As the second quarter corporate result season draws to a close, it is clear that Indian IT services companies, both large and small, have fared poorly, a trend that has been continuing for quite a few quarters now. This has inspired a number of obituaries about the sector, which contributes about 9.3 per cent to the country's gross domestic product and employs 3.5 million people directly. The companies, it seems, have enough reasons to worry.
For years, Indian IT companies have thrived on merely executing orders of customers. An ever-depreciating rupee meant they could thrive on 'Lift and Shift' (moving work to a low-cost destination such as India). While they earned in dollars, they paid employees in rupees, enjoying fat margins. The time zone difference between India and the mainly western markets it served meant that the vaunted 'Global Delivery Model' worked seamlessly. However, the low-cost model has been wrung completely over the past decade and a half. Also, most global IT companies have opened big India centres, negating the cost advantages enjoyed by Indian companies. Besides, customers themselves are now setting up captive IT units.
In a slow-growing world, customers are looking to rope in technology partners for growing at a fast pace. Shifts towards cloud, digital services, automation, machine learning and artificial intelligence mean that the industry's soft underbelly-under-investment in innovation - is getting exposed, even as its traditional areas get commoditised. The industry lobby group, Nasscom, has been dithering on lowering the growth guidance for the current year from the earlier 10-12 per cent. It is clear that the industry is facing fundamental challenges, if not an existential crisis.
Some industry insiders, though, don't agree with the assessment. They say growth is lower as the base is now bigger, and things will change once global economic growth picks up.
Can anything be done about the situation? Yes. To begin with, there is a need to acknowledge that a problem exists. While a few large companies realise this and are working out new business models, most mid-sized and smaller players are simply coasting along. They need to invest extensively in platforms, packages and people, say experts.
With protectionism on the rise, the industry will also have to tap new growth geographies such as China, Japan and Latin America. At present, it gets just 10 per cent revenue from these markets, obsessed as it is with North America and Europe.
The bells are clearly tolling for the industry.