The second-quarter results of India’s two information technology leaders, Tata Consultancy Services and Infosys, are not downright negative but the outlook their leaders have shared is a cause for concern. Both have slightly improved their margins but that is where the good news ends. Margins can be improved by belt tightening, but only up to a point. As for the top line, they have clocked levels of growth last seen in 2009-10, when the full impact of the global financial crisis was first felt. Infosys has downgraded its guidance for the second time this year. Barring a few companies that occupy niche positions in individual verticals, the plight of medium-sized firms will be worse because they mostly play on costs.
Any healthy industry clocks a period of high growth and stabilises thereafter. The growth of Indian IT was sensational till the financial crisis of 2008 and it was highly respectable during the partial recovery period of 2010-14. The deceleration in growth that began from 2014-15 not only continues but threatens to become worse. The industry’s leaders are aware of the problem but it’s not clear whether their companies know how to transition to a different business model. On the evidence so far, it doesn’t look like it. For example, ever since taking over as CEO of Infosys in October 2014, Vishal Sikka has been saying (repeated again last week) that the long-term future of the industry lay in evolving from a cost-based, people-only model, to one in which people are amplified by software and AI (artificial intelligence). But implementation of that vision has been painfully slow. For example, even two years after Infosys embraced disruptive areas such as AI and open-source technologies under Mr Sikka, it works on projects related to AI and open source for less than 50 (just 4.5 per cent) of its 1,126 customers.
The revenue per employee of Indian IT services firms has also been declining steadily. For example, TCS ended FY16 with a revenue per employee, a measure of efficiency and the kind of work a company does, of $46,758 — a decline of 3.29 per cent compared to a year ago. While Infosys only saw a marginal decline of 0.9 per cent, Wipro reported a fall of 5.1 per cent on this important metric. While cross-currency volatility played a role, pricing pressure for outsourcing deals and limited use of automation tools were important contributors. This shows that Indian IT companies are still over-dependent on manpower-intensive jobs, whereas their overseas counterparts have moved on to value-added models.
In the new technology horizon that lies ahead, bits of IT firms’ offerings are losing their speciality status and becoming skills that all educated workers need to have. According to one study, half the jobs in the top income quartile of the US need some coding skills. Almost everything in daily life is driven by software during the fourth industrial revolution. Jeff Immelt, CEO of General Electric, recently said a 20-something joining the company has to learn to code even to work in sales, finance or operations. As one expert said, you will either be told what to do by a robot or a machine or tell them what to do. To survive in this scenario, Indian IT firms have to go beyond delivering coding and maintenance and offer something more specialised.