India's top IT firms are troubled by slowing revenue growth. Growing outrage against immigration and outsourcing in key markets such as Europe and North America, are adding to their woes. Yet they can survive disruptive forces by re-calibrating their current strategies of focusing too much on a few business verticals and markets, and ramping up investment in futuristic technologies such as automation, cloud, data analytics, robotics, artificial intelligence (AI) and augmented reality (AR) that they have neglected for long.
In 2009-10, India’s IT sector had a turnover of $74 billion including $50 billion of exports. In 2015-16, the turnover has gone up to $160 billion including $108 billion of exports. However, in dollar terms, the revenues of top three companies - TCS, Wipro and Infosys – that grew at 20% or so until 2011 have now slowed down to sub-10% per annum.
Hiring has slowed. For instance, in 9 months to Dec 2016, Infosys added less than 6000 employees compared to 17000 same period last year. Others too are going slow on adding new employees. Margins are under pressure and a US proposal to hike the minimum salary from $60,000 to $100,000 for bringing professionals from outside is likely to raise cost and further squeeze margins and move the game away from cost arbitrage - the USP of Indian IT firms.
Analysts argue that with Donald Trump as the US president, things will only worsen for Indian IT companies given their excessive dependence upon exports to a few markets such as the US and limited number of business verticals such as BFSI and Telecom which account for 50% of their sales revenue on an average and neglect of high potential retail and healthcare sectors.
More than three-fourth of the export revenue of Indian IT companies comes from IT services and related support, and business process outsourcing. Indian IT companies are over-exposed to a few selected markets such as the US and Europe. The US accounts for more than 60% of India’s IT exports, while a selected West European countries including Britain, France and Germany account for another 25% or so.
Most of what India supplies cater to the lower end of the $900 billion global IT market that mostly operates on labour cost arbitrage. Top Indian companies have insignificant presence in high value strategy consulting and business road-mapping that is dominated by American and European companies such as Accenture, IBM, Oracle and SAP. Indian IT companies have not invested much in developing their own proprietary software products like Microsoft or Oracle and hence don’t have much pricing power. Worse, they haven’t been able to fully exploit rapidly growing digital opportunities.
Indian companies unlike their American and European counterparts have been slow to acquire smaller firms with niche skills that would have provided them timely competitive edge. Guided by short-term stock market considerations, they’ve neglected to invest in new-age disruptive technologies, and spend on an average 0.5 to 1% of their revenue on R&D than 2% or so by the likes of Accenture. Indian IT companies are disadvantaged by bloated middle management that’s adding to their cost of operation and which is not sustainable in an intensely competitive market place.
Trump’s criticism of H1B visas which are capped at 85000 a year and roughly 70% of that were given to Indians according to US Citizenship and Immigration Service (USCIS) in 2015 is getting too much media attention these days. However, that’s not the only problem of India’s top IT companies. There’s no official cap on the number of L1B visas which are relied upon to transfer say the employees from Infosys’s Bangalore office to its Atlanta or New Jersey offices.
Indian IT companies face hardship from high rejection rates for L1B visa applications, according a report by National Foundation for American Policy. Besides, there are higher rejection rates for applications for the extension of visas which are often followed by request for evidence (REF) that results in project delays and cost overruns.
Besides, the charges of misuse of work-visa rules and their wide-spread media publicity have not helped the cause of top Indian companies such as TCS and Infosys for which they themselves are responsible.
The way forward
The immediate concern of Indian IT companies is two-fold: dealing with the implications of increase in minimum wages that will raise the cost of moving Indian software professionals to onsite projects and a restrictive visa regime that will impose a cap on the number of such professionals who can be brought in the US.
However, a Brookings study (2013) says that H1B visa holders get, on an average, 12% higher salaries ($76356) than American workers ($67301) of same qualification and experience. So contrary to the perception, an increase in minimum salary at best will have limited impact on pushing employee cost of Indian IT firms as hiring more locals may not mean additional wages. Moreover, the potential impact of increase in minimum wages can be minimized if Indian IT firms are ready to play along Trump’s slogan of ‘Hire Americans’ by setting up delivery centres in the South and Midwest states such as Ohio, Michigan and Wisconsin where the overall cost of operation are likely to be lower.
Besides, it makes sense to hire and start training workers in the US that will only improve the clout of Indian companies in the eye of Trump’s administration. Given the growing outrage against immigration and outsourcing in general, it makes sense to hire more local workers as advised by IT veteran and former chairman of Infosys, Narayan Murthy. IT companies should strive for increase in the share of offshore engagement to about 90% and limit onshore engagement in projects to 10% or so. That will help minimize of impact of restrictive visa regulations or any future reduction in the number of work permits or H1B visas.
While citing a US Department of Labour report that says by 2018, there will 2.4 million unfilled STEM jobs in the country with over 50% of them in IT sector alone, the critics argue that there are not enough STEM graduates to hire in the US. According to WEF, the US produced 237826 STEM graduates in 2015. The shortage of STEM graduates may be true. However, the former CEO of HCL Technologies, Vineet Nayar says that if in India we can train thousands of non-tech graduates to code in 90 days, the same can be done in the US. Beside, having more local hires will aid the creation of a more multi-cultural work place environment that tends to raise productivity and promote innovation. Pruning bloated middle level employees to cut wage bills and improve cost efficiency in the short run is urgently needed.
Moreover, it’s time, Indian IT companies learnt to move up the value chain through innovation and quality offerings rather than continue playing the cost-arbitrage game which has limited future anyways. That calls for increased spending in R & D and investment in upcoming areas such as automation or robotics - that so far have been a low priority. That would mean being open to lower margins that are they have been so used to.
Though the top export markets such as Europe and the US can’t be wished away anytime soon, Indian IT firms need to increase focus on non-traditional markets in Asian Pacific in particular China, Japan and South Korea.
Domestic IT market (though offers lower margins) can be another option to fall back upon in a difficult time. India’s domestic economy with its transformation initiatives like 100 smart cities, digital payments, e-governance and GST offers provide ample opportunities for IT companies to tap.
To conclude, not all challenges have external origin. In the long-term, given the sentiments against immigration and outsourcing, Indian IT companies will do well by changing the strategy of exploiting their labour cost advantage to ramping up investment in new cutting edge technologies for driving innovation and moving up the value chain, hiring locally and also focusing on fast growing domestic opportunities.