The changing IT industry

As it changes, the government's attitude must change too

There is both good and challenging news from the recent Nasscom summit for the Indian information technology (IT) and services industry. The good news is that the global economy will slowly trend towards normal in the current year — and, consequently, the industry is cautiously optimistic in its export forecast. It thinks exports will grow 12 to 14 per cent in 2013-14. This is obviously just inching upwards compared to the 10.2 per cent growth likely in the current year. But that’s the extent of the good news. The challenging news is that the play for the industry is changing and if the transition momentum picks up, leading IT companies will be in for some major uncertainty. They have, till now, thrived on offering cost arbitrage, implementing ERP (enterprise resource planning) solutions and then comfortably coasting along maintaining those solutions. Today these firms are having to switch to the pay-per-use model of doing business. That is, during implementation they will earn nothing and then hope to see revenue grow as the client’s customers take to the solution. If this happens quickly, it will disrupt revenue flows in the near to medium term.

An industry leader like Infosys is aware of this and so aims to get a third of its revenue, compared to under 10 per cent at the moment, from newer technologies such as cloud computing and mobility. This pursuit of new technologies is going hand in hand with seeking to innovate alongside customers and partnering them on their core functions. For this, large Indian companies are setting up significant incubation operations in Silicon Valley and peopling them with those who have a start-up and innovation track record so that they can help the vendor come up with its own IP-based solutions to help the client. In this environment, most start-ups in India are not in the traditional services space; they are focused on mobile applications, social networking and promoting financial inclusion.

The impending sunset of the time-and-material model of pricing and its replacement by non-linear growth – thus delinking headcount and revenue growth – have serious implications for the government. It has to get ready for IT hiring to become less and less dramatic and be prepared for a decline in its role as a job-bringing Santa Claus for the middle class. But unemployment among the educated remains a huge issue, as also the need to keep providing a ladder for entry into the middle class. So the government cannot expect the IT industry to remain a cash cow. Several issues are prompting IT firms – whether MNCs confronted with transfer pricing problems or any other firm dealing with rising labour costs – to take development centres to the Philippines, to deliver not just voice BPO but accounting and even IT services. The industry, meanwhile, has to address ecosystem-related issues such as taxes and visas and help secure a space for Indian services in World Trade Organisation negotiations. Nasscom itself should consider making innovation-based start-ups more wanted, as it did in the past to make space for BPO and engineering services firms.