Opinion
Indian IT service providers won’t have a breezy 2024
Summary
- They should ponder if they have adapted sufficiently to a fast-shifting technology landscape. The success of Accenture's Song unit has lessons for them.
As we enter earnings season, the street’s expectations from Indian information technology (IT) services firms such as Cognizant, HCL, Infosys, Tech-Mahindra, TCS and Wipro are muted. Secular growth is on the wane and the companies have been talking about low visibility on top-line growth. Their share prices are off their peaks by between 10% and almost 40% as I write this. These firms spent much of the pandemic pushing up their labour costs by poaching each other’s mid-level staff, which led to a hiring bubble that has burst. Now, they are squabbling over senior employees moving from one to another. Rumour has it that “cease and desist" letters have been sent out and some of those who jumped ship have also received such missives.
A few weeks ago, I wrote about how Indian IT firms have stuck with their ‘paisa vasool’ (value for money) model by trying to offer services cheaper than their foreign competition, and that this model is in danger of being upended by IT firms such as Accenture, which have clearly been more adroit in responding to recent changes, starting with the ‘digital’ wave of SMAC (Social, Mobile, Analytics and Cloud). Accenture’s Song business unit, which by itself is as large as Infosys with revenues of $18 billion (bit.ly/48N5J39), should give Indian firms something to think about. Song’s success is remarkable because it is a ‘marketing creative’ business bolted together by over 40 acquisitions to offer the tech support needed for product design, creative work, media and marketing strategies, and channel, content and campaign orchestration. Most of Song’s clients are marketing or business executives, not IT support organizations or units, serving which is the focus of Indian IT players, given their strengths. So the latter are left undercutting each other for work of lower strategic purpose and value.
The adoption and integration of cutting-edge technologies like artificial intelligence (AI) is pivotal for businesses in general to stay competitive, so today’s technology buyer tends to be a specialized business unit: it could be the marketing, finance or some other function within a firm, for example. Indian IT firms, historically known for their cost-effective services and large talent pool, have been conservative in their approach towards digital and AI adoption. There has certainly been some progress. Players like Infosys, TCS and Wipro have made significant investments in both. But the pace and scale of these often pale in comparison with their global counterparts like Accenture.
Accenture’s approach has been aggressive and holistic, integrating these technologies not just as an additional service offering, but as a core aspect of their business strategy. The disparity in digital maturity is evident from the range of services offered and the depth of expertise. Apart from Accenture’s showcase of a broad spectrum of digital services, its investment in research and development (R&D), partnerships with tech giants like Google and Microsoft, and its acquisitions in the digital space underscore the company’s commitment to staying ahead on the technology curve. In contrast, many Indian IT companies are still in the phase of talking up their game while dragging their feet on acquiring competitive digital and AI capabilities.
Also, at least according to analysts, Accenture has heavily invested in reskilling its workforce for the digital age, on the understanding that the human element is as crucial as technology change. HFS Research ranked Accenture No. 1 on employee experience (accntu.re/3RHxWkU) recently. Its training programmes are aimed at creating a workforce that is adept in digital and AI technologies. Meanwhile, Indian IT firms, though in possession of a large talent pool, face challenges in rapidly reskilling their workforce to meet the demands of the new technological era.
R&D plays a vital role in staying at the forefront, but Indian IT firms have been cautious in their approach to it. While there are notable exceptions, the overall investment in innovation and research within the Indian IT sector is modest, at best. This hesitancy hampers the domestic industry’s ability to pioneer new technologies and also creates an Indian dependency on external sources for technological innovation.
There is also a need for a cultural shift within these organizations to foster innovation and adaptability. Our IT firms are not as professionally driven as some might like to imagine (bit.ly/3H84PT5); even where equity ownership is more widespread, founders (and sometimes their families) still have a larger-than-life role in how these companies are managed. While these businesses still pay fresh engineering graduates more or less the same as they did about 20 years ago (bit.ly/3HaFSpV), they now want them to work almost twice as hard for the money (70 hours a week, one of these founders recently said). Interestingly, the market has pushed up the value of smaller providers in this space, while our IT giants have lost value. It remains to be seen whether this is because smaller firms are over-bought or more flexible than the big companies.
This comparison of Indian IT firms with one of their global competitors (Accenture) should serve as a wake-up call for our homegrown stalwarts to press the ‘reset’ button. For Indian IT companies, the road ahead requires a fundamental shift in mindset and strategy. The message for the New Year is clear: adapt and embrace the new technological paradigm or risk becoming obsolete in an increasingly digital world.
