Is Indian IT Industry in trouble - with a Perfect Storm and a Black Swan Moment ? Is this another Opportunity to Capitalize?

As per a McKinsey study, more than half of about 3.9 million people in Indian IT industry will become "irrelevant" in next 3-4 years.

Precursors

A couple of introductions on key terms used in the headlines and in this post, for the benefit of a refresher for the readers.

A Perfect Storm is defined as an especially bad situation caused by a combination of unfavorable circumstances, drawing a parallel from a violent storm arising from a rare combination of adverse forces, as per dictionary.

A Black swan theory is a concept popularized by Nicholas Nassim Taleb via a blockbuster book he wrote on the same topic.

• The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.
• The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).

Introduction

There are plenty of tautological examples cited for a perfect storm or a black swan moment. What will happen when you combine both the concepts into one? How will you react to a perfect storm that comes and hits you like a black swan concept? How would you predict the outcome? Especially for the general majority of business leaders who focus on Skeuomorphic legacy wisdom, that can be considered as an antonym for a black swan?

This can be touted as a speculation; however, most of the black swan or perfect storms in IT industry and business originated as a speculative thought – Like a brilliant dialogue in the movie The Quiz Show - “Speculation in our society has a way of becoming fact.”

I recently read a brilliant article on the future of Indian IT industry written by Wharton that covers the Perfect Storm and Black Swan situation in a brilliant and well-researched manner. 

Wharton Business School - Has the ‘Dream Run’ for Indian IT Ended?

In the article mentioned above, a few key data points stood out

“For several years now, experts have been predicting that the dream run of the Indian IT services industry will soon be over. By all indications that time has actually dawned now.”– Prof. Rishikesha Krishnan - Indian Institute of Management - Indore

• This point highlights, the situation may not be a black swan entirely. However, a new trend has emerged where companies are predicting the next black swan event. In this case, they will no longer be black swans as per original thoughts by Taleb. That’s another topic for another post.
• Indian IT services companies occupy positions of very low strategic relevance with their clients
• As per a McKinsey study, more than half of about 3.9 million people will become "irrelevant" in next 3-4 years.
•  “Digital, automation, and protectionism – are three major ingredients of a perfect storm” - Ganesh Natarajan.

On reading the article fully, and using my own experiences and thoughts over a period of time, my immediate thoughts about the brilliant article highlighting the rough road ahead were.

• The dream run for Indian IT has ended for sure.
• With Protectionist measures on immigration – across the US, UK, Australia, New Zealand and other countries following the suite, one of the big attractors/carrots offered – Onshore work opportunities for employees are getting reduced, while the number vying for the evasive white elephant is increasing.
• The general industry is moving from a highway to my way(meagre-yields) or supersonic Hyperloop (for digital technologies)
• This is due to the fact that most of the firms are neither low –cost (as prolonged salary increases for last two decades) nor niche players
• To a large extent, many tend to serve the needs of the hour for the time-being.
• One Data point - An IT firm is no longer the biggest company in terms of Market Cap in India. After a gap of 4 years, Reliance Industries has outpaced TCS as the largest firm in terms of market capitalization in India. 
• Looking at the financial vitae of some of the firms, this shows multiple strands of evidence about troubled times. 

Source: Google Finance and respective company reports available at investor portal
Numbers intrepreted from INR or USD values for respective KPI

• To add to the woes, perennial bellwether of computing - IBM's share fell 6% this week when it reported a record 20th straight consecutive quarter of year-on-year losses, wiping the market cap by 6% and impacting the wall street. IBM has a massive presence in India as well.

Peter Drucker’s book - Management of Innovation and Technology has a brilliant quote: ‘’Innovation is a specific instrument of entrepreneurship, simply put it is the act endows resources with a new capacity to create wealth." It is during the troubled times that a character of an organization is tested. Only the stronger, agile, nimble ones will survive.

So, this perfect storm or the black swan moment may be leveraged positively by some of the strong, agile and nimble players. Potential consolidation is a possibility, acquisition of Intellectual Property rich product and technology firms may be on the cards. The emergence of next set of Unicorns, big-ticket productivity firms and services firms may be a reality. It is indeed a tough, traffic heavy and congested road for some time till creative firms leap ahead of others, including big players. One needn’t be surprised if a Nokia or a Kodak style situations arising with some of the established players.

Additionally - I raised a question in one of my previous firms to top leadership during one of the town halls about the impact of "BREXIT, TRUMP, Oil Prices, Financial Uncertainties and big ticket contract renewals which surmount to a perfect storm". The ready-made textbook answer that I received was more generic and not specific as no one having a "crystal ball" to predict.

With a textbook skeuomorphic stance, some of the firms may face black swan, Nokia/Kodak moments and may have a telling impact on the growth of the firms. Gone are the days of 20%+ growth that is currently needling towards 7%+ post a 15-11% decline in the past few years. A Sub 5% growth is very much on the cards for big firms, unless big-time consolidation and innovations make some to rise above the rest. It remains to be seen which of the WITCH (Wipro, Infy, TCS, Cognizant, and HCL) or CHADDI (CAP, HP Enterprise, Accenture, Deloitte, DxC, and IBM etc.) emerge as victors.

Taking a quote check here for reality and some humor check from the movies

• "Truth hurts. Maybe not as much as jumping on a bicycle with the seat missing, but it hurts." - Naked Gun - 2 1/2: The smell of fear
• "There is nothing noble in being superior to your fellow man; true nobility is being superior to your former self." - Kingsman - The Secret Service
• "Every accident, properly viewed, is an opportunity."- The bridge of Spies
• "Progress rarely comes from those who are content and secure." – Beyond the lights

What does this entail for freshers joining the industry? The key to success to new graduates is to be "Technologically relevant, capable and be very knowledge hungry and thirsty". Be hungry to learn technically, be relevant and always be learning. Future belongs to technically inclined, motivated and energetic perennial learners. These types of persons will be in demand - either in firms or as free-lancers in the new world. Multi-skilled and talented artists will be in demand – either virtually or in local markets where there is an increased demand for specialists with the rising wave of protectionism. This will also mean increased cost of operations for the firms.

• I have some thoughts on how the organizations can ride the demand and need for reduction of cost of operations. An ask for a reduction of cost by 20-50% by the clients is a common theme these days as the firms need to fund themselves for digital transformation and reduce the low-cost, less-strategic operations. Most of the outsourcing firms have been getting a very decent margin (Twice to thrice of traditional margins reported by some of the global peers). In the easy to access information heavy world where peers discuss and share trends – be it procurement, finance, IT or HR, sooner or later, a good practice followed at a firm is likely to be mandated by all the peers. This will result in more demanding customers. The question will be how you can deliver more with ￡€$$?
• More output with ￡€$$ cost
• More feature delivery with ￡€$$ time
• More productivity with ￡€$$ people
• More revenues with ￡€$$ cost
• More value with ￡€$$ cost
• More Quality with ￡€$$ operational overheads
• So on

I have some thoughts and point of view on cost-savings options some of these IT services firms will venture into, leveraging my experience and learnings and publically available information. This I will share in my next post.

I Hope you enjoyed reading this post. Please share your thoughts as comments. Your sharing is welcome! Caring is sharing. Feel free to like, share or comment on what you think! Please tag me if you forward this for relevance.

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