Taking stock. Digital transformation to accelerate infotech growth

Ever since the onset of the pandemic, a large part of our lives – be it work, learning, shopping, socialising, entertainment –has moved online. This trend is likely to accelerate over the next few years. Enterprises, big and small, have been forced to opt for digital transformation to survive. All of us are living in Extended Reality (XR) of a ‘Metaverse’ which is a combination of virtual and real worlds. This has meant tremendous opportunity for the enormously agile and value-driven, Indian information technology (IT) industry be it software, services or Business Process Management (BPM) players, which are enabling and in some cases even driving this change.

Probably after the Y2K opportunity in the late 1990s which heralded the arrival of the Indian IT industry on the global radar, the sector has never had it so good.

This year the National Association of Software and Services Companies (Nasscom) estimates that exports of software and services would be in excess of $150 billion and the overall growth of the industry may be in high single-digit.

Large Indian IT services companies such as Tata Consultancy Services, Infosys, Wipro, HCL Technologies and Tech Mahindra are likely to end this financial year with very healthy growth and margins.

Even the mid-sized players and the small niche ones too are seeing tremendous growth in revenue and profitability. While growth is likely to continue, 2022 is likely to witness some challenges too for Indian IT. Here are some key trends:

Acute talent shortage

Red hot growth has meant that there is an acute talent shortage in the sector especially in cutting edge areas like Artificial Intelligence, Machine Learning, Quantum Computing and Cloud-based technologies. While India produces the largest number of engineers in the world – about a million every year - most are unemployable without further investment in industry-specific training.

Right now, there is a ‘war for talent’ which means that those currently in the industry are likely to see their salaries go up significantly. Eventually, talent supply is likely to catch up with demand, but it may take time.

A majority of IT services firms get more than 60 per cent of their revenues from the US market.

Even in Europe usually, the UK alone contributes more than half of continental revenue. Indian IT companies need to broad-base their growth to other European markets or even Australia and South America to minimise the risks of any slowdown in some of these key markets. Even the domestic Indian IT market presents an opportunity for greater penetration.

Hardware manufacturing

Large segments of the global industry including automobiles, electronics and manufacturing were severely impacted due to the shortage of semiconductor chips. The Indian tech industry and the government have been criminally negligent in ignoring hardware manufacturing and 2022 may just be the year to change that. With the government recently announcing several production linked incentive schemes for the hardware sector hopefully, this would be addressed. India’s bill for import of hardware electronics is second only to that of oil imports, a situation which it needs to redress.

With a number of companies looking at ‘China plus one’ model to mitigate supply chain risks, Indian tech firms can work with their global partners to kickstart this sector to a higher gear.

With the increasing number of smart wearables – from phones to watches, smart bikes, cars to apps measuring everything from our heartbeat to the number of calories burnt, to what we did during a day, everything is becoming digital data.

Data is the new oil that can be mined, sliced and diced for commercial purposes. This has also meant privacy concerns surrounding the use of personal data. Cybersecurity thus has become a huge new opportunity which Indian IT can effectively tap into.

Historically Indian software and services companies have been loath to make significant acquisitions preferring to grow organically. They have been afraid that it will dilute their margins and more importantly may test their ability to culturally integrate acquisitions in other countries.

As Indian technology companies become large global enterprises, they need to make value accretive acquisitions of a substantial size so that it either provides them with an entry into a newer market or enables them to acquire technological expertise in areas where they have not been present.

Also, they need to invest more in research and development to build platforms as this would enable them to command a higher premium. Indian IT services companies need to be more ‘consulting partners’ rather than mere ‘system integrators’ who work on a piecemeal basis. 2022 may just be the year to rectify that.