As in nature, it is neither the biggest nor the strongest that wins but the ones most adaptable to change
The earnings releases of Infosys Ltd and Tata Consultancy Services Ltd last week have resulted in a raging debate about the future of India’s IT services companies. One commentator went so far as to proclaim an obituary for the industry. An IT industry veteran contradicted him by stating that 7-8% growth in a $100 billion business is nothing to be sneered at; fundamentally, all is fairly well. The growing consensus is that the crowning economic achievement of India is about to be disrupted because of a failure to innovate. True?
The term ‘disruption’, along with ‘platform’ and ‘Uber of x’, may be among the most overused and abused. Disruption refers to an innovation that drives a business model shift and changes the established game in the industry. The iPhone was a genuinely disruptive innovation; it changed the basis of competition from competition among device manufacturers to competition among ecosystems and created new ways of making money. In a very short period, the old leaders—Nokia, Blackberry and WindowsPhone—were all dead.
In contrast, what is happening in IT services appears more evolutionary than revolutionary. The big issue is accelerating commoditization of old service lines like application development and maintenance and infrastructure management resulting in fierce price-based competition. It’s not that IT spends are evaporating; companies are spending differently—on things like digital transformation, Internet of Things, analytics, security—and in smaller tranches. The challenge for many of the established companies is that they have failed to build new capabilities that allow them to participate in the new spends.
None of this comes as a surprise; the trends have been evident for years and will continue to accelerate. The strategic response is also quite straightforward. Automate so that productivity grows faster than pricing declines and cost increases. Build capabilities in new growth areas. Help clients innovate. No technology company can survive for long without reinventing itself and India’s IT services companies have been fairly adept in the past at navigating to new growth areas such as SAP implementation, business process outsourcing, testing and infrastructure management. They need to do the same again. The difference this time is just two. Many firms are late to the party, so they are running out of time; speed is critical. And they are now much larger, so the revenue and margin declines in the old business are hard to compensate for with growth in the new services.
The core and really worrying issue is that the old behemoths are trapped into a quarterly treadmill of maintaining growth and margins in the established service lines. As a result, investments in and the focus on building new capabilities are lagging exactly when they need to accelerate the transition. It is useful to contrast this with Microsoft’s response to industry changes. Having missed the mobile bus, Microsoft is pivoting to services that run on all devices, especially Android and iOS. Although Windows revenues continue to decline, Microsoft has invested very heavily in becoming a leader in the cloud and is now closing in on Amazon Web Services. It is bulking up its capabilities in important areas like AI through acquisitions and has just spent $25 billion on acquiring LinkedIn. Not all of these bets will work, but it is hard to fault the company for failure to make big moves. The growth in cloud services are now more than offsetting the decline of Windows, propelling Microsoft’s market cap to a record high.
Now, contrast this with the anaemic moves of most Indian services companies, and that points to the core of the issue.
IBM offers another good example. In 2010, Sam Palmisano committed the company to Roadmap 2015, a mission to hit $20 earnings per share by 2015, locking IBM into a financially driven treadmill at exactly the time the industry was transitioning to cloud, big data and AI. As a result, the company has had 18 quarters of decline. Fortunately, Roadmap 2015 has been consigned to the dustbin, IBM is investing massively in new platforms and services in a race against time; this quarter, the new services have very nearly offset the decline in the traditional business.
So, what is the future for Indian IT? Recently, Bill Gates said that computing is still in its infancy; the biggest advances still lie ahead of us. Machines will close the gap with humans in their reasoning ability and the ability to interact with us in more natural and intuitive ways. With every device and every human being connected to the Internet, the possibilities and opportunities are mind-boggling.
As in nature, it is neither the biggest nor the strongest that wins but the ones most adaptable to change. Success requires the correct diagnosis. What the industry is facing is not disruption but a crisis stemming from a self-inflicted inability to adapt. Success now requires the courage and tenacity to shift focus, resources and most of all intellect away from legacy businesses towards the brightest opportunities. What will make the difference at the firm level is nothing more than the quality of leadership.
Ravi Venkatesan is the chairman of Bank of Baroda. The views expressed here are personal.