​Indian IT sinks into existential crisis after Q2 2016 results

How quickly Indian IT players can transform their business by relying less on cheap labour and more on genuine innovation will determine whether they survive over the long haul.
Written by Rajiv Rao, Contributing Writer

This much is clear from the recent quarterly earnings announcements of the two largest Indian IT players: In five years, Indian IT outfits will either cease to exist, or will survive in some drastically altered state.

Last week, both Tata Consultancy Services and Infosys announced their earnings for the second quarter of this year, a disclosure that effectively proved to be a few more firmly struck nails in the coffin of Indian IT.

Infosys, which resurrected its fortunes somewhat after luring Vishal Sikka away from SAP, actually did pretty decently on the surface of it with an 8 percent year-on-year revenue uptick and 3.5 percent sequential revenue growth. It also beat analysts' estimates of net profit and operating margin for the quarter.

Yet, all of this relatively good work was undermined when the company reduced its full-year revenue guidance to 8-9 percent from 10.5-11.5 percent -- after having rejigged its numbers once in the previous quarter.

With TCS, the numbers were not so mixed. It was an unadulterated tale of woe when it registered a shocking 1 percent sequential growth -- much lower than the 2.5 percent analyst estimate -- and a year-on-year growth of 7 percent that was substantially lower than the 10.1 percent reported for the June quarter.

The fact that these figures are from India's bluest chip IT services company and a decades-long bell-weather for the industry suggests to many industry observers that the bells may indeed be tolling for Indian IT.

N Chandrasekaran, CEO and MD of TCS, said that "growing uncertainties in the environment is creating caution among customers and resulted in holdbacks in discretionary spending this quarter", but the fine print may be far more serious.

The inescapable reality for Indian IT, as I suggested many months ago, is that in this brave new world of digital, cloud, machine learning, and artificial intelligence, global companies view any IT solution as that which is going to be transformational to their overall business, and not just relegated to an "IT" silo.

This demand suggests a far greater need for innovation than that which Indian firms have provided so far and a radical shift away from chasing a "legacy systems" mindset that still pervades -- indeed revenue from these businesses that were once bread and butter are still a shocking 85 percent to 90 percent of total revenue today, according to industry insiders. This is why average revenue growth rate for the industry was consistently around 30 percent as recently as five years ago but has now nose-dived to 5 percent.

Business transformation is perhaps the toughest task to undertake when you are being disrupted at light speed, where exhaustive analysis of a decision needs to exist along with risky bets, gut feel, or a bold long-term vision. This is certainly what allowed Fuji Film to succeed where Kodak didn't. That is the unenviable path that Indian IT will have to now embark on.

Still, some things remain clear. The one glaring Achilles heel for the industry is its bloated workforce that ranges from 200,000 to 400,000 employees, both a human resource nightmare as well as an impediment to reorienting the mothership towards a new era.

Plus, even when it comes to working in new businesses like "digital", there is a huge productivity gap between Indian IT and its global peers. As a report from Mint newspaper states, the big three in Indian IT (TCS, Infosys, and Wipro) employed 1.5 times more workers than Accenture did in digital last year but the revenue being brought in was 40 percent less than the consulting outfit.

So it's a no-brainer that productivity has to improve but, as this writer suggests, there needs to be other more substantial and expedient changes necessary to survive. For one, these firms need to relocate to the US, where much of this innovation is happening, and hire more Americans rather than spinning its wheels in India while still keeping a workforce of low-end coders in India.

They also need to immediately deploy the large piles of cash that they are uselessly sitting on, on acquisitions that will get them to their goals faster. There are also suggestions that the companies need to be split up into various divisions -- one that retains a body-shop component that will service a huge Indian market in years to come, another that it focused on businesses of the future, and a third that is firmly grounded in consulting. All of these can be interlocked to take advantage of synergies.

Any other kind of thinking or hesitation would spell a catastrophic future for a sector that was once a poster-child for global Indian business.

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