IT Services: The coming storm & why India needs to be worried

The IT services industry is facing significant headwinds of late. This is no secret. Many people attribute this to the advent of “automation and artificial intelligence.” But to my mind, that is a bit of a red herring. Automation and technology have consistently replaced low skill, repetitive jobs in industries across the ages. Agile businesses don’t shut down because of automation. They move up the value chain.

What we see now, is the industry getting disrupted and the big players still figuring out how to respond to it. This is something that India should worry about. For a long time now, the IT services industry has soaked up young, employable talent emerging out of Indian engineering colleges and driven prosperity in it's wake. But if the mass hiring drops, we could well be faced with rising rates of unemployment among the middle class.

Faced with a twin crisis of growth and profitability, the big offshoring firms are quick to point out that they have the perfect get out of jail card. “Digital”, they exclaim in unison, when asked how they plan to salvage falling fortunes. The reality, though is that digital is not just another wave of services opportunities that can be leveraged. It represents a move up the value chain. A fundamentally different way of approaching business transformation, for which we needed to have been preparing for a while. Spending large cash reserves on serious upskilling and building future ready business models rather than continuing to play the labor arbitrage game and amassing fat margins at the expense of the future. No one wants to break a highly successful model when it seems to be working fine, but sometimes that is just what we need to do. Perhaps it is time to move to a model where lesser people do more value added work, in a very purposeful manner.

The downside to focusing on labor arbitrage is that the industry has been forced to “down-hire” for decades. Starting with talent from the elite IITs and top engineering colleges, they moved to just about any engineering college and then to regular graduation colleges and so on. Soon we were hiring entire passing out batches on the basis of rudimentary tests. Higher “volumes” and lower productivity became the de-facto business strategy. The problem with this strategy is that it poisons the talent pool over time. Businesses end up employing masses of average talent with no one to inspire or direct them. They end up creating a culture of mediocrity. Over time, the same talent becomes mid and senior management. They have no incentive to change the status quo and actively resist change that discomforts them.

The other casualty tends to be front line sales. When the central promise of a business becomes predictability and scale, sales folk slowly become mere order takers because there is really no extra edge that they can deliver or play on.

Over time smaller, nimbler firms start snapping at the heels of big firms. Customers learn the game and start setting up captive delivery centers. Technical disruptions come by and customer expectation starts to shift. This is when the industry looking for the next tide to lift all ships found “digital”. There is only one problem, though. Unlike earlier tides, digital is complicated, layered and difficult to manage because it integrates so many diverse competencies. It places little value on the ability to deliver predictable outcomes at scale. That can be left to the bots and AI. Customers now require a zesty soup of innovation, creativity, design, marketing, data sciences, emerging technologies and high-end coding to come together and deliver transformational solutions. What most large services firms have on the table instead, are masses of mediocre talent and operationally strong managers.

So how do we respond now? One way is to fundamentally re-imagine future business models and start rebuilding for the same. This means a lot of pain in the short run. Accepting a few years of flatlining or declining revenues as new leaders, business lines and practices find their feet and steer the ship on a new course. This is very difficult for firms that are answerable to Wall Street every quarter and have large running P&Ls.

So what can the industry do differently, if it needs to change the wheels on a running car? There are 2 significant steps that are still eminently doable, given the strength of this industry, which are its cash reserves.

1.      Acquisition, acquisition, acquisition:

The industry needs to stop believing that everything can be "built" or achieved organically. Especially because the skills and the environment required to deliver new capabilities in the digital world may be in complete opposition to existing core values. For example, innovation and creativity are rarely process driven, cost-optimised, team sports. They tend to be driven by stars. Quite often by quirky personalities who will refuse to fit into a brick wall. An industry which has operated on a factory model will struggle to attract and retain such talent. The alternative is to start behaving like a holding company and acquire strategic capabilities through acquisitions. Let the acquired companies and talent flourish without trying to integrate them into the existing culture. Hold them as separate entities. Let their innovators and sales team be the tip of your arrow. Use them to sell the ideas and push the innovations. Make money off the long tail of execution work that inevitably follows through.

2.       Set up aggressive venture capital units with long horizon investment objectives:

Instead of trying to foster innovation within closed environments through self-directed teams etc, simply identify talented start-ups. Take a stake in them and support them through funding and access to markets. When it reaches a stage where the model is proven and ready to scale, then and only then, step in and get involved in the go to market strategy.

The above actions should not be difficult to execute. They can go a long way in preparing us for the pivot. But it will require a willingness to step out of comfort zones and take risks. Leaders will need to stand up to boards and shareholders and justify why investments are being made into areas that don’t fit with traditional business models.

Pulling off this change through vision and conviction will perhaps script the success stories in the next chapter of this industry.