These days when I read the “obits” of the Indian IT industry penned by doomsday prophets, I am reminded of what Mark Twain once said when he read his own obituary in the newspaper. “The rumours of my death were vastly exaggerated,” was his retort.
The level of uncertainty that the world is grappling with is clearly not just in the Indian IT sector. Janet Yellen, the Fed Chief had remarked last year, “Extreme economic events have often challenged existing views of how the economy works and exposed shortcomings in the collective knowledge of economists”.
Having said that, there is no denying that the industry is buffeted by short-term factors, which have had an impact on the results of some of the bellwether companies, and lowered guidance for a few others. However, a deeper look at medium to long-term horizon will reveal that the macros remain in place, and cynical gross exaggerations about where the industry is headed, remain unfounded.
By now, it is pretty obvious what the short-term factors are and their seismic impact. These include but are not limited to:
- 1. BREXIT: It is taking a toll on financial conditions and market sentiments. The pound has seen some weakening, equity prices are lower in some sectors, especially for European banks and yields on safe assets have declined.
- Slowdown in BFSI: Low interest rates help economies recover but many advanced-economy banks are facing profitability challenges related to low net interest margins (NIMs) increasing the cost of capital, which has led to delay in discretionary spending in the sector.
- Political Uncertainties: Recent wave of protectionist measures proposed in US has accentuated uncertainties which is leading to slowdown in decision making.
- 4. Lower GDP Growth in Key Markets: Economic volatility has been exacerbated post BREXIT, making the situation more volatile. The IMF in its July update last year, reduced the growth for US from 2.4% to 2.2% for 2016 and UK from 1.9% to 1.7%; Euro area has also been reduced by 0.2%.
While short-term challenges of this magnitude do provide grist to the mills of sceptics, we should not jump to hasty, ill-founded conclusions especially since medium to long-term industry outlook remains unchanged. We should also draw succour from the fact that this is not the first time the IT industry is confronting severe challenges. I am quite confident that the industry is robust enough to negotiate these humps successfully, this time as well. At the same time, there’s a strong likelihood that the future will be considerably different from a mere linear extrapolation of the present and will not be characterized by the current business models.
Analysts’ indicate that Global IT spend is steady right now, and if anything, there’s been a rise, albeit not a sharp one. For India too, the overall share has remained constant and not reduced, as implied by some observers. I do believe that the current adverse conditions are in the process of bottoming out and are unlikely to witness any further freefall. What is noteworthy however, is that within the sector, results have not been uniform. A top-line growth for instance, has been offset by flat margins and vice versa (in some cases), which adds to the complexity in interpretation. Also, the industry cannot have a one size fits all outlook. It is a diversified mix of sub sectors – IT Services, BPM and Engineering and have different growth rates. Also, GICs and MNCs contribute about a third of the total exports basket and are seeing a constant growth trend.
Technology disruptions are reshaping enterprises, while global and Indian companies increasingly focus on building digital platforms to redefine how their services / solutions can be delivered. This has led to de-coupling of revenue and productivity. Simply put, the industry revenue of 100 billion USD saw 3 million people being added, but the next hundred would require less only about half that number, as the NASSCOM – McKinsey study indicates. While the commonly held threat perception about job losses remain, but the opportunity to get re-skilled in new areas is unmistakable. Tech disruption eventually creates better jobs than what it takes away.
Interestingly, the average deal sizes are getting smaller (0.18 billion USD in ’15 to 0.14 in ’16 YTD, IDC), rendering higher chances for new entrants to claim a share of the pie, especially in the digital business. Enterprises are opening up to the idea of new sourcing models and creating opportunities for entrants. The demand will be for a combination of domain knowledge, consulting experience and technological expertise. In 2016, there has been an increase in contracts that combine both Consulting and domain-specific IT spends. In a bid to leverage these opportunities, the interlinkages between smaller niche players and large companies have been growing stronger and spurring collaborative models. NASSCOM has been able to leverage its unique position straddling big and small, innovative companies by building mutually beneficial partnerships between them under the Industry Partner Program.
The Indian IT industry is not about services exports alone. An under-served domestic market provides new opportunities for the industry. The gargantuan challenges that the nation is grappling with in the areas of healthcare, education, financial inclusion, are all perceived as billion dollar opportunities. Certainly, solutions which will work for India will find resonance in other markets as well. E-commerce and technologies driving the shared economy are worthy mentions here, with phenomenal growth rates.
India will continue to be the largest producer of world class engineers and data analysts / scientists, at scale, and remain a dominant player in the tech driven world. A recent NASSCOM-Mckinsey Study indicates that the level of digital adoption and its consequent impact will not be uniform. Digital Attackers, Followers and Laggards will co-exist, and it is wild speculation to predict that a 150 billion USD industry that we have painstakingly built over several decades which today disseminates best practices in more than 80 countries, will evaporate overnight.
Rest on our laurels – we definitely should not and won’t; the digital future we are learning, but the current bump should act as a catalyst for the industry to make that inevitable leap into the future and cross the chasm.