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India’s information technology service companies have long held reputations as innovators, but in recent years the ground has begun to shift. The model that allowed them to grow effectively — deploying cheap labour to perform simple IT tasks — is itself being disrupted by advances in technology.
As a result, analysts expect companies such as Tata Consultancy Services (TCS), Infosys and Wipro to move from a strategy based on high headcount and low costs to one reliant on higher employee costs and flexible services.
“Their financial model is under stress. It’s that simple. They can’t just keep hiring freshers [out of college] to keep costs down,” says Pankaj Kapoor of JM Financial Institutional Securities, a Mumbai-based brokerage. “Clients know data centres can be operated by one person now, so why do Indian companies need so many?”
As their clients move towards automation, artificial intelligence and cloud computing, India’s IT companies are being forced to redefine their pitches. “Our context has fundamentally and irreversibly changed and we cannot go back to the approaches and methods of the past. The world as we know it has been transformed,” wrote Vishal Sikka, chief executive of Infosys, in its 2015-16 annual report.
Wipro’s chief executive Abidali Neemuchwala shared similar concerns with the Indian newspaper Business Standard in April.
“It’s very simple. The number of people required in the lower end of the pyramid is going down. Robots and bots are taking over. You will see a slowdown in hiring across the industry.”
Infosys, Wipro and their rivals are now revising their old service model: to provide a fixed IT service for a fixed cost.
“We have started seeing models where we are jointly investing with the client, putting skin in the game,” says Pravin Rao, chief operating officer of Infosys. “I go to the client saying: ‘We believe that by applying these technologies, leveraging them, we can bring you benefit. You can pay me based on the number of transactions, or based on the percentage of revenue I drive, or the kind of cost savings I do.’ It’s probably a small percentage of the business right now, but over the next five years it will become much larger.”
UBS’s Indian equities team thinks revenue growth in the industry could fall to 8-6 per cent in 2020 from 13 per cent in 2015. UBS analysts say the below-consensus estimates are based less on cyclically weak markets and more on increasing pressure on “legacy services”, which they say make up 85-90 per cent of total revenue, and “shrinking contract size” that may weaken incremental revenue growth.
They argue, too, that business model disruption has not been priced in and that as the “revenue disruption” of digital technologies becomes more visible the industry will suffer a structural decline.
Mr Rao admits the value of deals is falling: “Earlier, anything from $300m-$500m over five to 10 years was possible, but today the large deal size is typically $100m-$150m for three to five years.
Those deals will also come in chunks based on performance for defined tasks, said Mr Rao. “You will do business in incremental $5m-$10m chunks rather than in a big-bang way.”
But, he argues, this does not necessarily equate to lower growth. “Client spend on IT is the same or probably increasing 1 or 2 per cent a year. As long as we have the capability and competency, there is an opportunity for us to capture a larger share of the pie and continue to grow.”