Why software exporters are bracing for a rough ride

Software exporters are expected to face further headwinds from macroeconomic factors such as Brexit, shrinking deal values, and an inability to transform their workforce who are still deeply rooted in old skillsets.

As the first-quarter numbers started coming in, Infosys, which seemed to be on a comeback trail after posting four consecutive quarters of strong performance, scaled back its revenue guidance for the year to 10.5-12 per cent. The company cited possible headwinds from Brexit on some of its clients and visa issues in the US. Infosys is not alone in taking this cautionary stance.

Wipro, India’s third-largest software exporter, too gave a disappointing guidance; and Cognizant followed Infosys’ cue by cutting its annual revenue guidance for the year to 8.4-9.5 per cent from the earlier 9.9-12.7 per cent.

Industry watchers attribute many factors for this wariness. Despite earnest efforts to move to a differentiated business model, the bulk of the revenues continue to come from existing service lines, which depend largely on throwing bodies at a project. According to IT analysts Abhishek Shindadkar and Raj Kantawala at Equirus Securities, historically Indian vendors have been good at industrialisation of ‘services’ but not ‘software’. “Essentially, providing ‘functionality’ is very unlike providing ‘trained manpower’,” they add.

This mindset, honed over years, has resulted in consistent project rampdowns in recent quarters as clients see a disconnect. Infosys saw delayed ramp-ups in a large deals with a healthcare vertical in North America and another one in the financial services segment in Europe. Wipro too saw slow ramp-ups in some of its projects.

Indian IT majors were caught asleep at the wheels, expecting large-sized outsourcing deals in the post-Lehman era, much like in the past when Fortune 100 companies parcelled off multi-million dollar deals across 3-5 outsourcing companies, say industry watchers.

“Nowadays, clients are buying in smaller chunks and want to see the benefits before ramping up projects,” said Sanjoy Sen, Doctoral Research Scholar, Aston Business School. According to KPMG, global IT-BPO deals in the first quarter of 2013 were valued at $20.3 billion; at the end of 2015, they were $22.8 billion, indicating that deal values have gone up marginally, alongside a situation if intense competition resulting in commoditised services.

So, why is this problem happening now? Part of the problem has to do with Brexit and its ripple effect as FTSE-listed companies are deferring their IT spending.

According to a senior executive in Infosys, a large manufacturing company in the UK planned to roll out a portal to optimise its supply chain, but would now wait a while. Others like Dinesh Goel, Partner, ISG, an outsourcing advisory firm, point out that apart from Brexit, a couple of other factors have come up in the last year. “There is uncertainty over the US economy on the backdrop of the Presidential elections, which is causing financial companies to hold on to their tech spend. Additionally, IT companies are undergoing a “shift” issue. What he means is that the competitive intensity in traditional application development and maintenance business is cut-throat, which is forcing companies to sacrifice margins. “The new business is not moving the needle either,” he added.

Companies are looking to balance the old and new, but the tightrope walk will result in further volatility as companies struggle to meet client expectations in the changing business environment, say market watchers. There is also the issue of huge inefficiencies within the system when it comes to putting the right people on existing and new projects.

“We estimate the inefficiencies to be upwards of 50 per cent when it comes to internal job match-ups as can be seen from the fact that most of the time, engineers end up on wrong projects,” said Arjun Pratap, CEO of Edge Networks, an HR tech start-up that counts as its clients a few top IT companies in India.

IT companies, which relied on throwing bodies at a problem, did not have to worry about these issues when the going was good. However, they have now woken up to a new reality, added Pratap. In effect, there are issues even at the management level. “Many of them do not understand the intricacies of business, and hence never find a seat across the table when it comes to discussions for deals,” said a consultant who did not wish to be named as he works with most top IT companies.

All this raises red flags for the job prospects for the 1.5-million engineering graduates that are churned out every year.

A 2014 study found a huge mismatch between the aspirations of graduating engineers and their job readiness. While 97 per cent engineers aspire for a job in IT, a mere 18.43 per cent were employable.

“Companies are saying to these engineers: –‘That is not the skillset we are looking for’,” said V Ravichandran – Founder, Alive Consulting.