The Indian Information Technology (IT) services industry, which has been through a roller coaster ride since the 2008 financial crisis hit it hard, is transitioning to the digital age for growth given the strategic position in which technology companies are placed in the IT spectrum.

Infosys, for example, which had been through a few troughs in the recent past, is on a turnaround under the leadership of Vishal Sikka, its Chief Executive Officer (CEO) and Managing Director (MD). With his strategy of ‘Renew and new,’ the bellwether is now focusing on digital technologies. Optimism seems to be high given the opportunities in digital technologies that IT companies are best placed to exploit. The ability to visualise uses for new digital technologies combined with execution capability is driving opportunities for the industry.

“In the current digital business front, the sourcing model is changing. Clients are looking at IT services firms as partners with whom they can work and can do more co-discovery, co-sourcing and co-innovation,” said Partha Iyengar, Vice President, Gartner.

Consulting

Gordon Coburn, President, Cognizant, recently told The Hindu that the company’s combination of investment in consultants and the retraining of its employees in digital technologies is bearing fruit now. Consultants help clients understand what technology can do for them and as to how a technology vendor can help implement the same. Retrained employees from the technical teams help execute the project, typically. Clients find this attractive since their technology investments in the past and returns from them have reached a plateau. The only way for some of these large spenders to move forward is to devise dramatically new ways to engage their own end-users. In today’s economic environment, cutting costs is as critical as enabling new revenue. “Clients want savings from the way they run their business and then use those savings to invest in new ways to change their business” said Mr. Coburn.

Digital spend

According to Gartner, of the total IT spend of about $ 3.54 trillion in 2016, IT services is expected to be about $929 billion, fuelled by digital technologies. Digital technologies are certainly more mainstream today than five years ago. But they still do not account for a major portion of IT services revenue, yet. For TCS, in the last fiscal, digital revenues grew 52.2 per cent due to faster adoption of digital solutions. Infosys is concentrating on digital solutions through its platform business. The company has announced an ambitious plan of achieving $20 billion revenue by 2020 of which $2 billion would be from ‘next generation’ services. Under the new leadership of Abidali Neemuchwala, billionaire Azim Premji-promoted Wipro has also embarked on a new journey equipped with six themes, including digital. “Our vision of the digital business across advisory, design and technology is securing mindshare amongst existing and new customers. We believe consulting capabilities in business and IT strategy, functional and process excellence are critical to the advisory offering in digital,” said Abidali Neemuchwala, CEO,Wipro.

Changes

HfS Research, an analyst firm, said in February it came across about 56 large outsourcing deals of which over 50 per cent are in the digital arena, including social, mobility, analytics, cloud, automation, security and IoT. The percentage of digital deals stood between 30 per cent and 40 per cent during the period between September and November 2015. But in the last three months, it has risen over the 40 per cent mark, the report said.

Hansa Iyengar, Senior Analyst - Large Enterprise Services, Ovum, a research organisation, said, “There is surely a lot of work being put out on the market. We have witnessed an increase in contract activity. Major markets like North America and Europe (U.K., Nordics, Germany) are showing an increase in the number of contracts coming up for renewal as well as new contracts coming to market.”

Niche capability

With new technologies, niche players get an opportunity to gain experience. Large outsourcing companies lacking in expertise may need to either partner or acquire specialised players. Now, ‘acquihire’, or buyout of a company for skills of its staff is also gaining ground. Infosys’ acquisition of Panaya and Skava, Wipro’s buyout of Designit, Mindtree buying Magnet 360 and Cognizant buying US-based KBACE Technologies are examples. Funding start-ups, both external and internal, is gaining acceptance as giants value a nimble-footed culture. “We will see more collaboration between larger companies and start-ups that address niche needs,” said P.N. Sudarshan, Senior Director, Financial Advisory, Deloitte.

In-sourcing

With new technologies coming in faster than before, clients today realise that vendors are only a step ahead.This has given rise to the in-sourcing phenomenon. David Smoley, Chief Information Officer, AstraZeneca, said last month on a visit to India that the company’s move to get technology operations in-house had resulted in annual IT costs dropping from $ 1.3 billion in 2013 to $ 900 million now.

Deal sizes are also dropping, moving to the $75 million range from $100 million-and-more. While this may worry major firms, smaller players see an opportunity. “There was a notion that dealing with large companies involves less risk than with smaller one. With the focus on digital and specialisation, smaller players are also getting a chance to compete with major players,” said Rostow Ravanan, CEO and MD, Mindtree.

However, large deals have not disappeared. The challenge for large vendors will be to find ways to retain margins in smaller deals.

Deal size

Deal sizes are also dropping, moving to the $75 million range from $100 million-and-more. While this may worry major firms, smaller players see an opportunity. “There was a notion that dealing with large companies involves less risk than with smaller one. With the focus on digital and specialisation, smaller players are also getting a chance to compete with major players,” said Rostow Ravanan, CEO and MD, Mindtree.

However, large deals have not disappeared. The challenge for large vendors will be to find ways to retain margins in smaller deals. Moreover, the smaller deals are 2-3 years in duration rather than the older pattern of more than five years range, which poses a challenge of dealing with reduced recurring revenue streams and annuity revenues.

Reskilling

Companies are spending more on training its workforce to become digitally able to execute projects. TCS, which is the largest employer in Indian IT, has trained 1.20 lakh people in over 400 new digital technologies, Wipro, which trained 10,000 people in digital, will train 20,000 more while Infosys is also training 30,000 people on design thinking.

“There is a growing interest in non-linear models and a lot of the vendors show greater appetite to tie in their revenues to business outcomes. There are pockets of business where there is a greater tendency to move towards non-linear models but the evolution is rather slow at this juncture,” said Hansa Iyengar.According to IT industry body Nasscom, the industry will see 20 per cent fewer recruitments this year as players like TCS, Wipro and Infosys are focusing more on automation. Earlier, it had predicted that the $150 billion industry will hire 2.75 lakh people in 2016-17 against 2.3 lakh people in the year earlier period.

(This article first appeared in The Hindu dated May 23, 2016)

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