Despite transformation amid falling investor confidence, Indian IT is still not out of woods.
In October 2016, Indian IT executives received a flurry of WhatsApp and email forwards. Bloomberg, the global news agency, had a column proclaiming the imminent death of their sector. The obituary said India’s pre-eminent industry was ‘terminally affected by the rise of robotics and artificial intelligence.’
The sector’s displeasure was apparent. Hot denials were issued and executives dusted off and amended the Mark Twain quote — rumours of Indian IT’s death were greatly exaggerated. But there was cause for concern. Growth had slowed, clients were taking their IT budgets in-house or tapping smaller innovative players to run tests on new technologies, stricter visa rules were hurting the sector’s ability to service clients, and the companies had hundreds of thousands of employees with limited knowledge of the skills now in demand.
Take Tata Consultancy Services. For two years, the company’s results press conferences were dry, recitations of numbers. Then CEO N Chandrasekaran and current head Rajesh Gopinathan batted away questions on when growth would return and how the company, steadfast in its refusal to spend on acquisitions, might be losing out in the digital race. As the company returned to doubledigit growth this year, Gopinathan spelled out just what a toll the questioning had taken.
“We faced a lot of skepticism about our plans, not just from outside but internally as well. But now we have been validated. Two years back we slipped down from our double-digit growth trajectory, and as a management team we have been focused at getting back to that growth level,” Gopinathan said in October.
To get here, Indian IT companies have had to change every part of their process—even becoming less Indian. They have shed jobs, changed how they work, upended part of their business models by focusing on hiring at client locations abroad, invested in training their employees, and chased acquisitions. The goal this time: growing digital revenue, in the hopes that it would offset the contraction in the traditional business, which is still over 60% of their revenues.
“The core purpose of IT has changed to helping transform businesses and drive revenues from reducing cost and improving efficiency. This has led to a new wave of growth for IT, helping customers digitally transform their businesses,” said Hexaware CEO R Srikrishna.
The most visible change in Indian information technology is that it is becoming progressively less Indian. Every company wants to hire in local markets. Infosys said it would hire 10,000 Americans in two years. Cognizant wants to hire 25,000 in the next few years. TCS and Wipro haven’t issued targets but ‘localisation’ is at the top of the agenda there too.
The drive to hire in those markets is coupled with a distinct pruning of headcount back home. This was most apparent in the case of Cognizant, which made the deepest cuts in its cost structure at the behest of activist investor Elliott, a US-based hedge fund. At the end of 2017, Cognizant employed about 260,000 people, of whom 180,000 were in India, down 8,000 from the year before. Its US headcount had increased by about 2,900 to 50,400, and its Europe headcount rose by about 2,300.
Those US and Europe headcount numbers will climb higher still. “In North America, a little over 40% of our headcount is locally hired. In our other significant markets, we are over 50% local talent. In North America, we will be over 50% local talent in the next few years,” CEO Francisco D’Souza told analysts last week. The scramble to add local talent is not without its costs. “We recognize the localization initiatives undertaken by Indian IT, with many having local US headcount that is higher than visa workers.
However, constrained availability of resources is making its impact felt,” Kawaljeet Saluja, analyst with Kotak Institutional Equities, said in a note. “Infosys attributed higher costs in the quarter to this dynamic, while Hexaware missed consensus revenue expectation due to demand fulfillment challenges.” Even when they do hire in the US and Europe, Indian IT companies are pretty much poaching from each other, exacerbating the salary inflation onsite.
“There is a challenge for talent in the local markets. This is a zero-sum game. We need to break this and develop talent in those markets. We are going to campuses and we have started bringing those campus hires to our training centre in Trivandrum,” Regu Ayyaswamy, global head for internet-of-things and industrial engineering at TCS, told ET in an interview.
IT companies are looking at building the same campus recruitment engine in client markets as they did in India, and are focusing on current campus hires to become ambassadors for them at their universities. On Wednesday, Infosys announced it would hire 1,200 locals in Australia by 2020, over a third of whom would come from campuses. Cognizant has earmarked $100 million in a foundation created to develop skills in the US.
Where they can’t hire, or train, locally, IT companies have been forced to pay increasingly large sums of money to sub-contractors. “During the last 12 months or so, we have also seen certain visa regime changes in the United States that has put certain lead times for the visas. While we have accelerated the localization and local hiring, we still need to meet certain immediate project requirements especially in digital and niche areas,” former Infosys chief financial officer MD Ranganath told analysts in October last.
MOVING WORK OFFSHORE BUT NOT BACK HOME
Even as the US has made it harder to get H-1B work visas, and local talent is scarce, IT companies have focused on moving as much work as they can offshore. Infosys presently handles over 71% of its work offshore, up from a little over 70% two years ago. Wipro and TCS have also talked about bringing as much work as they can offshore. But companies say there won’t be much of a shift and that offshore no longer just means India.
“I don’t see the big split—the offshore and onshore—changing meaningfully. What I do see is a lot more work being done nearshore and in regional delivery centres,” Cognizant’s D’Souza said. The company spent over $500 million buying digital engineering company Softvision, partly for its presence in Romania. Mid-sized IT company Hexaware has said it would use its Mexico centre to service US clients.
IMPROVING EMPLOYEE UTILISATION
Workforce utilisation across Indian IT services has increased as companies gradually adopt automation into different layers of work at the backend. While large IT companies have historically reported utilization of nearly three-fourths of their overall workforce, in recent quarters, this has increased to more than 80% (including trainees) with a higher focus on people plus the machine-delivery model.
This has contributed to overall profitability by improving peremployee revenue. Infosys has consistently reported over 80% utilization in the past four-five quarters. Wipro called out an all-time high utilisation number of 85% (excluding trainees) for the past two quarters. For long, these companies had seen higher onsite cost of employment at low utilisation, as an offshore-heavy delivery at lower cost balanced the profitability. These lines are blurring. More companies say collaborative technologies and automation are reducing the need for more people across projects.
NOT OUT OF THE WOODS YET
While the Indian IT industry is indeed recovering, companies face individual challenges. “Companies that embraced the change see high growth overall, margin protection, and continue to stay relevant,” said Rostow Ravanan, CEO, Mindtree. “Customers are looking for partners who can help build solutions for their business problems with speed and quality. Some IT companies have adjusted well to this changed scenario and have greater chances of thriving in the times to come.”
Despite Indian IT’s painful transformation amid falling investor confidence, they are still not completely out of the woods. Challenges such as hostile protectionism abroad and pricing pressures remain. “While there are early signs of success, there is still a long way before Indian IT firms become truly consulting, sales-led organisations,” said Sanchit Vir Gogia, CEO of Greyhound Research.
Indian IT companies, he said, face critical external pressures— continued political diktats against outsourcing in the US despite local hiring, a systematic crackdown on visas, and changing regulatory environment globally such as new data protection laws and imminent Brexit. “Companies that navigate the deflationary pressures effectively while positioning to ride the new digital growth wave are the companies that will be the most successful in the next decade,” said Hexaware’s Srikrishna.