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Why the Indian Tech Sector may weather the storm
Why the Indian Tech Sector may weather the storm

March 17, 2023

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The recent announcements of massive workforce reductions by global technology companies, and a hiring slowdown by Indian Tech majors, have led commentators to question the future of the sector. Analysts forecast a drop in the demand for technology services; some have slashed the Indian tech services sector’s estimated growth rates in half, from approximately 15% in 2022 to 6-8% in 2023.

Given its track record of relevance and resilience, the Indian Tech sector would be able to withstand the global macroeconomic headwinds, even as it faces challenges related to longer decision cycles, lower discretionary spends and pricing pressures as customers consolidate vendors. Companies that focus on the following imperatives are likely to emerge winners:

 

Customer intimacy: Over USD 100 billion of contracts are expected to be renewed over the next few quarters. Tech companies need to analyse the spend drivers of their priority clients, cut the tail of non-performing accounts, and sharpen their focus on proactive pitches to capture revenue pools. The ability to intercept early warning signals regarding reprioritization of spends and respond quickly with customer-relevant solutions will be critical. Risk-sharing propositions and financial engineering of contracts will serve as differentiators as well. For instance, a recent infrastructure transformation win by a Tech major has involved investing over USD 50 million in upfront cash to help fund the customer’s digital initiatives.

 

Delivery excellence: Over a third of all outsourcing deals fail to deliver their intended business value. This is especially true for multi-tower contracts which include commitments to deliver annual productivity benefits that are dependent on delivery-automation and the customer transforming upstream processes. Governance and execution challenges lead to bid-versus-did dilution. This adversely impacts project profitability and delivery-led growth opportunities. Organizations need to double down on sharpening engineering capabilities, industrializing “lights-on” projects, and accelerating hyper-automation initiatives – such as micro-bot factories and reusable assets – to improve quality, productivity, and gross margins.  

 

Demand-Supply optimization: Even as attrition is moderating, people costs – the largest cost head for Tech companies – remain high. Many companies have over-hired during the last several quarters due to demand volatility and the ineffectiveness of traditional forecasting methods. Often, the skill sets of benched resources do not match customers’ evolving requirements, and companies turn to high-cost subcontractors to fulfil demand. To recruit the right skills at the right time, organizations need to invest in developing demand-supply optimization models that can predict demand signals by account, skill-group and geography, and further, map these to talent catchment areas. This not only sharpens forecast accuracy, but it also prevents revenue loss and protects margins by ensuring timely internal fulfilment, better utilization and creation of training and re-skilling programs that align with clients’ requirements.

 

Internal transformation: Many Tech services companies have scaled at the cost of operational efficiency over the last two years. Redundant management layers and disjointed processes often shroud performance improvement opportunities. In such cases, while simplifying and aligning systems can boost data fidelity for smarter decision-making, optimizing costs can release capital for funding investments. Similarly, rapid digitization, for example, by adopting cognitive technologies and modern architectures to enable a cloud and mobile-first strategy can unlock value. For instance, to increase win rates, a leading organization is improving the throughput of its sales enablement functions by building a digital platform that enhances RFP response-agility and helps curate differentiated and high-quality, client-relevant content.

 

Transactions focus: EY’s recently released study indicates that the appetite for Tech deals will return in 2023, especially as valuations become reasonable compared to the last 12-18 months. Tech services companies and private equity backed Tech portfolio companies should view M&A as a key opportunity vector. Cloud, analytics, design and digital engineering were dominant themes for strategic acquirers last year. These, along with sector-specific platform plays, would be relevant bets for 2023. 

 

Winning during the global slowdown requires both defensive and offensive plays from Tech services companies. Doing so will help them emerge stronger as they prepare for the next super-cycle of growth.

 

 

Disclaimer: The article was first published in The Economic Times

 

-          Author of the article is Nitin Bhatt, Technology Sector Leader for EY India


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