How do companies respond to the kind of change and mayhem that rips through an industry like an unexpected gale force wind? Both Kodak and Fuji found themselves in this unenviable situation in the late 90s when glimmers of the dawn of digital first appeared.
In almost as much time as it takes to say “cheese” — or at least it seems that way now — Kodak was toast, a once-king of the photography empire and a perennial Fortune’s ‘Most Admired’ company unable to adapt to the digital era and shoved into Chapter 11. Fuji on the other hand gambled by investing in a variety of businesses, struck gold with its chemicals-to-cosmetics play, and thrived in a post-film world.
Indian IT has had a similar kind of hurricane sweep through it. An era awash with riches collected from tasks such as infrastructure maintenance and application development has suddenly been upended by the world of digital cloud, rendering armies of engineers unnecessary, if not obsolete.
Industry growth for the top Indian IT players have already flatlined dramatically, dropping to as low as 5 percent in some cases versus over 20 percent just two years ago. Unable to take a leap into the digital realm, at least 70 percent of business for Indian IT still comes from the old lines that are crawling at a less-than-salubrious 4 percent. Meanwhile, what is sizzling are digital and consulting practices in the areas of social, mobile, artificial intelligence, and the cloud that are sailing along at a 40-percent clip. Both new deals as well as renewals will henceforth hang precariously on how well Indian firms play in these waters.
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Indian IT companies can still be enormously relevant in the new era thanks to their abundance of engineers and inherent cost advantage. However, they need to devise a whole new way of doing business around the globe. This will mean taking big bets and wrestling with bold challenges, something that they haven’t been accustomed to doing in their past era of easy gravy. It is not as if they are not trying — Cognizant, Wipro, and Infosys have shown their desire to change. Yet, their actions are far too little and far too slow to allow them any kind of purchase on a playing surface that requires speed, agility, vision, and decisiveness.
Here are a few things that they need to do immediately to claw themselves back into contention, if not avoid becoming another Kodak:
Putting one foot each in both worlds in an effort to ease the pain will not soften the migration. In fact, the effort it will take to continue servicing and chasing dwindling deals from the traditional model will simply be an exercise in distraction, say experts, in a scenario where time is of the essence.
Instead, they need to fling themselves headlong into chasing new deals by wooing companies who operate in the new economy, and grow while they grow into the leaders of tomorrow. In order to do this, they need to start by offering solutions that use a microservices architecture, which is the way new-economy companies like Uber and Google write and implement code.
As I have written before, this new landscape requires gravitating toward these sorts of modular services, built via APIs and HTTP, which allows running processes over disparate distributed systems that can communicate with each other, thereby imparting developer agility to solutions.
Clinging on to old world clients has the additional, ironic disadvantage of witnessing them — and one’s revenue flow — being disrupted by new world outfits (such as Amazon versus traditional retail), which has added insult to existing injury. Chase the future not the past. Here’s a good Mint article that details how Indian IT has seen traditional retail clients slash their IT expenditure in exactly this fashion.
Go on an acquisition spree
In a case of colossal shortsightedness, Indian IT has been sitting on humongous piles of cash that in many cases have touched $5 billion. What is worse is that these firms have decided to issue large stock buybacks in an effort to quell shareholder dissent who you could argue have been justifiably fed up watching no discernible gain from a growing pile of inert cash during a period that marks perhaps the greatest disruption to India IT in its two-decade existence.
Instead, what these companies should be doing is tearing up the ground with acquisitions much like Accenture has done by slapping down $2.5 billion for 38 acquisitions in the last three years, 70 percent of which was spent last year alone and on all things digital. This is precisely why its digital business has mushroomed to $7 billion. Indian IT has performed woefully inadequately by comparison.
Sure, a Wipro goes out and buys an Appirio and an Infosys goes out and purchases a Panaya, but these are few and far between. TCS, for instance, has shockingly not done anything in this department. How these firms hope to unleash talent with special skills that are catered to the new economy — skills that they don’t really have and will take time to build — is the multi-million dollar question that doesn’t seem to have any answers.
Think differently when thinking digital
The Capgeminis and Accentures of the world today have realized that IT workers in this new era will have to wear many hats. They need to become business savvy and thoroughly understand how marketing and sales affects their companies and their jobs. Most important of all, in this era of convergence, they need to understand design, which is as far removed a mandate as you could imagine an IT company embracing even five years ago.
Consequently, Accenture has rushed out to purchase design companies such as Fjord and Karmarama, while Capgemini has bought Fahrenheit 212 amongst others. Along with these acquisitions come what Indian IT is thirsting for — clients that are new era firms (Google) or old-era companies morphing themselves into new era ones (Coca-Cola, Citi). This is an era where clients are doing a ton of things in-house, especially on the technology front. When they decide to hire someone, they are looking for a firm that can offer an end-to-end solution that includes design, technology, and analytics, something that Indian IT is woefully inadequate to implement today. Realizing this, Cognizant has snapped up Idea Couture, which is a good move in the right direction. But it needs to do more ,while the rest of Indian IT needs to urgently follow Cognizant’s footsteps.
Get consulting skills fast: Acquire or build
Speaking of end-to-end solutions, companies these days speak the language of ‘transformational’ projects — and the key to landing them is a consulting arm. Consulting arms within the top shelf IT global companies motor along at 30- or 40-percent growth rates, and in Accenture’s case, are responsible for a third of overall revenue. This is also where the fat margins lurk. Consulting personnel at IT firms will soon become the engine rooms of the company, driving the firm forward, winning new deals, and servicing old ones while equipped with a holistic world view that combines a sophisticated understanding of technology, business marketing, and sales.
Indian IT has been trying to go in this direction but hasn’t had much luck primarily because in-house engineers probably don’t make good consultants. Yet, look at the McKinseys and Bains of the world and you will find a preponderance of Indian engineer-MBAs. These, however, are of a different world from the ones you will probably try and train into that position at an Indian IT firm.
Again, this leaves only one other way out: Acquire. As Phil Fersht at research firm Horses for Sources (HfS) has pointed out in the past, companies like Bain and AT Kearney (and Booz Allen) could be perfect acquisition targets and a worthwhile way to spend all that loose change lying around. Actually, this is not even a suggestion, it is an imperative considering these IT companies are getting their lunch stolen from them by the Big 4 consultants in all of the higher-value-chain digital design and implementation work. The other alternative is to build a large consulting practice from ground-up, which is easier said than done.
Aggressive training in new technology areas
This is the low-hanging fruit part of the to-do list, and if a company can’t or won’t do this, it’s probably time to call it quits. Languages like C++ and Java belonged to the old world just as DevOps, advanced RPA,s and Hadoop belong to the new. As Fersht observes, India’s real strength is its programming talent, so launching robust training programs that also include analytics and cognitive algorithms should be embarked upon with furious urgency.
It is not as if money has suddenly dried up in what feels like a new era of protectionism — not only is it there, but it is growing dramatically. “Research at HfS shows that all B2B Digital Spend could be as high as $7 trillion worldwide ($2 trillion in the US alone),” says Fersht.
Question is, can Indian IT re-invent itself in time to go out and grab some of it?