Indian IT's Slow Road To Digital Is Hampering Revenue Growth

It has been a bleak year for Indian IT, beleaguered by Brexit and hostile pronouncements on the H1B visa by US President Donald Trump. All of this of course has been on top of the sledgehammer blows being delivered by cloud outfits that have destroyed traditional businesses such as infrastructure maintenance and app development, which Indian IT has grown fat on over the past decade.

Fat builds complacency and it hasn't been such a shocker that all of the Indian biggies such as Infosys, Wipro, and TCS have been slow to jump and stay on the digital bandwagon. So far, they seem to be trying to play both ends of the game -- milk their rapidly-fading, bread-and-butter trade while making tentative forays into the digital realm.

"I think the Indian entrepreneur is pretty good at working a demand curve," HfS's Phil Fersht previously said on the cloud impact on Indian outsourcing. "They will milk something as long as they can until it loses money. They won't change the model until they really have to."

Predictably, this game plan has had an impact as the industry has posted the most miserable revenue growth numbers it has ever seen. Yet, for some mystifying reason, analysts a few months ago were upbeat about prospects for the industry, specifically its September earnings releases that the biggies were going to announce in late October.

For instance, Forbes cites Apurva Prasad and Amit Chandra, analysts at the investment wing of HDFC Bank, who expected IT firms to "post the strongest growth in the last five quarters", which is what they told their clients in an IT earnings preview report.

True to previous form, the October results were underwhelming. The big three turned in lackluster growth, between 0.2 percent and 2.2 percent, but that was just the tip of the iceberg. Infosys' 4.6 percent growth over the same quarter in the previous year was almost half that of a firm that is more than three times its size (Accenture). It also lowered its guidance to below the 8 percent estimate that the industry trade association Nasscom has slated for the industry for the financial year.

You could argue that TCS made Infosys look above average by comparison. Not only did it post a lower-than-expected 1.7 percent sequential growth figure, it represented the 12th straight quarter of performance that was either sub-par or at best matched analyst expectations.

Slow to digital

This much is certain: The evolution of IT is firmly in the realm of digital, which encompasses social, mobile, analytics, and cloud computing and is galloping along at upwards of 30 percent. The old, traditional businesses are declining in single digits, but that fall will soon accelerate until it is but a memory.

Yet Indian firms have been slow to grab opportunities in this new world. The big three in Indian IT along with Cognizant have less than a fourth of their business coming from this world. Accenture, on the other hand, gets a hefty 52 percent from new digital businesses.

In fact, as Mint newspaper has observed, Accenture's $18 billion in revenue is more than TCS's entire revenue for last year, a statistic that has further resonance when you consider TCS hasn't made even one significant acquisition in recent memory, preferring to build capabilities in-house, while Accenture has made 37 acquisitions (yes, you read that number correctly). It has done so by forking out $1.7 billion, comfortably outstripping the $1.58 billion spent collectively by TCS, Infosys, and Wipro together in three and a half years.

Yes, Indian IT does have fatter margins than free-spending Accenture. But the question to ask in this new era -- where businesses are obsessed with time-to-market and require specialized, off-the-shelf, plug-and-play products that have been tried and tested over the years and can be deployed instantly -- is whether avoiding snapping up niche firms is just dumb? Or will a bloated Accenture, the result of its frenzied buying spree, face increasing integration and culture issues and be eventually forced to shed a lot of its acquired baggage?

While there can be no definitive answers, the following speaks volumes about the nature and pace of change and an indication of the road ahead: There was a 43 percent increase in contracts for cloud-based services globally while the old era businesses of IT outsourcing crawled ahead by 2 percent.

Indian IT, now more than ever, needs to quicken its adoption of new-era digital projects or resign itself to a less-than-salubrious growth in its overall business.

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