There was a dot com bubble in 2001. Then there was a whole recession period in 2008, post Lehman Brothers bankruptcy. But what is happening in 2017 has never happened before in the Indian IT industry.
The IT industry growth rates, which were in double digits, have come down to 5-6%. Further, there is squeeze on margins as overseas clients want to save through efficiency, automation, robotics, etc. They want 50% of these savings to be passed on to them.
As a result, there are a lot of internal reviews going on in the industry. A lot of benchmarking has been done in global giants like Accenture and Capgemini.
I am noticing that for the first time Indian IT industry is laying off managerial level people, which has never happened before. Many of the managers being let go are given generous compensation, depending on their years of service.
If one studies carefully, the managers/others being laid off are no longer conversant with the latest technologies or with the market. These are typically people in the age group 38+ with salaries of Rs 20 lakh and above.
Interestingly, the same companies are hiring people in the same age group with higher salaries, provided they have domain expertise or technology skills, or proven record in client handling.
They are laying off people on one hand, and hiring select few on the other. A McKinsey report has said that nearly half of the workforce in the IT services will be ‘irrelevant’ over the next 3-4 years.
Most companies are cutting down on managerial positions. It’s like taking off the fat in your body. These are people who have been in the same organization for long, are taking home big salaries, but have lost touch with the client base. Automation will eliminate at least 30% of tech jobs in the next few years.
Additionally, companies are now looking at developing platforms based on artificial intelligence (AI). Infosys’s Vishal Sikka is talking about it. IBM has Watson, Wipro has Sherlock and so on and so forth.
These platforms basically help in faster completion of projects with lesser manpower. The IT companies are going to their clients, offering solutions which will reduce their costs and help in improving the bottomlines. The fear is that if one IT company doesn’t do so, somebody else will and take away the full cake.
IT sector will continue to thrive, but the growth rate will not be high. It will be like any other industry. The growth of the industry will be somewhere around 5-7% over the next 4-5 years.
The silver lining is that our companies are having fatter operating margins. To give an example, Accenture, which is the world leader, had an operating margin of 14.6% for the last financial year. For the same period, TCS, India’s premier IT player, had an operating margin of 25.7%.
So, it is not all gloom. Our companies can and will grow, albeit at slower rate. They have plenty of operating margins to play with.
Further, most of the IT companies have focused on exports to US and Europe because it was highly profitable. How many industries offer operating margins of 25%+ consistently over the years?
Now is the time for them to look at the domestic market. The potential is big, thanks to the Digital India wave of Prime Minister Narendra Modi. The increased penetration of broadband into the interior parts of India and improved speed of broadband has led to fast growth of data business. Along with data, a lot of services can be offered. The Indian market is ripe for growth. Most of the top companies are fully aware of this and have geared up with top notch teams to tackle the domestic market.
One caveat for the domestic market is that it is price sensitive. The implication is that your costs have to be significantly lower than that of the global market. For all you know, you may have to pay 20 to 30 % lower salaries for those who work in the local market.
Secondly, a large chunk will come from the government, and as all of us know, the government delays payments, sometimes inordinately.
The bright side is that market is very big and largely untapped. Look at Accenture or IBM or Facebook, for example. They have a strong domestic base. Only then did they grow outwards. Indian IT firms, on the other hand, have looked to earn in dollars. Only now they are trying to build domestic market share.
This is a ‘digital tsunami’. Quite a number of earthquakes will lead to something big. But, that comes at a price. Those willing to work at lower salaries with average skill set will find a way out. There is a structural change in the industry and the firms need people who are okay with the change and are willing to save the firm a lot of money.
The glass is half full, or half empty — you can look at it either way. The best possible way for firms would be to increase their domestic share. Make mistakes, learn from them and then move on.
— As told to Aishwarya Kumar