Why India’s technology outsourcing industry has not yet turned the corner?
By | Raja Jamalamadaka | Industry speaker | Neuroscience coach | Marshall Goldsmith awardee | Author | LinkedIn Top voice | IIT | Harvard
Indian Software Dies at 17 From Failure to Grasp Future
This Orwellian conclusion in a widely circulated article summed up the mood in India’s technology outsourcing industry in the months leading up to year 2016 (when this article was published).
While the article was predictably criticized by Indian technology captains for its extremist approach and earth-shattering conclusions, it did draw attention to the precarious state of affairs – driven by its inability to adapt to the digital disruption wave -in the Indian technology industry then
· TCS – India’s largest technology company – had just reported flat numbers.
· Infosys had slashed revenue guidance twice in three months.
· Layoffs had become the norm in an industry that was known to hire technology programmers by the thousands.
· Regulatory challenges, court cases, high attrition, employee unionization – challenges once unheard of, had become regular news.
· On their home turf, Indian technology outsourcing organizations were being beaten black and blue by their global counterparts like Accenture and IBM.
Fast forward to 2019. TCS and Infosys beat investor expectations with TCS reporting the best quarterly numbers in years. The share of digital business as a percentage of revenue has been steadily increasing for both organizations.
So was the doomsday prediction too much, too early? Has India’s technology industry turned the corner?
Before we get to that, lets understand the source of the challenges.
Indian technology outsourcing industry – A background
In the 1990’s, the global organizations were adopting technology in droves but wanted to keep costs in control. Around the same time, India was unshackling its socialist roots and was saddled with vast numbers of English speaking engineers waiting for opportunities. This combination resulted in perfect conditions for a collaboration driven by Indian technology organizations. It didn’t take a lot of hard sell for global organizations, especially in the US, to outsource their backoffice technology work to Indian IT organizations, who gladly lapped it up at low prices – driven by the availability of low cost talent. An industry was born. The infamous Year2000 (Y2K) challenge propelled the fledgling business to an industry juggernaut that excelled at the legendary ADM business (Application Development and Maintenance).
As business grew, the industry streamlined its entire value chain to suit the ADM business needs. Since most technology work originated at IT departments of clients (i.e. IT owned the budget), the sales teams of technology organizations mastered technology sales skills and developed its network there. With a steady flow of projects, the entire operations value chain was optimized to deliver ADM and make profits. Project managers mastered the right mix of onsite (at client premises) to offshore (those primarily in India) resources. By tinkering with this ratio (i.e. hiring more in a low cost country like India), these organizations started reporting high net margins. To keep costs further low, engineering college graduates – otherwise unemployable elsewhere – were hired in thousands and taught technology in training rooms that resembled Pentagon war rooms. LABOR ARBITRAGE (cost control) and PROCESS OPTIMIZATION (consistency control) were the buzzwords in the industry. Top management meanwhile kept everything in-house, maintained a conservative approach to business and designed metrics to drive workforce to maintain the high margins that the stock market had come to expect from the industry. With sky-high stock prices and dizzying valuations, everything was going smooth – until technology advancements brought digital to the forefront and damaged Indian technology industry’s party.
Digital sneaks in
A combination of dynamic startups (Amazon, Facebook), macro-economic changes (Global Financial Crisis), changing client preferences (insourcing IT work by top financial firms) and technology shifts (everything as a service- SasS, PaaS etc) changed the business dynamics. Digital changed client business needs, technology platforms, content consumption patterns and disrupted the well-oiled value chain of technology organizations.. In fact, the very value chain that was an asset during the pre-digital era become a bottleneck to adoption of digital disruption. Why?
Because with digital, the client wasn’t the IT department, but business functions like marketing and sales. The Chief Marketing Officers (CMO’s) became more important than Chief Technology Officers (CTO’s) – forcing the sales teams of Indian tech organizations to network deeper and harder. A raft of new technologies replaced the older ones leaving thousands of programmers unprepared. KPI’s like Onsite/offshore mix, Time and material became anachronistic leaving project managers confused. A staffing plan that relied almost 100% on engineers had snuffed out design and creativity – the very requirement for handling digital. Conservative managements were left restless as they struggled with acquisitions – necessary to stay ahead of the innovation curve. Nearly EVERY element of the value chain was disrupted by the digital tsunami.
See diagram below.
With such a radical shift, Indian technology organizations were simply unprepared leading to the conclusions in the Bloomberg article cited at the top.
Necessity is the mother of invention
Everyone adapts – some by choice, others by force. Indian technology organizations fell into the latter group. Following the mantra “better late than never”, they started making aggressive changes to face the digital hurricane. Sales started upselling and cultivating strategic relationships with the right stakeholders. Thousands of programmers were upgraded in training “war rooms” – TCS trained over 210,000 trainees through internal programmes and Wipro launched an initiative called Newton’s Cradle which identifies skill gaps in middle management and helps them upgrade. Between April 2016 and March 2017, Wipro trained 39,600 employees in digital skills. KPI’s were modified. Hiring strategies reflected the change – graduates with a liberal arts background made a sizable chunk of new hires. To stay ahead of innovation curve, technology organizations started dabbling in acquisition of startups.
This changed strategy is now showing results
Has the Indian technology industry turned the corner?
Far from it. What the Indian technology outfits have done is to tackle the “low-hanging” fruits. Key challenges remain-
1. Acquisition integration – Acquiring an organization isn’t just about throwing money. The real challenge is finding the right integration model. Integrate too tight and the acquirer loses the innovation DNA of the startup. Integrate too loose and the acquirer has a poor strategic fit. Finding the right mix while retaining the culture of acquired entity is a challenge even for the most seasoned of organizations.
Indian technology organizations – whose DNA is rooted in offshoring – have adopted the former approach – at the cost of losing the innovation DNA of the acquired entity. This has led to several failed acquisitions (Panaya and Skava by Infosys, HPS by Wipro).
2. Legacy Model – Despite strides in digital, a substantial part of bottomline and topline of technology organizations still comes from the legacy ADM business. Since ADM business relies on onsite resources, changes in regulatory policies affect this business. Protectionist policies taken by advanced countries like the US – resulting in high costs – is a bane for Indian technology organizations. Until digital accounts for a major part of revenues, Indian technology organizations will continue to face financial pressures.
3. Management mindset – Training bottom-end programmers, sales and changing KPI’s is the easier part. The real success lay in changing the mindset of top management.
a. Short term vs Long term – The Management of Indian technology organizations need to wean themselves away from enjoying the “sugar-high” of excellent quarterly numbers to delivering the “boring” long term value. This will be a major step in changing the DNA of the organizations.
b. Leverage ecosystem – Cultivating an innovation driven culture in-house while simultaneously engaging with the ecosystem players and startups has been a major challenge for Indian technology organizations. Long accustomed to an in-house culture, managements find themselves leaning to the “build in-house” model in the classic “build vs buy” debate. Without a stronger risk tolernace leading to a judicious mix of “build vs buy”, Indian technology organizations will continue to play a catch-up game with global players like Accenture and IBM.
Years from now, as the management of Indian technology organizations look back, they will have a lot to thank the digital wave for, IF they have learnt the fine art of future-proofing their organizations to face future disruptions after all, digital certainly wont be the the last disruptive force in the life of Indian technology industry.
Goldrartt was right when he said
“Bad luck is when lack of preparation meets reality while Good luck is when opportunity meets preparation.”
Indian technology organizations faced the former with digital disruption, they would do well to learn from digital and get ready for the latter.
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Raja Jamalamadaka is a Harvard educated TEDx and corporate speaker, entrepreneur, mentor to startup founders, board director, member of CXO search panels and winner of “Marshall Goldsmith award for coaching excellence” for being top 100 coach to senior industry executives. He was adjudged a LinkedIn Top Voice 2018 for being one of the platform’s most insightful and engaging writers. His primary area of research is neurosciences – functioning of the brain and its links to leadership attributes like productivity, confidence, positivity, decision making and organization culture. If you liked this article, you might like some of his earlier articles here:
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Republished with permission and originally published at Raja Jamalamadaka‘s LinkedIn
