The IT Services industry needs good shopping habits

By Ravichandran. V Sep 20th 2016
The IT Services industry needs good shopping habits

IT services companies should embrace automation and make acquistions that will help them address customer needs more effectively.

 

A few years ago the CEO of a leading IT Services company told me that all CEO are alcoholics. I asked him why he says so and he responded, “We all live by the quarter.” A very profound statement that talked of the CEOs’ inability to focus on the long term but look for how best to meet and exceed the next quarter’s market expectations.

A few years ago the CEO of a leading IT Services company told me that all CEO are alcoholics. I asked him why he says so and he responded, “We all live by the quarter.” A very profound statement that talked of the CEOs’ inability to focus on the long term but look for how best to meet and exceed the next quarter’s market expectations.

The results announced during the last week by Infosys, TCS and Wipro reminded me of this living by the quarter and also clearly showed a few trends – slower growth (mostly in single digits), lower profitability and worse still, lower guidance. Hidden away in the numbers are – slower hiring plans, automation and most importantly lower revenue per employee (also called revenue productivity).

I had visited some engineering colleges a few months ago in the 2nd and 3rd tier locations of Tamil Nadu. Hiring was extremely slow there. The IT majors were, at best, dishing out Letters of Intent (LOI). What these letters would say is that if the market conditions were good, they would consider hiring. Basically, these were not offers. Most colleges show as though they have 100% placements when in reality it is not even 10% and the rest are LOIs.

Hiring for all the major IT companies (Wipro, Infosys, TCS, Cognizant and HCL) was 24% lower in 2015 as compared to 2014. NASSCOM has said that in 2016 it will be a further 20% lower. All companies claimed that they were automating jobs. For example, Wipro talked of its Artificial Intelligence Platform Holmes that will take out 3,300 jobs from its services workforce of 30,000 who are on fixed price contracts. The fact is that if these companies do not automate, someone else will and will force automation to happen. Robots will take these jobs. After manufacturing, the IT/ITES sector will see the largest displacement of jobs as more and more roles get robotized. This is happening as the space of Artificial Intelligence, Machine Learning and the world of Data Sciences are getting better and better.  However, this is not the major cause of dipping profitability as of today. This is only the tip of the iceberg and most companies talk more and deliver less on this aspect.

The biggest reason for dropping profitability is pricing. Companies are giving up margins for market share. The revenue per employee for most of these companies is dropping year on year. It is ranging at 1% - 5% currently but I believe will go down further till these companies change the product/ service mix.

The quantum of exposure of different companies to troubled verticals has also resulted in dropping revenues. For example, the banking industry in Europe is causing sleepless nights for some of our IT Majors. Further, currency fluctuations are not helping.

TCS, Wipro and Infosys average around $46,000 per employee per year. Cognizant seems to have bucked this trend because of their acquisition of Trizetto and also the fact that their split of work is more towards consulting and technology than outsourcing.

Vishal Sikka of Infosys talks of reaching around $80,000 per employee by 2020. So, what needs to be done to make this a reality not just for Infosys but also for the industry as a whole?

Build Consulting and Technology Practices - As businesses globally  struggle with technology and the impact of Digital to their businesses, the IT Majors need to shift more to consulting and pure technology and start reducing their reliance on outsourcing using headcount. I had a European friend who would say “Is there a problem? Why don’t we throw more labour at it?” Those days seem to be fast disappearing as smaller and nimbler companies are throwing robots at problems or people with higher skill sets who build robots to be thrown at these problems.

Learn to shop and actually shop effectively to build capability - This shift to consulting and technology means a different kind of capability build in products, platforms and services that the IT Majors currently don’t have. Such a capability build will take years. So, an approach would be to acquire. Like what Cognizant has done with Trizetto or Infosys with Edgeverve. Most acquisitions are small but the Trizetto one was not only huge but catapulted Cognizant in to a vertical that is hot and got them off to a flying start. It also improved their revenue per head and margins. So, the IT majors should start a shopping spree. If the Government of India can be so pro-active and invest $500m to build a port in Iran so that it can protect its energy interests, I am sure our IT Majors can do better.

Build Data Sciences and Analytics Practices at a very large scale The data sciences practice should replace the fast commoditizing IT Outsourcing practice with really high end artificial intelligence and robotic capabilities that will help customers not only to scale faster but also move out of old technologies.

More data scientists than just coders - Push universities to bring out more employable engineers – strong in maths, computing, machine learning and artificial intelligence.

Balance the long term and short term – The stocks may take a beating in the short term as speculators leave your counter on the stock exchange. But the long term investors will invest for your strategy. Of course the speculators will return to your counter – they cannot stay out of “ups and downs” forever.

As I walked past a liquor shop I couldn’t help notice a few people buying a quarter liter bottle and smiled as I wondered which CEO was going to down that bottle that night.

The author is founder, Alive Consulting, a leadership and shared services consulting firm.

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