By its own making and due to external forces beyond its control, India’s $150 billion outsourcing industry finds itself at a tipping point. Lauded for its ability to put India on the map as a destination for high-quality, low-cost technology skills, and for being an engine of wealth and job creation, this industry stares at an uncertain future.
Rapidly shifting technology needs, Brexit, changes in immigration and visa norms and the ascension of protectionist Donald Trump as US president could slam the brakes on the industry — with the latest growth projection from industry body Nasscom slumping to 10% for 2016-17 from 12% for 2014-15.
Hiring too has slowed to a crawl, with fewer people required in a sector embracing automation and robotics to revitalise itself. In the past five years, revenue and profit growth for the top five companies listed on the BSE have halved.
Infosys, once the industry’s bellwether, is feeling the full force of this headwind. In August last year, the company suffered a jolt when a contract from the Royal Bank of Scotland was nixed following the Brexit referendum. That resulted in some 3,000 jobs being lost at the Bengaluru-based company. It is no surprise then that InfosysBSE -2.49 % CEO Vishal Sikka’s New Year note to employees was muted.
“We will not survive if we remain in the constricted space of doing as we are told, depending solely on cost-arbitrage, and working as reactive problem-solvers,” he said. Its dollar revenues in the December-ended quarter fell 1.4% sequentially.
Industry leader TCS too felt the impact as it made a shift in business model towards software platforms and chased digital contacts. “We have had a tough year,” outgoing TCS CEO and chairman designate of Tata Sons, N Chandrasekaran, said in a recent interview with ET. “Let us not deny that. I think we have had the slowest growth for Q2 in our history.”
Infosys has cut its growth forecast twice this year as it seeks to expand its use of non-linear initiatives such as software platforms to reignite growth. Even as the company invests in new technologies such as its artificial intelligence platform Mana, COO Pravin Rao admitted that the company’s big-ticket contracts were taking longer to fructify.
In the past 12 months, Cognizant has seen its growth targets reduced thrice in the face of changing realities. ” “As recent as two years ago, this talk of a transformation felt theoretical,” says Malcolm Frank, executive vice president of Cognizant.
“Today talk of software platforms, automation and digital businesses is grabbing everyone’s eyeballs and, as we deal with this sharp transition, there will be a period of flux.”
This slump does not surprise industry watchers. “Indian outsourcers need to be very concerned. In addition to them being out of sync with the changing markets, they are now facing a protectionist and populist government in America,” says Vivek Wadhwa, distinguished fellow at Carnegie Mellon University’s College of Engineering.
“I have repeatedly been warning executive of the Indian IT companies to rethink what they are doing. They hear me but don’t listen. I am more pessimistic than ever about Indian IT.”
These dire warnings centre around a shift from an old way of doing business (a focus on outsourced, cost-based software services) to evolving first to provide software platforms (like Infosys’ Mana); and updating capabilities to cater to shifting customer demands to be more of a business partner and less of an IT provider. This would involve Indian outsourcers learning to work with marketing chiefs (who often control more of the IT budget than CIOs and CTOs), and speaking their language (busines outcomes over tech jargon), to stay competitive.
The Trump effect
External factors may be harder to fix. While the Brexit vote hobbled some outsourcers’ plans, a more serious issue is possible changes to visa regulations in the US, the largest market for these companies. Proposed legislation called the Protect and Grow American Jobs Act wants to increase the salary of H-1B visa holders from $60,000 to $100,000 annually and remove an exemption for those holding a master’s degree. US President-elect Donald Trump and his pick for attorney general, Senator Jeff Sessions, have promised to crack down on job losses in the US.
“The proposed visa and immigration legislation… will raise the cost to operate by raising the cost of the Indian firms’ landed or onshore costs,” says Peter Bendor-Samuel, CEO of offshoring advisory Everest Group. “Given the hyper-competitive pricing environment, it seems increasingly unlikely that they will be able to pass along the cost to their clients, putting increased pressure on margins.”
The struggle of top companies in this sector has reflected in the caution voiced by industry body Nasscom. “We believe the industry is headed for challenging times,” says R Chandrasekhar, president, Nasscom. “The expectation of customers has changed and companies are trying to keep pace with this shift.”
To do this, companies need to transform their businesses, acquire new skills and move into emerging dimensions of the business. “Indian companies need to build deeper understanding of domains and take a consulting approach, with solutions based on both business and technology understanding.” The rise of a protectionist administration in the US will only make this transition harder, with a wave of protectionism and anti-globalisation expected to take centre stage
“This is not a random event. This is a clear shift in political and economic thinking,” adds Chandrasekhar. To counter this, Nasscom hopes to promote the IT industry’s pivotal role in keeping the US economy competitive, while highlighting Indian firms’ role in job and skill creation.
Immigration experts suggest that the US has committed to the WTO to provide at least 65,000 H-1B visas annually, and the Indian companies use a legitimate comparative advantage for India with its large number of welleducated technology workers to build an industry.
“The Issa bill (to reform H-1B immigration programme), even more than the previous actions, could easily be seen as violating that commitment by introducing a new, higher wage standard,” says Edward Alden, Bernard L Schwartz senior fellow, Council on Foreign Relations. “Other US companies have used firms like Infosys and WiproBSE 0.28 % to reduce their backoffice costs, making them more competitive.”
Additional restrictions will raise costs for these US firms, which could make them less competitive globally. Instead, an auction system in the H-1B programme has been mooted by experts, so that companies would be bidding against each other for the right to hire workers under the programme (as opposed to the current lottery system). That is the only accurate way to determine what the value of these immigrant employees is for the companies that hire them.
Company executives seem to suggest this is the best time to bite the bullet and shift tack. “The industry is in the midst of a necessary yet painful transition. We are trying to address a new decision-maker, learn to speak to customers in a new language and address their problems in new ways,” says Jagdish Mitra, chief strategy and marketing officer, Tech MahindraBSE 1.58 %.
As the outsourcing industry evolves, Tech Mahindra is racing to keep pace, with its DAVID (digital, automation, verticalisation, innovation and disruption) offering that hopes to latch on to the customers’ evolving needs.
Along the way, the company is changing the way it approaches its business — from trying to build everything in-house to leaning on crowd-sourcing and collaboration now. It is working with over 15 startups (incubated within the company or externally) to get ahead in a tough market.
Late last year, about 3,000 employees spread across the company’s offices in India and North America (and some employees of a large financial services client) participated in a hackathon, a collaborative programming event, to develop a solution for blockchain, a digital ledger for transactions in cryptocurrency like bitcoin. “We may not always have the answers and we are open to solutions coming from anywhere in the company,” Mitra adds.
Despite the gloom, some analysts look for a silver lining. “There are signs that the market is stabilising. US interest rates are going up. US Bank index (Dow Jones US Bank) has rallied 25% since Trump’s win,” says Sagar Rastogi, a research analyst with Ambit Capital.
Meanwhile, in this push to go digital, Indian outsourcers may regain some lost ground as contracts move from pilot projects to complex technology implementation. Some large companies, including a financial services giant, have already handed out huge digital contracts. “I expect revenue growth to accelerate, beginning fiscal 2018,” adds Rastogi.
Indian firms have held on to margins during this phase of slow growth by a range of measures, including low wage hikes, changes in the employee pyramid and shifting of more work offshore.
India’s outsourcing industry may be in the midst of another shape shift. “At the end of the day there is no alternative to India and the Indian firms as a source of essential talent,” says Bendor-Samuel of Everest. “But the industry growth will slow, and margins are likely to shrink.” Not that industry leader TCS agrees; with net profits hitting $1 billion for the first time and its digital business growing by over 30% for the third quarter of this fiscal year, Chandrasekaran has laid down the gauntlet for his rivals.