It’s been a bumpy few years for the Indian IT/ITeS sector as it grapples with more change than it’s seen in over a decade-and-a-half.
But the $146 billion-industry isn’t sitting on its haunches. It’s taking control and making sure it’s in charge of its destiny.
The question is: Will its efforts be enough to make comeback in 2016?
Probably not. But the fruits of its efforts could ensure a revival in the next couple of years.
How Did We Get Here?
Change and volatility. You can’t get past a day in this industry without bumping into those two words.
“This is the biggest phase of technology disruption I am seeing,” said N. Chandrasekaran, CEO, TCS, in an interview with Livemint.
That sentiment is echoed by T.K. Kurien, CEO and member of the board, Wipro, to the same newspaper.
“There is this huge change…the way clients are buying technology, the impact it is having on the way we have traditionally worked..,” he said.
The changes they are referring to are to the adoption of SMAC technologies (social, mobile, analytics and cloud computing), and how their customers’ clients now want to interact with companies digitally.
“Digital is a perfect storm of opportunities and threats. It’s an opportunity for companies that can ride the wave and transform their offerings, business models, and value creation levers. But for companies that are slow movers, it is a big threat and can topple them from their leadership positions,” says Salil Godika, co-founder, chief strategy and marketing officer and industry group head, Happiest Minds.
To be fair, it isn’t only the Indian IT players that have been grappling with sudden shifts in the environment. The world’s largest, most-entrenched IT companies have had to move into overdrive to try and keep up, and most, really, haven’t managed.
The problem is that most IT companies just weren’t ready for the wave of change that digital brought. They didn’t see the future clearly enough, and didn’t react fast enough when the change came.
Although, not everyone agrees that the industry was sleeping at the wheel.
“I don’t think the industry has been slow (with regard to embracing the digital opportunity). This is a period of transition. It’s not like this (the digital opportunity) has been around for five years and the industry has been sleeping,” says Godika. “It’s a big transition, there’s no question about it. The industry is changing and that takes multiple years to happen.”
Could that change have come earlier? Possibly, and if it had more business would have come India’s way. Satyajit Bandyopadhyay, chief delivery officer and president, Ness India, says “what has happened in 2014, and partly in 2015, was a consolidation of regular IT, and not a lot of expansion in the digital space. Digital needs new technology skills and these skills are not easily available. That’s one of the reasons why the industry was taking some time (to get digital projects).”
In the last two years, he says, “Customers have been spending time and money on these projects (digital projects) but those jobs were not coming to India. In 2016, a big portion of that will come to India, that’s for sure.”
However you look at it, one fact everyone acknowledges is that the industry is in a state of transition—some companies are halfway through it, others at the end. It’s a transition that didn’t have to come at the cost of business—if the sector’s leaders had read the tea leaves more carefully.
Yet, to their credit, many have moved fast to catch up. There isn’t an executive in the sector worth his salt who believes that the digital wave doesn’t represent long-term disruption—and long term opportunity.
There isn’t an executive in the sector worth his salt who believes that the digital wave doesn’t represent long-term disruption—and long term opportunity.
The challenges IT companies face go beyond technology. There’s a volatility on the business side that’s created new levels of complexity for both the business and the technology that supports it. And that lack of visibility is overflowing into the IT sector.
The volatility’s gotten so bad that the chairman of the board of directors at India’s second-largest IT services exporter, Infosys, R. Seshasayee wants to change the way guidance is issued.
In an interview with the Economic Times, Seshasayee said that volatility is the new normal, and he believes that the industry needs to re-look how it issues guidance to stay in step.
"The planning cycle at companies, and at the industry level, has to get shorter. Guidance needs to be relooked at--giving a set target a year in advance may not be the best way. The idea could be giving shorter term targets while keeping the overall direction firm,” he said.
Growth in 2016
The industry body, NASSCOM, believes the sector will close off the year (that’s March 2016) with between 12-14 percent growth. In the next fiscal, NASSCOM expects the sector to add $20 billion of revenues to its current $146 billion—that’s about 13.6 percent growth. According to NASSCOM, “Export revenues for FY2016 is projected to grow by 12 to 14 percent and reach $110-112 billion. Domestic revenues (including ecommerce) for the same period will grow at a rate of 15-17 percent and is expected to reach $55-57 billion during the year.”
In the next fiscal, NASSCOM expects the sector to add $20 billion of revenues to its current $146 billion—that’s about 13.6 percent growth.
Will the industry really be able to hit next year’s target? “If there's ever been a time to meet these targets, if there's ever been a time for great growth, it is now. The next couple of years could be some of the industry's best years, what with the demand for digital solutions,” says Prasanth Puliakottu, CIO, Sterlite Technologies.
A key project that his team will be working on in 2016 is data analytics. Data, he says, has become more and more important. For years, he says, IT's has been concerned with base infrastructure, systems and platforms.
"But it's time for IT to own data, the accuracy of data, and allow organizations to use data to be more predictive. The business world has become very dynamic and business needs help to predict what might come," says Puliakottu.
Bandyopadhyay from Ness India believes there are big opportunities next year. “I believe we will meet the NASSCOM target of 12-14 percent growth for this year. Next year, it might go to 15-20 percent (not including the BPO segment) because thanks to the current transformation, more (digital) work will come to India.”
Happiest Minds’ Godika is optimistic about growth—for companies willing to embrace change. “2016 will be the year of re-invention. Our business models are changing, our buyers are changing, and the speed at which we are expected to deliver is changing. Companies will have to re-invent themselves,” says Godika.
And that means hard work. According to CIO India Research, most CIOs in the IT sector believe 2016 will be a challenging year for both their industries and their companies. The survey, which was taken in November 2015, shows that 65 percent of Indian CIOs in the IT sector say that 2016 will be a challenging year for their business, and 50 percent say 2016 will be a challenging year for their industry.
Despite their enthusiasm, if you took cues from the second quarter results (July to September 2015) of India’s top IT companies, it’s seems unlikely they will get to NASSCOM’s target. While their performance doesn’t dictate the direction of the industry, it’s certainly an indicator. It’s important to note that traditionally the second quarter is the strongest for the IT industry. And in this quarter, IT exporters were further helped by a weak rupee. Yet, most of them didn’t really shine.
The big boy of the pack, and India’s largest company by market capitalization, TCS, has been having a rough few quarters. The company, which has a track record of beating the NASSCOM target, had a poor second quarter—and fourth bad quarter in a row. Its second-quarter growth, in dollar terms, at 3 percent, was its lowest in seven years.
Wipro, the third largest player, saw a 2.1 percent rise in second-quarter revenue, in dollar terms, over the last quarter. While that was in line with analyst expectations, the company also predicted a weak third quarter. It’s guidance for Q3 was 0.5-2.5 percent growth, which analysts say is far from the 2-4 percent it needs to grow if it wants to show an overall 8-10 percent growth for the year.
HCL Technologies, the country’s fourth-largest software services exporter, grew only 1.9 percent sequentially, in dollar terms, and its net profit was lower than analyst estimates. However, the company expects to have a strong second half.
The exceptions to this list is Infosys, which seems to have righted its ship. In the July-September quarter, Infosys fared well. At 6 percent, its revenue growth, in dollar terms, was head and shoulders above the rest, and its own best in 16 quarters. But it’s reporting that the second half of the year will be tough. Many analysts believe that it will meet the bottom of its yearly guidance.
But, keeping Infosys aside, the current state of the IT industry isn’t a pretty. Especially when you take into account that Q3 tends to be a weak quarter for the industry. And that’s unlikely to change drastically in the next fiscal, given the transition the industry finds itself in.
Like Infosys, there’s another player that’s done well. And in its performance are lessons for the industry.
That’s Cognizant. In the last quarter, the company grew more than analysts expected. But what’s more notable is that it raised its guidance for the third time in the year--and expects to end the fiscal showing a 21 percent growth.
So how’s it pulling this off? In an interview with the Economic Times, CFO Karen McLoughlin points to two things: The company’s Trizetto acquisition, and its digital portfolio. “The other big component is the shift towards demand for transformation and digital services, what we refer to as the SMAC (social, mobile, analytics, cloud) stack.”
That digital is where the future is, isn’t news to the industry. In an interview the Business Standard, Ganesh Natarajan, CEO of Zensar Technologies, lays it out clearly. "I think the need for consolidation has always been there and will continue. At risk are companies who do not have a clear growth strategy particularly in areas like digital transformation."
“Digital is going to be very important in the next year,” says R.P. Rath, VP-Technologies, Quatrro Global Services.
Rath is practicing what he is preaching. In 2016, he says, IT within Quatrro Global Services will take forward an important agenda it started in the current year: Going digital.
Already, his team has digitized the accounting function at Quattro. “It’s digital end-to-end and it’s saving the company a lot of money,” he says.
At Wipro, Kartik Visweswaran, head Mobility and Cloud Applications CIO Office, says the company is really embracing digital. “What’s an immediate focus for us is this: We are embarking on a transformation. We want to leverage the cloud for our entire infrastructure and application landscape, in a very large way. I’m not talking about pockets. Our vision is to have 100 percent internet access to applications and infrastructure,” he says.
Ness’ Bandyopadhyay is vehement that digital is the new growth area. “Multiple reports show that, after a number of years, IT has become a number one priority for CEOs. Why? Because every business is undergoing transformation. There’s no doubt that for the IT industry that’s an area (digital) where maximum growth is going to come.”
Sharat M. Airani, CSO and director-IT, Intellinet Datasys, agrees with the importance digital is getting. “Digitization has become of strategic importance. The C-suite has it at the top of their minds and is directly involved in pushing the agenda,” he says.
NASSCOM reports that the industry is increasingly investing in digitized solutions to drive future growth opportunities. It says that digital solutions already account for between 12 and 14 percent of the industry’s revenues.
At TCS, digital now accounts for 13 percent of overall revenue. Digital is a serious agenda at the company. It says it’s already trained 30,000 employees in digital technologies, and plans to train 1 lakh staffers by the end of the current fiscal.
Infosys, too, is re-skilling its workforce so that it’s more comfortable with new-age technologies. According to the company, it’s already gotten 54,000 staffers to attend classes in design thinking, a key initiative of Dr Vishal Sikka, CEO, MD, and whole-time director of the Board at Infosys. The company’s also made progress on its Zero Distance initiative, which is supposed to infuse innovation into each of the company’s customer projects. By March 2016, 8,500 projects would be injected with the Zero Distance approach, reports Infosys.
In August, Sikka also announced that Infosys would rebrand its offerings under AiKiDo. Ai refers to platforms, and platforms as a service to build intelligent solutions, Ki for knowledge-based management, and Do refers to the service offering on Design Thinking and design-led initiatives.
Additionally, Infosys says it offers platforms to address the Internet of Things (IoT). It has already put plans in place to collaborate with GE and others to create IoT solutions. HCL is doing something similar with IBM.
All of this activity in the digital space is helping. In a recent survey by consulting firm Everest, Infosys had high recall among 120 companies in the US in relation to going digital.
All of this points to the fact that the IT industry is well aware of the need to get on the digital bandwagon, if it wants to flourish. That trend is only going to intensify in 2016.