go so far as to argue that the headcount drop is a positive indicator of change in an industry that dangerously delayed starting to move out of the “factory” age. The mechanization or automation of tasks has long been something that the manufacturing sector has dealt with, and continues to do with élan, even while many in the sector have labour forces that are unionized. Why then should it be any different for major IT firms? They are equal to the challenge. And we underestimate the inherent resilience, grit and practical nature of the youngsters who are now the backbone of the industry. They will accept change—and adapt well.
There is no doubt that some will win and others lose in the race to adjust business models, but nonetheless, the IT services industry is not in imminent danger of drowning. Demand for technology solutions is growing, according to most research firms. To quote Jim Newman, a former client of mine while he was CIO of a cutting-edge telecom company, “the good news is that the consulting demand from companies integrating technology silos and incorporating ‘Internet of Things’ sensor networks feels limitless”.
Why then are we still holding onto indicators meant for the Industrial Age when we have now moved to the Intelligent Age? We should be clearing our long-term memory banks.
Siddharth Pai is a world-renowned technology consultant who has personally led over $20 billion in complex, first-of-a-kind outsourcing transactions.