It is a kind of ghastly irony that Indian IT firms such as Wipro, Infosys, and TCS are sitting on vast reserves of cold, hard cash while their fortunes abroad are rapidly dwindling. But first, some background.
Trump's executive order may not be the dagger in the heart of the H-1B that some were hoping for, but truth be told, action against the H-1B isn't the real killer. In fact, far from it.
It has now become a widely accepted reality that increased automation is destined to take away 9 percent of jobs from the tech sector in general both in India and in the US. The rest will simply be "off-shored" -- in other words migrated to places like India and China where a virtualization of work will make hiring in the US for these positions redundant and hiring someone for half the price overseas a no-brainer.
Therefore, the real challenge here for Indian IT is not how to save basis points on their operating margins brought about by increasing costs due to onsite hiring -- already Indian IT majors have started picking up American techies by the droves in the US -- but to do something that is crucial to their ability to win new projects, extend existing ones, and continue growing in this digital world. And that is to quickly scarf up as many companies out there as possible who can help compete in the future, never mind boost their toplines.
If you were not familiar with the health of Indian IT companies, you would point out that this requires a fair amount of cash to sprinkle around on many bets, some of which may work and some of which may not. The other avenue would be a stock sale to raise these finances.
Well, the fact is that cash is exactly what Indian IT firms have -- massive piles of it that they've been sitting on for the last six years or so that they have done absolutely zilch with.
An analysis done last year had Infosys topping the list with 33,200 crore rupees (roughly $5.1 billion) in its kitty followed by TCS with 31,900 crore rupees (roughly $4.9 billion), while Wipro and HCL Tech had 19,200 crore rupees ($3 billion) and 11,900 crore rupees ($1.8 billion) respectively.
Before we get into what these companies did, or more importantly did not do with that cash hoard, witness the experiences of global IT player Accenture.
The company shelled out $2.5 billion for 38 acquisitions in the last three years -- a mind-boggling 70 percent of that in 2016 alone, and spanning all areas digital. This has allowed its business in the fiercely-contested digital space to grow approximately 35 percent to more than $7 billion last year.
It is not that Indian IT isn't thinking this way, but it is doing so without a visible sense of urgency that other global companies seem to be demonstrating. Infosys made three acquisitions of some note in the past -- Noah Consulting, Kallidus, and Panaya for a total of $390 million -- but hasn't done anything since 2015. Wipro made a crucial and savvy purchase of Appirio last year, but nothing else before or since of note.
TCS -- and this is a shocker for a firm whose 7.1 percent growth was the slowest since 2009-10 and half of what it registered in the previous year -- has not bought a single firm. Yes, the company has had bad luck in its previous buys, especially with Diligenta, a UK BPO in the life insurance space, but these are only to be expected and should be taken in stride.
The only serious target it chased in the last few years was Perot Systems, owned by Dell, which it should consider itself lucky to have avoided buying considering it is, in the words of an analyst, "yesterday's technology" and not exactly situated in the cutting-edge world of a digital tomorrow.
So, instead, what have the "big three" Indian IT firms decided to do in these troubled times? Why, simply issue share buyback plans of course, which is only guaranteed to keep investors happy in the short term while squandering attempts to get ahead via savvy acquisitions.
Tata Consultancy Services (TCS), the country's highest-valued company on the stock market, recently announced a buyback of shares worth 16,000 crore rupees ($2.4 billion), the biggest ever in the Indian capital market. (Its cash hoard at the time had gone up to 43,100 crore rupees ($6.4 billion), nearly a staggering 9 percent of its market cap, according to the Economic Times).
Of course, this was apparently largely precipitated by the announcement of Cognizant's $3.4 billion buyback over the next two years as a payout to shareholders after being pressured to do so by activist investor Elliott Management Corp.
Predictably, Infosys followed suit with its own buyback announcement of 13,000 crore rupees, or $2 billion, from its cash reserves. This is hardly the fault of shareholders who are no doubt tired of seeing a growing pile of inert cash that is simply doing nothing for either the firm's fortunes or shareholders. And management at these firms, feeling the growing concern of shrinking revenue growth, feels like it needs to placate its shareholders in some fashion before the axe falls definitively on them.
There's much more to building one's future than just going on an acquisition spree. This new era that has dawned so quickly for IT firms has also provided a once-in-a-lifetime opportunity for them to go where no IT firm has dared go before -- into the digital design space.
Accenture's purchase of Fjord and Karmarama, one of the UK's biggest independent design agencies, has allowed it to now offer an entire end-to-end suite of capabilities that range from BPO, technology, analytics, consulting, and design, which can be a hard-to-resist proposition for a client involved in a transformative project. Its efforts here were significant enough to have industry bible Ad Age rank the firm as the world's largest and fastest-growing digital agency network in its 2016 report.
Similarly, Paris-based Capgemini bought Fahrenheit 212 recently, a company that brought with it valuable clients such as Coca-Cola, Marriott, and Citi. These days, IT clients are looking for complete solutions rather than hiring them out piecemeal, and Indian IT will quickly find themselves at a disadvantage if they don't make plays like this. To its credit, Cognizant did last year buy Toronto-based Idea Couture, a digital innovation and design firm, but this has proven the exception rather than the rule in the IT space in India.
Indian IT has instead focused on building out and strengthening their in-house offerings. TCS has worked on developing its neural automation platform Igneo, Infosys has its AI platform called Mana, and Wipro has its AI platform Holmes, all of which will be crucial in helping them negotiate the difficult road of winning new business and keeping old ones. However, one thing is for sure. These efforts won't be enough by a long shot.
For these players to truly become competitive with the likes of IBM and Accenture or even a consulting firm like Deloitte that is also becoming a serious player in the digital and design realm through acquisitions, Indian IT will have to buy their way out of trouble and they will have to do it very quickly.