Transformation in 2014 Will Determine Indian IT’s Survival in 2020

Zinnov today released its outlook for the Indian IT landscape in 2014. With the industry at an inflection point - similar to the situation 13 years ago, service providers are facing existential challenges and their response will be a key determinant of the industry's future. Margins are expected to go south, with the new normal pegged at 15-18% over the next few years with growing commoditization of services. While volume growth will continue, disruption and consumerization caused by emerging technologies are changing the way IT is consumed and provisioned. In such a scenario, doing more of what they are doing currently will ill-serve Indian service providers. 

To overcome these challenges and emerge as winners in the long-term, Indian IT will need to make some drastic changes in 2014, as it will take at least five years for the full impact. These include:

Scale: Today Indian IT service providers seem to hit a ceiling in capacity for sales and delivery beyond USD 1 billion/year. There is a need for reorganization - possibly around region-wise P&L structures - allowing service providers to tap local sourcing opportunities and work around protectionist measures. In the area of inorganic growth, acquisitions will have to move from capability augmentation to building scale. This will also result in consolidation among Tier II service providers.

Talent Regeneration: The past couple of years have seen some tough questions being posed to the leadership of Indian IT service providers, whose focus so far was on delivery challenges. To succeed, young, ambitious and aggressive leaders with a sales orientation will need to take the reins. This will result in inevitable exits at the top level. Fresh talent will also need to work harder; as training costs are the largest component of acquisition; the onus of re-skilling and up-skilling will be on the employees rather than the employer. Roles will also see a shift; as existing account-mining becomes a bigger priority, project managers will have to transform from being people-and-schedule managers alone to consultative sales leads as well. Sales teams will be responsible for farming as well, and this will involve a holistic view of accounts/customers rather than the typical transactional quarter-on-quarter (QoQ) view. This will require a paradigm shift in skill-sets.

Re-engineering Engagement Models: Although the domestic business is growing faster than exports (at 14%), Indian service providers have been unable to effectively build this business or work with MNC captives (GICs). Delivery overheads are high and domestic transactions don't allow for the margins that service providers are used to making. To address this, service providers will have to build innovative, low-overhead models. Hiring at "Graduate-1" level (Diploma), selling value added services in addition to core services, driving up automation, adding non-linear components like platforms / solutions into a deal and creating just-in-time delivery structure by increasing the sub-contractor percentage to about 10 times the current levels, are some of the initiatives that service providers could be taking up soon.  
 
Developing Newer Markets: Indian service providers who have lagged in identifying and investing in whitespaces in both the market and technology dimension, will need a new focus on new markets. For example, we are still catching up in developing an ecosystem to build capacity in SMAC (social, mobile, analytics and cloud). While growing Europe and breaking into Japanese markets will be the topmost priority for investments, winning domestic business from global players will also be a focus area. For international markets, the Fortune 500/Global 1000 segment of customers has become saturated; service providers are already looking at the mid-market segment in geographies like the US for growth. However, this is a challenge in itself: it demands leaner delivery models, innovative pricing structures and increased presence at the customer site.

Commenting on the trends, Sundararaman Viswanathan, Manager-Consulting, Zinnov, said, "Indian service providers need to urgently initiate a series of transformational initiatives across multiple dimensions - Scale, Talent, Market, Models and Capabilities. It is critical to embark on these sooner rather than later, although this can be like walking on water while attempting to still deliver quarter-on-quarter numbers. For survival and growth into 2020, a resurgent and proactive IT industry in 2014 is a must."