IT services: the coming storm and why India needs to be worried

The IT services industry is facing significant headwinds of late. This is no secret. Most people tend to attribute this to the advent of “automation and artificial intelligence.” But that is a bit of a red herring and the technology industry should really be the last to use it. Automation and technology have consistently replaced low skill, repetitive jobs in industries across the ages. Agile businesses don’t shut down because of automation. They move up the value chain.

What we see here is the industry itself is getting disrupted and there seems to be little that the big players are able to do about it. This is something that India should worry deeply about.

Over the last few decades, the IT services industry has soaked up young, employable talent emerging out of engineering colleges like a sponge. But this scenario may not last long. We may soon be faced with serious challenges set off by rising rates of unemployment among the middle class.

Faced with a crisis of growth and profitability, the big offshoring firms are quick to point out that they have the perfect get out of jail card. “Digital,” they exclaim in unison, whenever asked how they plan to salvage falling fortunes. The reality, though is that most of the large players are poorly positioned to take advantage of the digital opportunity.

The poisoned pool
There was a time when they could have spent their large reserves of cash on serious upskilling and building future ready business models. Instead, most of them continued playing the labor arbitrage game and amassed fat margins at the expense of the future. After all, who wants to break a highly successful model when it seems to be working fine?

The downside was that the industry was constantly forced to “down-hire” for decades. Starting with talent from the elite IITs and top engineering colleges, they moved to just about any engineering college and then to regular graduation colleges, colleges from smaller cities and so on. Soon they were hiring droves of people almost blindly. Entire batches passing out were hired on the basis of rudimentary tests. Higher “volumes” and lower productivity became the de-facto business strategy.

The problem with this strategy is that it poisons the talent pool over time. Businesses end up employing masses of average talent with no one to inspire or direct them. They end up creating a culture of mediocrity. Over time, the same talent becomes mid and senior management. They have no incentive to change the status quo and actively resist any change that discomforts them.

The other casualty tends to be front line sales. When the central promise of a business becomes mere predictability and scale sales folk also slowly become slothful order takers because there is really no extra edge that they can deliver or play on.

Over time this strategy simply stops working as smaller, nimbler firms start snapping at the heels of big firms. Customers learn the game and start setting up captive delivery centers. Technical disruptions inevitably came by and customer expectations start to shift. This is when the industry looking for the next tide to lift all sinking ships finds “digital”.

There is only one problem though.

Unlike earlier tides, digital is complicated, layered and difficult to manage because it integrates so many diverse competencies. It places little value on the ability to deliver predictable outcomes at scale. That can well be left to the bots and AI. Customers now require a zesty soup of innovation, creativity, design, marketing, data sciences, emerging technologies and high-end coding to come together and deliver transformational solutions. What most large services firms have on the table instead, are masses of mediocre talent and managers who simply cannot see beyond the mundane.

One way to fix this broken engine is to fundamentally re-imagine future business models and start rebuilding for the same. This means a lot of pain in the short run, though. Accepting a few years of flatlining or declining revenues as new leaders and practices find their feet and steer the ship on a new course. This is a near-impossible task for firms that are answerable to Wall Street every quarter. So far, only one giant has shown the willingness to try and take this pain. The rest continue to pay lip service to digital, innovation etc while showing no inclination to make bold, decisive moves.

So what can the industry do differently, if it is unable and unwilling to disrupt the existing cash cows? There are two significant steps that are still eminently doable, given the strength of this industry, which are its cash reserves.

1. Acquisition, acquisition, acquisition
The industry needs to stop believing that it can learn how to fly to the moon just because it has successfully driven a bus for 50 years. Everything cannot be achieved organically. Especially because the skills and the environment required to deliver new capabilities in the digital world may be in complete opposition to existing core values.

For example, innovation and creativity are rarely process driven, cost-optimised team sports. They tend to be driven by stars. Quite often by prima donnas who will refuse to fit into the brick wall. How can an industry which has operated in a factory model, even hope to attract and retain such talent? The alternative is to start behaving like a holding company and acquire strategic capabilities through acquisitions. Let the acquired companies and talent flourish without trying to integrate them into the existing culture. Hold them as separate entities. Let their innovators and sales team be the tip of your arrow. Use them to sell the ideas and push the innovations. Make money off the long tail of execution work that inevitably follows through.

2. Set up aggressive venture capital units with long horizon investment objectives
Instead of trying to foster innovation within choking environments through so-called self-directed teams etc, simply identify talented start-ups. Take a stake in them and support them through funding and access to markets only. When it reaches a stage where the model is proven and ready to scale, then and only then, step in and get involved in management.

The above actions should not be difficult to execute. But it will require a willingness to step out of comfort zones and take risks. Leaders will need to stand up to boards and shareholders and justify why investments are being made into areas that don’t fit with traditional business models. Pulling off this change through vision and conviction will perhaps script the success stories in the next chapter of this industry.