Now that the last quarter’s result for the IT industry has been declared, it has evoked different reactions for different companies. It has left the investors concerned about what to expect from the industry going forward. Nasscom has projected growth target of 11-14 %. The first reaction is, if this is good enough for a sector which has historically grown in strides? On the other hand, as one looks at the fragile status of the global economy, one began to wonder if double digit growth is even achievable. Investors wonder what the way forward for the IT industry is.
It is interesting to look back and see the way this industry grew. They got the break out opportunity during the Y2K crisis. Indian engineers with superb IT skills were best suited to perform that time-critical work. The second wave of growth came during last decade when outsourcing became an accepted norm. The business model was that to grow more, one just needed to hire more. While this was quick way to grow, it also came with an inherent issue. There was a limit to which companies can grow by adding people, often called the linear growth. Beyond a point they become too large. Hence most of the companies now want to innovate to grow in a non-linear way. This also goes well with their ambition to move up the value chain, both in terms of the value added in new business offerings, and contribution to the bottomline.
For the last few years, one can see many instances of the technology led innovation. This space has become so large that it cannot be ignored. Number of young, small and nimble companies with lot of entrepreneurial energy are coming up and making a large impact. Take the example of Facebook, which has become newfound love of the investors. The valuation of Facebook is set to be around $85-95 billion. This is much more than combined valuation of TCS, Infosys and HCL Technologies, which comes to about $85 billion. Facebook has only about 3,500 employees, compared to about 470,000 employees in the three Indian IT companies altogether. This is the magnitude of impact of the non linear growth. These companies are getting formed all across and especially so in the Silicon Valley. IT companies have to make sure that they are part of the story and capitalize on the growth opportunities.
The IT industry has been gradually increasing the share of the intellectual property based high end work, which can provide higher revenues and margins. They have started penetrating into the parts of their client's business which are close to the core business. They have also gone into buying out the companies which have such capability. This is evident from the string of acquisition of the high end business units comprising Analytics or KPOs (Knowledge process outsourcing) or captive BPOs (business process outsourcing). This should have resulted in substantial shift to high margin business. However this has not happened fast enough.
The companies realized that they are not able to create intellectual property which they can patent and sell as product. IT companies often apply well established practices of the software business to these high end business units. However it should be the other way round. The practices of these high end units should be preserved and must be automated by the software. This is way to create platforms with intellectual property incorporated in them. In fact if we look inside a client’s organization, it is these high end business units which define the functionality of software which is then automated by the software engineer. This practice should be addressed early on, lest it becomes like putting cart before the horse. To implement this, there will be heavy demand of the managers who equally well understand business and technology. These people should be groomed for business leadership role.
There are many new technologies emerging like cloud computing. Indian IT companies cannot ignore this sector. This sector requires skills in software development and infrastructure management. In addition capability to manage customer transactions is also needed. It is interesting that the competition is coming from companies in the e-commerce sector like Amazon or eBay which already have such experience. One of the detractors of cloud is data privacy. Over the years Indian IT sector has developed high end practices in these areas to convince the overseas customers to move work to India. With the result some the data protection practices in IT companies are world class and even better than western countries. They must strive to develop successful business model in cloud computing environment.
The Indian IT industry is going through change. The players have number of strengths which will definitely make at least few of them of them the global giants in future. One of the hallmarks of IT industry is their customer focus. The customer relationship is derived from, the culture of ‘Atithi Devo Bhavah', whereby treating customer like a God, which more than compensates any lack in domain knowledge. NASSCOM estimates that Indian accounts for less than 5% of global technology spending. Surely with new business model there is ample opportunity for growth in coming quarters.
Author is chief operating officer with Daiwa Capital Markets India Pvt. Ltd.