IT Outsourcing: Doomsday or Booms Day?
It’s true the Indian IT services industry is feeling some pressure as IT demand patterns change with improving technology and Trump threatens to enforce new H1B regulations. Some see these troubles as the writing on the wall, while those who know better see it as an opportunity
For the past few months, there have been reports and subsequent banter around how the end of the Indian offshoring space is around the corner. Naysayers are making doomsday predictions even as organisations let go as few as 600 people. And whilst some reports have accurately pointed out what seems to be happening, most continue to mix up the issue of layoffs with H1B regulations that Trump administration is proposing to enforce.
One look at the performance data of IT majors would reveal that most of them have been under “growth” pressure for several quarters — even before the US election rhetoric. Since the turn of the century, there has always been noise about the ill-effects of offshoring on the American citizen by the Republican Party. But after elections, it invariably dies down. Though this time, Trump’s threat seems real, it would be naïve to assume that the layoffs in the industry have anything to do with the proposed changes in H1B norms, at least as of now.
It’s not just the Indian IT outsourcing industry, other industries too have been under severe pressure — recording lower revenue and margins. This is happening due to various changes across the globe, most importantly a changing business model across most industries. Such change is driven by technology, which means more work for the Indian offshoring sector. As models change, demand changes, and therefore offerings change. Organisations need to constantly reinvent by reskilling themselves and going to market with what is in demand to keep themselves relevant and growing. This happens across industries and functions.
In terms of products, a few years ago there was a growing demand for audio players (in different formats) and cameras, today that demand has moved to mobile phones. Companies that managed to change themselves to cater to the new demand, survived. Likewise, in terms of people skills, until a decade ago, companies would employ telex operators and stenographers, those roles don’t exist now. People who conducted these functions acquired different skillsets and moved to different functions.
The real challenge the Indian IT offshoring companies face today is from automation and digital transformation, and not so much from H1B regulations. But more than a challenge, this presents an opportunity. The volume of work will only increase with the changing technology as what works now may not be relevant next year. And that leads to a great scope of work for IT companies that are ready to deliver what the market needs.
The Indian IT outsourcing industry employees 40 million people —not a lean number for a nation like ours with not very encouraging unemployment rates. Some cities such as Bangalore and Hyderabad have prospered due to the advent of IT services. It would not be out of place to say that at least 70 per cent of Bangalore’s employment comes directly from IT organisations dependent on technology providers. In fact, most Indian cities have a significant number of people employed in technology services.
Yes, the writing on the wall seems scary and the issue here is that of automation. A significant volume of work done by the Indian IT workers is being automated. Robots and machines are replacing them. What was once perceived to be a complex task that required human judgment and intervention is being done by advanced technology. The journey ahead is going to be difficult, but can India take the lead in becoming the automation capital of the world?
We certainly have the ability to do that. But we need to get a quick action plan in place to leverage this opportunity, instead of being simply concerned about it. Some Indian organisations are already working on this, but the speed of progress needs to be significantly accelerated.
The volume of demand for technology, led by automation and digital transformation, is going to be the same as the current demand, if not more. And India very much has the intellectual capital to leverage it. But will the visa norms become a deterrent? It’s unlikely! Because the skill gap in the US remains wide and the country will need talent from across the world to meet its requirements. In fact, this new demand is going to lead to better profitability for Indian IT companies as what they have been doing for the past decade has become commoditised and does not yield great margins. Technologies that help in digital transformation aren’t going to become commodities, not at least in the near to mid-term future.
Indian IT organisations that rapidly reskill themselves will survive and thrive. This industry, which was built on the back of the Y2K issue has seen several transitions and headwinds. The ones who were able to remain relevant to market needs, prospered. Some vanished after 2002. Those who could not move beyond the Y2K service, shut shop. But many moved up the value chain. It is time again to significantly move up the value chain. The $150-billion industry, which has amongst the smartest minds, is also sitting on cash reserves to the tune of $50 billion. This surplus is now the industry’s war chest. Some companies have begun using it to increase their relevance and grow inorganically. This is no time for gloom.
That said, let’s not expect IT giants to register higher growth figures at their current size. Their new line of business will grow exponentially as their current offerings change over the next few years.
So what happens if the US decides to put draconian regulations around the H1B visa? The US is most certainly not targeting India. If it decides to minimise technology skills from India, it will also need to put strict regulations around imported products that it survives on, which could significantly increase pricing for the end consumer (Americans); it would also have to deport cherry pickers and other labour support that it gets from neighbouring countries. However, if the US does all of this in the current scenario, will it have the manpower and skills to substitute what it removes from the system? Let’s assume, it has these skills and can seamlessly manage the continuity in services and products. But using its own labour with its wage norms, what will the final product or service cost to the consumer? And given the current weakness in the US economy and related unemployment, can the average American afford to pay more — significantly more than what s/he is paying as of now? It seems to be a vicious trap for the Americans that they need to break out from, but with a more planned and well thought-out approach.
So if the visa restrictions are imposed, it’s a doomsday for who, India or the US?
The question here is are we really close to doomsday or booms day.
In this issue, we have interviewed three important stakeholders of this industry whose efforts, policies and actions will shape the future of this Industry: Karnataka’s IT minister Priyank Kharge. His isn’t a lean task. Karnataka’s GDP, specifically Bangalore’s, is dependant on IT services since its fortunes changed on the back of this industry — at least, 70 per cent of the workforce in Bangalore is directly or indirectly dependent on this segment. Raman Roy, head of industry body Nasscom, which represents and sprearheads the progress of IT outsourcing industry, shared his opinion on the current situation of the sector. Roy is also the founder, chairman and managing director of Quatrro, a leading IT services provider for developed countries. We also got some ket inputs from C.P.
Gurnani, managing director and CEO of Tech Mahindra, a $-4 billion IT outsourcing company that employs in excess of 1,00,000 people. Gurnani is also the former Nasscom chairman.