Road to irrelevance

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irrelevance

There’s no strength in numbers. Indian IT companies have learnt this the hard way over the last two years. The Indian IT industry collectively employs over 3.9 million professionals – most of them engineers.

Road to irrelevance

In good times, companies crowed about the size of their talent pool. Now, many of them are groaning under its weight. In private, executives tacitly admit that size is denying them the agility they need to respond to rapid technological shifts. The realisation that elephants can’t dance after all has sunk in.

Mostly, Indian IT companies maintain and support IT systems for clients. Beyond a handful of exceptions, they did not build any vital technology. They simply built low-cost teams. Their revenues come from employing professionals to customise, piece together and support existing software to ensure that it works to the satisfaction of clients.

Employees are billed by the hour, so the incentive is to put more people on projects. Companies make about $50,000 on a programmer on average and the median wage is about $8,000.

Most employees aren’t even expected to have advanced technical skills, which is why it is common for companies to hire fresh engineers from campuses, train them for two months, and deploy them on projects. Some companies hire civil and mining engineers too, because it simply doesn’t matter.

In the pyramid-like organisational structure of IT companies, these engineers occupy the base. They perform repeatable tasks for years and have limited opportunities to improve their skills, which makes their jobs vulnerable to automation and shifts in technology preferences.

Cloud Over Sunshine Sector
The early years of this millennium experienced an outsourcing boom. Heavyweights like General Electric led the way with its 70-70-70 rule, which set the company a target to outsource 70% of its processes, offshore 70% of outsourced processes, and locate 70% of offshored processes in India. Other US multinationals followed suit.
At Indian IT companies, headcount grew in lockstep with revenues for many years. This linearity was finally broken due to a combination of factors, including higher IT spends and advances in technology.

For example, it took over 37,000 professionals to generate $1 billion in revenue in 2003. By 2012, just over 19,000 professionals could generate the same revenue.

This period also coincided with the emergence of enterprise-grade cloud applications delivered over the internet, which allowed clients to avoid upfront investments and pay for software based on usage. These new applications were also quick to set up, easy to use, and featured comprehensive functionality. CIOs began migrating to cloud-based services, which needed fewer people to keep them running.

NewGen Technologies
If cloud-based software struck at the heart of Indian IT’s business model, a new generation of technologies, including mobility, big data analytics, security and Internet of Things (IoT), sucked the lifeblood out of them. Indian IT companies have limited capabilities in these areas.
As enablers of the digital transformation agenda of clients, the new areas vied for a larger share of IT budgets, eating into the demand for traditional services. This created two-speed IT architectures within client organisations and IT companies realised that they inhabit a very different world.

Global IT giants like Accenture were quick to adapt to this trend. Beginning in 2012, Accenture suffered two years of low growth, before successfully shifting its revenue mix to generate over 40% of its revenues from new areas today.
Indian IT companies, on the other hand, were slow to respond. Afraid that new areas will cannibalise revenues from traditional services, they couldn’t muster the will to make the pivot to new technologies decisively enough. The growth expectedly slowed to single digits in the last fiscal.

Laid Back Then, Laid Off Now
A majority of the Indian IT workforce is skilled on old technologies and half of them will be irrelevant in the next 3-4 years, according to a McKinsey report. Advances in automation are making the situation grimmer still. Compared with all this, the fallout from H1B reform and Brexit is mere background noise.
IT companies are partly culpable for this situation. Leaders of the self-same companies used to decry the poor quality of engineering graduates. In their turn, they have done much worse in helping their employees keep up with the demands of the talent market.
Sober soundbites on the shift to digital aside, companies are still busy drumming up business in traditional services. “They are shuffling deck chairs on the Titanic”, as Vivek Wadhwa, a distinguished entrepreneur and academic, puts it.

Inevitable Result
Meanwhile, a new generation of smaller, nimbler digital specialists are undercutting them. The hard truth is that modern-day IT solutions need fewer people to build and maintain them. Mass layoffs are inevitable. One would expect Nasscom to coordinate an industry-wide response, but the industry body is in denial. It announced baldly that it doesn’t see anything out of the ordinary.

Layoffs are not new to the IT industry. What makes them alarming this time is that they are driven by structural reasons rather than external ones. The workforce at the top five Indian IT companies could shrink by a third over the next two years.

These layoffs will cut deeply into the psyche of the IT community, but professionals should not lose hope. They should aggressively reskill themselves on new technologies. Their bar should be higher than that of the company they work for.

(The author is co-founder of Lexys Labs, a Hyderabad-based IT services company)