As consulting firms enter tech, problems mount for Indian IT companies

 As consulting firms enter tech, problems mount for Indian IT companies

European customers, who typically account for a quarter to a third of Indian firms' sales, are almost certain to cut their tech budgets - at least until the war in Ukraine ends.

The quarterly earnings season for India's outsourcing firms has started on a cautiously optimistic note. The country's largest software exporter Tata Consultancy Services Ltd reported a better-than-expected growth of 8% in net income. Its operating margin, which fell to a seven-year low of 23 per cent in the three months of June, rose 1 percentage point as Mumbai-based TCS dialed in on new recruits.

However, things can get challenging from here. European customers, who typically account for a quarter to a third of Indian firms' sales, are almost certain to cut their tech budgets – at least until the war in Ukraine ends and energy supplies return to normal. Caste. The more important US market could also disappoint as the Federal Reserve slows the economy to control inflation.

Some US companies may still look to information technology to reduce costs as they prepare for a recession. That is, new outsourcing orders. However, the pandemic's spurt on IT is now in the rearview mirror for Indian vendors. The ease-of-hire coders they found during the Covid-19 lockdown are becoming restless at the lack of career progress since the global economy reopened. TCS had an attrition rate of over 21% in the previous quarter.

These are all momentary problems for an industry that came into its own at the turn of the millennium - the Y2K bug put India on the tech services world map. Two decades later, publicly traded Indian software exporters generate more than $100 billion in revenue, employ 2 million people and have a market capitalization of about $350 billion. That alone is worth more than TCS International Business Machines Corp.

But size has come at the cost of agility. The outsourcing industry is all about helping global companies reduce friction at work, something the consulting firm has been doing better as of late.

Tightly managed from headquarters in Mumbai or Bangalore, Indian IT firms still have a strong advantage of the labor-cost of large-scale enterprise software. However, the center of demand is SAP SE or Oracle Corp. Moving away from implementing technologies at customers' premises. Demand for cloud-based workflow automation has seen Service Now Inc.'s revenue grow six-fold since 2015, while San Francisco-based Atlassian Corp.'s sales grew eight-fold thanks to Jira, a cloud-based application for tracking projects Is.

Fast-growing German startup Celonis SE, a pioneer in so-called process mining, claims to help customers "fix inefficiencies they can't see." Salesforce Inc., which owns business productivity tool Slack, accounted for a third of SAP's revenue in 2017. Now it's just 12% smaller. According to Bloomberg Intelligence, Shopify Inc. acquired a 19% stake in digital-commerce software against Oracle's 6% last year.

In implementing new-age IT platforms, Indian outsourcing players are lagging behind the likes of Accenture Plc and Deloitte Consulting.

In 2015, Accenture acquired Cloud Sherpa, a smaller organization of 1,100 employees, 500 of whom were Salesforce implementation consultants. Seven years later, the cloud is a $26 billion business for Accenture, growing 48% annually. Indian outsourcing firms have also ramped up cloud-based offerings, but they are struggling to scale in popular new technologies such as the human-resource management system offered by Workday Inc.

Tech is now a major part of consulting firms. That's why they're getting into the nuts and bolts of their customers' operations -- or at least enhancing their ability to do so. McKinsey & Co., which has acquired more than 20 tech-related companies in recent years, has acquired Jackie Wright, formerly Microsoft Corp. was appointed as its first Chief Technology and Platform Officer last month. Deloitte is aggressively recruiting coders and investing in training them on new technologies.




As the dividing line between business and technology in global corporations rises, Indian software vendors run the risk of falling behind their consulting rivals. Outsourcing companies are comfortable talking to in-house tech czars on large corporate clients. But when it comes to setting priorities, functional heads are increasingly calling the shots. And they don't speak the language of technology. A related trend is the rise of citizen developers – non-IT professionals coming up with automation applications for their teams using so-called low-code platforms such as Appian.


Mind you, Salesforce and Workday Implementation may not offer an exit from the global slowdown next year: New IT players are also concerned about demand. But at least they are more connected to the future of work than their traditional enterprise-software rivals – flexible, digital and often remote. Top-tier Indian outsourcing firms should have created billion-dollar franchises to implement the new platforms by now. To get back in the game, they will need to take a close look at muscle acquisition and work conditions at their firms, starting with freshers' salaries that have been stuck at around Rs 350,000 ($4,250) per year for nearly two decades. .

Mint reported last week that entry-level positions in the Indian IT industry could shrink by as much as 20% in the fiscal year starting next April. This may give some relief to the outsourcing firms on the profit margins. But focusing too much on the current slowdown can be harmful. This is the future they need to face – and make bold bets on it.