Globally, businesses are realigning themselves to make a digital transformation and the winds of this change are sweeping across India Inc too. The time is ripe for Indian IT service providers to make a windfall, and therefore at Leading Edge 2021, Outlook Business Editor N Mahalakshmi hosted a panel discussion on Digital Transformation: India Opportunities and Challenges. According to the Nasscom-McKinsey study released earlier this year, Indian IT services will touch $300 billion-350 billion in the next five years, with an annual growth of 10% as opposed to 7.5% over the past five years. This will be driven primarily by digital services, which currently account for 30% of revenue but in the next five years will contribute up to 50%. A panel of eminent speakers—Sandip Patel, managing director, IBM India and South Asia; Puneet Chandok, president, AWS India and South Asia; Rajesh Nambiar, chairman and managing director, Cognizant India; and Anuj Kadyan, Partner, McKinsey India—share their insights on how to mine this ‘gold rush’.
“When something phenomenal comes our way, we are almost never prepared.” Since I am quoting from a McKinsey report, the first question is directed to Anuj. Are Indian IT service providers ready to seize this digital opportunity?
Anuj Kadyan: The opportunity has been brewing for a long time and it accelerated over the last 12 to 18 months. And, even historically, the Indian IT industry has been growing at market-leading rates. During the pandemic, they have done a phenomenal job of coming together and capturing the opportunity. They are well-positioned to keep that momentum and retain market-leading growth rate, and it’s largely on the back of investments they have made over the last few years. They have really stepped up the pace at which they are acquiring new companies and building capabilities. They are investing aggressively in digital reskilling and the digital portfolio is what will drive their success going forward.
Rajesh, as an IT service provider, in what way have software services companies changed their delivery and operating models over the past 12 months? How has Cognizant beefed up or realigned resources, with staffing, sales services or client management?
Rajesh Nambiar: This is a huge shift. We believe companies have succeeded based on their digital maturity and their recovery will depend on that as well. So the pandemic actually made a business case for a digital future. As physical channels were locked down, digital channels became essential. So COVID-19 accelerated the pace of digital disruption, by about five to 10 years, through the adoption of remote working, the digital marketplace and so on. I would say the pandemic actually widened the divide between digital natives and legacy companies that have struggled to shift to a fully digital model, in many ways.
Sandip, from an Indian business perspective, what kind of eagerness or urgency do you see among companies to go digital or build a digital business? Where are small and medium enterprises (SMEs) on this digital path and how have large, legacy business fared compared to their digital-native counterparts?
Sandip Patel: It’s not really fair to contrast digital natives with traditional companies. The pandemic accelerated digital transformation as never before and, across companies of all sizes and industries, digitisation is impacting business models and consumer experience in many respects. Everyone was forced to adapt to this new normal. I keep saying that technology has become the sutradhar, if you will, for driving innovation and building resilience across companies, irrespective of their size. How to stay relevant in the midst of digital ecosystems is a question that every company has had to tackle, in some way, shape, or form. Companies have also had to contend with the expansion of new business models (and how they can build or benefit from that). Then, how can they drive cost efficiencies, agility and, most importantly, build a reputation of trustworthiness within these new digital ecosystems. Also, a whole network economy starts to emerge around this, so how can they cope with this?
I’ll give you a couple of data points that will bring this to life. We did some research after polling about 3,000 CEOs around the world, out of which about 120 were from India. We attempted to understand the minds of these executives who led organisations through this one year, which was probably the most uncertain. Six out of every 10 Indian CEOs expected technologies such as cloud computing to deliver results by 2023. Now, overlap that with another study we published a few months earlier (pre-pandemic) and the contrast is stark. According to the earlier study, though 90% of companies globally were sort of on the cloud by 2019, only about 20% of their workloads had been moved to the cloud environment. So now technology has become ubiquitous to drive agility, enable a hybrid workforce, and drive operational efficiency and customer engagement in a fundamentally different way. All companies, large and small are on this digital-transformation journey, and the distance each has covered varies a little bit by industry. Not just because they want to, but because they have to, because that’s what their customers and the ecosystem are demanding.
Puneet, is that your assessment as well, that the contrast between digital natives and traditional companies in their ambition and imperative to go digital has lessened sizably?
Puneet Chandok: I agree with Sandip. Obviously they adopt cloud and technologies differently but the ambition is similar, which is that all want to digitise their customer journeys. They want to digitise their processes so that their employees can be more effective, and they want to reduce technical debt (implied cost of prioritising a quick solution over a better but more time-consuming approach) because they want to be more agile. India is in the middle of a perfect storm of digitisation. Companies realise that they have to think deeply about technology and cloud, as the world becomes more and more dynamic. From my conversations with clients, I have gathered three things. First is that everyone has realised that cloud responds well to uncertainty and that businesses that had spent time thinking deeply about technology and building architecture on the cloud will come out of the pandemic much stronger, because they have become agile and scalable. Second, most customers and most businesses have realised that digital is no longer an option and that it is necessary for survival. Third is the speed at which I see customers acting now. Earlier, conversations that are conceptual, around full-stack and digital roadmaps used to run into quarters and years. Today, nobody has the patience, time and money to do that. They want to get it done in weeks, if not months.
Yes, then the focus was not on the need to go digital, but on the pace of transition and cost benefit, and companies preferred to go slow since their businesses remained intact. That has changed now. Now, tell me, who are really the front runners in this digitisation drive?
Kadyan: The trend has largely been secular. But, over the past 12 to 18 months, a couple of sectors saw an exponential increase in adoption. First is obviously everything connected with e-commerce. The second is media, especially OTT. The pace at which digitisation initiatives were launched has been pretty significant in this space. Next was the digital payments space.
Patel: Let me first put this thing in context. Just as Puneet said, the important part is that customer journeys have had to be remapped, because in the digital world, it’s no longer about, whether you are a bank customer or a telco customer, you are just a customer in the digital space. Therefore, different organisations across different industries have had to get up to speed. One sector where I have seen tremendous acceleration, both in terms of putting sustainable architecture or infrastructure in place and in catering to the digital consumer, is financial services. Digital banking is sort of the new norm and you serve the digital consumer in a fundamentally different way. They were already a little bit ahead of the rest but now they are able to also sustain a work-from-anywhere structure, which many banks in India had struggled with. Now, banks have been working on their customers’ digital experience so much so that the customers’ experience with a traditional bank is similar to their experience with a digital native e-commerce company.
The second area where we see a lot of activity is in manufacturing, where they are trying more industrial automation, and are thinking about connected and accelerated supply chains. Across financial services and manufacturing (which uses intelligent industrial automation), clients are starting to see about 40% to 50% increase in efficiency.
Then, the third domain is public services, where digitised government services are the new norm.
Rajesh, what does this mean for a company such as yours or for that matter all IT service providers, especially in your approach to verticals? Are there any pockets where you see transformation on a fast track that will front end growth? Do you see a re-alignment of sorts?
Nambiar: From Cognizant’s point of view, we think the industry is at an inflection point in digital adoption. And so we see companies increasingly taking a top-down approach, which means making bold decisions on strategic use-cases to shift to what we call agile workflows. This is underpinned by technology, obviously, to drive customer value as well as business value. So we believe that the wholesale enterprise-wide digital transformation is a thing of the past. So this certainly requires a bit of a change in approach, which is basically taking the client’s desired use case as a starting point in the transformation process.
In terms of sectors, we put them into three different categories. One is where the digital transformation has been long overdue, but it took a crisis to get it going, such as retail, hospitality and healthcare. The second is sectors where transformation was well underway, but the pandemic has speeded it up, such as in banking and financial services, and insurance. These are great examples where there has been speedier investment in artificial-intelligence-powered predictive analytics and so on. The third are those who were already well ahead of the curve, but for whom COVID-19 introduced other challenges, for example, life sciences.
Kadyan: If I can add, we looked at this specifically from an end-customer, business-model perspective. We call it DTC, direct-to-consumer. But if you broaden the definition, meaning customer journey being digitised end-to-end, then that business-model transformation alone is a $50 billion to $70 billion new opportunity that services clients can go after. Obviously, this would require capabilities around journey re-design, experience management, omni-channel interactions and personalisation, and would require the underlying technological capabilities. That is one. The second is that, all of a sudden, business spending is shifting from ‘let’s invest in technology’ to ‘what is the business imperative that we are trying to digitise’. As a result, it is about digitisation spend moving up the stack, with companies thinking ‘what is the vertical solution we are going to deploy’ and ‘what business value are we going to get’.
That brings me to the point in the Nasscom report which said that tech intensity is going up from 3% of revenue to 5% of revenue, and that requires a different approach by companies in terms of how they engage with clients or organise themselves.
Nambiar: Technology has gone from being very discrete to being pervasive. So decision makers are no longer limited to technology buyers. The purchase dynamics are changing. Today, the CIO/CTO population is only responsible for 22% of the purchasing decisions whereas this was about 48% five years ago. Increasingly, the line-of-business executives are the primary decision makers, and they are looking for partners with domain experience, expertise, and a point of view on business pain points. So this whole thing is about leading with business pain points, as opposed to leading from technology, infrastructure and so on. Every company has a unique technology fingerprint and client centricity is going to be a real differentiator for all of us. And talent is central to exceptional client service, needless to say. I will turn it over to Sandip for more.
Patel: I refer to the Nasscom report, in which there was one point that we debated over quite a bit — it was this notion about the emergence of the platform economy, where you build a few of them once and then you have multiple tenants across those platforms. With the evolution and maturity of technology, we are starting to see those. Now, by very nature, those platforms are difficult to build with a lot of small organisations; those are typically built with larger organisations, and then you have others participate in it. I can say this because a few years ago, we actually started to do that in the insurance space. For example, with MetLife, we built our platform which now others are participating in, and we did that with Food Trust, which has now come together as a blockchain platform that multiple organisations are participating in. More recently, we announced the financial services cloud with Bank of America. We will continue to see a lot of this transformation, where new business models will be created for an industry with larger companies, but the intent of that should not be protectionist in any way. This is a trend that will become more mainstream and there is a lot of debate going on around this. The question is, if you have a large company or a couple of large companies building these platforms, why should they let others compete on them. But, then again, as long as you can protect what you are selling — your USP or your product design, pricing and so on — a lot of the backend becomes very fungible and repeatable in some respects across many industries. And that evolution, we are going to see as clients are now moving rapidly.
Sandip, you have co-created a number of platforms, including IQuippo – the infra equipment marketplace. So, what does this kind of model depend on? Has it a lot to do with how an industry is structured, in terms of market share of various players and how the economics of the transformation works out?
Patel: Yes, I think, it’s the industry economics, and then also the industry workflow dynamics. The first one we did was insurance and that was five years ago when this kind of conversation was almost forbidden because of data and so on. But that is where the design was important. For that industry, it was extremely important to bring the overall cost of transactions down and it was relevant because the company was trying to go after small to mid-market enterprises, where you needed to have a much more commoditised bundle of offerings, which didn’t have that much of differentiation. Where the company saw the value was that, if they had to re-engineer their core systems, even to touch the systems would have cost probably a few million dollars. They realized that if they could have more players on it over a period time, where they don’t invest capital in that entire property, it made sense. This was thus entirely built on the cloud and run as a software-as-a-service (SaaS). So, you basically start to create a capital-light model for a lot of fungible, repeatable processes that are not that differentiated across multiple players. It was all about faster time-to-market, lower cost and making cost variable.
With a different platform such as The Food Trust or TradeLens, which is a blockchain-based virtual supply-chain, what was critical, was the ability to keep an irrefutable audit trail of transactions. Again, cost efficiencies were key. Now, data sharing was a big issue there too. And this is where a company such as IBM became the Switzerland of data in some respects, to ensure that there was permissioned access and the right levels of data access across the board.
And finally, IQuippo was about creating a fundamentally new business model — to create a marketplace for financial inclusion in infrastructure financing, for companies with different risk appetites and sizes. SREI, the developer, wanted to be its convener more than anything else, and get more into the services business by de-risking some of their portfolio.
Puneet, do also you see companies willing to collaborate or share platforms with competitors? Presumably, it requires a fairly high level of maturity and trust.
Chandok: I don’t think we are fully there. But people get the logic, and economics prevails in the end. There hasn’t been a discontinuity at this scale ever, and that is what is making companies step back and think about change. I will give you three examples of the change that I’m seeing. First, there is openness to platforms today, people realise the value in them. I was talking to a fairly large bank in India, and they said, ‘We don’t have the patience to lift and shift or re-factor our applications. Why don’t we just go the ISP route, look at the eight or ten processes that matter to us, and just work with off-the-shelf solutions. It will save us time and money’. And I have seen banks today buy software and applications from companies that are younger than my daughter. I am seeing openness such as never before, and that is the second thing. Third is a little bit of a bottom-up organic movement, which is democratisation of technology with APIs becoming the gateway to information. And our ability to link systems and processes together is much more powerful than it was ever before. If you bring these three things together, customers want to change. They are open to new ideas and our ability to pull together solutions. What they are saying is, don’t show me cool tech, simplify and be prescriptive; bring the ecosystem together, I don’t care who’s building it; and move with speed. If I bring all this together, I don’t think we are far from that day when Sandip said this will really come together.
Anuj, how do you see CIOs reprioritising their spending this year?
Kadyan: I would say four major behaviours stood out for me. First, 70% of the CIOs said that either there is going to be no change in spending or there will be a slight increase but, more importantly, re-prioritisation of the spend from ‘run’ to ‘change and transform’. The top three spending categories that we picked up were business digitisation initiatives, cloud transformation, and cyber security and data privacy. In terms of what they were focusing on as they were evaluating different service providers, speed stands out, as that is the new cost, second is impact, and the third is truly about differentiated offerings and capabilities.
Now, in terms of cloud transformation itself, is there a change in thinking in using cloud for mission critical IT? How are large and small companies really thinking about this transition?
Chandok: Critical IT workloads beyond the periphery are indeed moving to the cloud. I will give you some examples. Let’s start with data. Customers are now telling us that legacy data storage is great at creating data silos, and locking you into hardware refresh cycles, but if you want to move fast, make decisions, pivot as the world around you becomes more and more dynamic and hard to predict, you need to be on the cloud. I will give the example of Vistara. They are running pretty much most of their core workloads on AWS cloud today. And they are using data in a very differentiated way, to figure out patterns of route and route profitability, which allows them to be effective in an environment such as this.
Let’s talk about core workloads. SAP is critical to many large organisations today— RBL Bank, DSP Investment Managers, Larsen and Toubro Infotech, Brigade, Max — I could give you many, many examples of large organisations migrating some of the core technical complex workloads onto the cloud, again, for the same reasons — speed, agility, ability to ramp up and ramp down, cost, pay-by-the-drink (pay-as-you-go pricing model), also leverage and access to tonnes of new services and innovation that come your way, because once you are on a platform such as AWS, you have access to 200-plus services. So your developers can look at analytics, AI/ML, IoT, and that just completely unleashes a different level of innovation.
Sandip, in terms of cyber security of services and products, what is the risk perception among companies now? In the past year, for example, what kind of acceleration have we seen in terms of putting those fears to rest or, on the contrary, have the fears got heightened?
Patel: Cyber-security will continue to be the risk of this decade. We have seen a significant increase in cyber security attacks across industries, be it pharmaceutical, engineering or energy, they have affected just about anyone. So, in a recent study, the 2021 X-Force Threat Intelligence Index, India was the second-most attacked country in Asia-Pacific, and its share was a significant percentage of all the attacks in Asia. So the threat is real. This is no longer an IT issue, this is a board level issue. Thus companies are strengthening their entire infrastructure with a zero-tolerance approach, building a very robust mechanism to monitor, detect and contextualise dynamic behaviours and movements across their entire environment, be it on cloud or otherwise. We did another CEO study earlier, which revealed that enterprises which had outperformed through unprecedented challenges had heightened focus on cyber security as a discipline. So security risk is very much here to stay and we need to think about it dynamically. Because, even as we strengthen our company and technology environments, the hackers are continuing to learn and are getting more and more sophisticated.
With digital transformation so strongly underway and becoming central to many businesses, do you really see bigger companies taking ownership of their digital businesses and teams? May be this question is a tad early and may sound unnecessary when we are seeing a clear opportunity for service providers. Still, it is worth asking given how profound this change really is for businesses.
Kadyan: I would start by saying, as the companies undertake digitisation efforts at scale – these are no longer just a sprinkling of digital initiatives – the enterprise stack is going to look completely different. As we talked, these could be built on various platforms. The aspiration might be to keep it internal but there is no denying the fact that the future enterprise stack, if companies want it continuously updated, and built on the best innovation that’s out there, it would have to be built on various platforms that come together. So the reliance on the platform partners will definitely continue when it comes to stitching it all together and making it all work in a seamless and secure manner. There again, it is no longer about having talent that has the technology skills; you need productised, IP-backed offerings to do those things in a differentiated manner. And that comes from repetition, rhythm and constant investment in IP. It becomes very hard to do that if you are the only one investing in that talent pool or innovation. That is where the service providers come into play in terms of their unique value addition.
Having said that, considering how AI is being deployed in business processes end-to-end, there are absolutely areas that companies feel are so critical to their strategic advantage that there is a high reluctance to completely rely on a provider. There is the aspiration to handle this internally, but it’s hard to find the talent, and retain and groom them. Even providers who have at-scale practices around these areas struggle to retain talent. There are a lot of variables at play but, I would say, in niche areas where it is really core to the IP, companies may take ownership, but outside of that, the collaboration with service providers will continue.
Thank you so much gentlemen for your valuable insights. I recall a quote by Satya Nadella, where he says one of the best kept secrets in technology is that we only have the beginnings of a solution, not the solution. It is not constant in time, because business itself is not a constant neither is technology. I guess, with respect to this new normal of digitalisation, we do have more than the beginning of some critical solutions. Thank you, again.