The world economy is in an uncertain space with Brexit ripples still to reach their crescendo. This combined with the complexity of automation and scare around immigration is expected to affect Indian IT industry adversely.
The first-quarter earnings that have come out until now paint a dismal picture of growth. As pointed out in this article a fundamental shift has taken place and it is becoming clearer now. With the changes in the technological space, disruption in the BFSI sector, and advent of automation and cloud-based services, the IT services business is caught in a perfect storm.
These changes have not all happened together, they have been developing over the last four years. IT services for all their vision did not prepare for it. To prepare for it meant disrupting their business and saying no to revenues.
The challenge of the IT industry is that it is like a 30-car freight train going at 90 mph. How do you drop half the cars and change tracks on this running behemoth.
Board of Infosys believed that Vishal Sikka as an outsider with relative little emotional connect to the past would be able to do it. Unfortunately it does not seem to be so. While Infosys initially seems to have recovered it is not because it has changed its business model.
It continues to do more of the same thing. The sales improved briefly and margins perked up with efficiencies. But there is no fundamental change in the business model.
Sikka is blunt enough to admit execution failure in the first quarter. In his letter to the employees he says, â€œI am disappointed. Disappointed that our revenue performance was not what we could have delivered, but even more so, that this overshadowed the many strong strides we made on executing our strategy.â€
Sikka also announced immediate changes in the team as the stock slipped 8 percent on the day of the results announcement. He claims that 20 percent of the growth came from the new strategy of design thinking, Mana etc. That means that a percentage of growth is coming for new initiatives the existing business model remains where it is. Which can also means that Sikka may now go for acquisition-based growth.
While the team at Infosys was shuffled immediately after the results in a very American style, Tata Consultancy Services (TCS) did no such thing as TCS beat revenue and profit estimates for the June quarter. Operating margins, however, shrank to 25%. While analysts are focusing on the margins the real question is still the business model.
The business model cannot be changed by having the same people running the same verticals. TCS the single bright spot in the Tata group of companies, does not even believe in changing or adding to the leadership. Unlike Infosys there has been no change in the top leadership for decades all the top guys started their careers with TCS. Asking a team that built TCS to dismantle and rebuild it for the future is tough. Last year, TCS decided to revamp and wanted to fire staff but the reaction was so venal that the leadership backed off.
The only company that anticipated the change but also reacted well to it was Cognizant. CEO Francisco Dâ€™ Souza moved out from the operation to craft the firm’s offering to social, mobile and e-commerce.
Companies such as HCL Technologies, Mind tree , Wipro, are even worse off. HCL Tech may see a change as Anant Gupta has not really been able to pull it together. There is also confusion in the top ranks as to who will take over the reins and whether promoter Shiv Nadar is indeed looking to exit. The talk of Nadar selling his stake does the round almost every six months. Uncertainty of this nature combined with business slowdown is not the best thing for a company.
Wipro has been struggling for a long time, and trying to retain its performers is forced to offer higher incentives than they deserve. A higher salary bill has now starting cutting at its margins. In a way to keep the current business running, the firm is expending more when it should be looking at changing with the times. Maybe it is changing internally, as its CEO keeps reiterating to the media. Maybe the worst performers are the ones who will come out of trough better.
Whatever be the outcome there is pain on the way for both current and potential employees of IT companies. As a job engine the sector is one of the largest in the country and every year hires lakhs of fresh graduates. Two things will happen – the hiring will slowdown and secondly it will change tracks.
Old skills may not be as useful in the new business model. IT companies hire engineers, software engineers first, but also other engineering graduates. IT companies have also hired science graduates in droves. Coding as a skill is going down with automation for code generation becoming the norm. There are enough packaged software in the market that can generate code now.
What is more important is â€˜training the codeâ€™, thinking architecture, defining the problem in better algorithms etc. This needs a new set of skills. Middle management which I call as email managers in these companies is most at risk.
As all they do is send emails out they are an inefficient communication layer and most likely to lose jobs as automation takes hold. New jobs will be created in this disruption but they will need new skills. But the big question is does Indian IT has the wherewithal to reinvent itself ?