In 2013, when Accenture released its vision document, it marked the beginning of a major transition in the history of the 29-year-old company. From a business enabler, technology had started assuming the role of business creator, causing serious disruption across industries. A shift from legacy to digital had become the need of the hour. “We said every business is going to be a digital business,” says

Mohan Sekhar, senior managing director, Advanced Technology Centers – India. From that year on, Accenture adopted an aggressive mode to grow its digital business and today it constitutes about 60% of its revenue.

While foreign firms such as Accenture and IBM were pivoting to the new business, tier-I Indian IT firms — TCS, Infosys, Wipro and HCL Technologies and their American counterpart, Cognizant — were caught in a dilemma. On one side, there were the legacy businesses to be protected, on the other side the industry was going through a digital upheaval. According to Sekhar, the disruption was so big that 30% of the Fortune 500 companies in 2010 dropped out of the list by 2017. 

The double-digit growth days of the Indian IT industry came to a halt. Switching to digital had become an imperative, and Indian companies took a precious two to three years deciding on the course of action. Over the past two years, tier-I companies have struggled with the digital transition and cloud-led disruption, which led to declining revenue growth. According to a report by Edelweiss Securities, digital businesses, which roughly make up 20% of their revenue, will continue to drive overall growth and contribute nearly half of their revenue by 2021 (see: Digitally enhanced). But, unlike the offshoring opportunity, the growth path will not be linear and will definitely be more challenging because the small guys have an early-mover advantage. Adjusting to this non-linearity of revenue, reducing dependence on large clients and adapting faster to technological change will determine the success of large companies in this race for digital domination.

The Goliaths

Legacy businesses, the mainstay of the $154-billion Indian software industry, have been going through a stagnation that is shrinking profit margins. Ranging from BFSI to healthcare and retail, digital is now the core of any business, forcing IT firms to adapt. CP Gurnani, CEO, Tech Mahindra, notes, “More customers are coming back to us with challenges that directly impact business outcome, such as generating newer streams of revenue or generating differentiated business models.” Tech Mahindra has 27% of its $4.8 billion revenue coming from digital, which has witnessed 30% year-on-year growth for the past two years. 

Technology research firm IDC estimates the global spend on digital transformation to be more than $1.1 trillion in 2018. Ashutosh Sharma, research director at Forrester, puts the story in context. About seven years ago, when digital began to trend, Accenture and IBM were quick to sense the change. So, they built some initial capabilities in design, consulting and machine learning. “The first phase of that particular digital transformation was not good for Indian firms because the nature of the contract, the size of the project, all of that changed. They were not equipped to respond to those needs,” says Sharma.

DD Mishra, research director, Gartner, adds, “Indian companies wait to see if others are benefitting from the change and, when we see this is the only way left, we start working on it,” he says.

Difficult terrain

Cannibalisation of revenue through creative destruction was a huge risk indeed. The firms took a few years to make that decision and, even when they started, they moved slow. On the other hand, global companies such as IBM, with revenue of $104 billion in 2012, decided to put their full effort into the transformation. They took a hit on their revenue every year till 2017, but their digital business – a strategic imperative – kept growing at 27-30% per annum. Today, 48% of IBM’s revenue comes from digital. “Indian companies’ digital revenue share continues to hover around 25%. They need to speed up,” says Mishra. 

Besides being mired in a culture of caution, Indian tier-I firms are also slowed down by the large multi-year contracts they are locked into, and can reorient only when clients decide to. “Not all customers are changing at the same pace. Particularly, those from industries such as financial services and healthcare, which require regulatory approvals,”
says Sangeeta Gupta, vice
president, Nasscom.

The biggies are now putting their weight behind ramping up digital revenue. Cloud makes up a large chunk of digital offering from Indian IT service providers. Many are involved in helping clients migrate their business to the cloud.

India’s largest IT service provider, TCS, has probably handled the transition better than its peers. The company, which raked in nearly $4 billion in digital revenue in FY18, is seeing this business grow by 35%, and is likely to clock over $5 billion in FY19. The company, which won its first $50-million dollar deal in December 2017, has managed to snag five long-term deals worth $5.5 billion early this year, and nearly 50% of them are in the digital space. In January, it signed its largest contract till date, a $2 billion multi-year deal with Transamerica to replace their legacy core system with a modern cloud-based digital platform. While a lot of their work is digital driven, that is, managing the transition and integration, these deals allow TCS to bundle their other offerings and earn more. “TCS continues to grow quickly, thanks to its capacity to reinvent itself. Years of focused work and investment on building an organisational culture have given it an ability to collaborate with customers in an agile manner, which is key to any digital transformation,” says Peter Schumacher, CEO, Value Leadership Group.

Infosys is looking to put all its leadership drama behind and CEO Salil Parekh has rolled out a 3-year revamp plan to drive change at the software major, which includes training digital specialists, rebranding the company, reskilling employees and acquisitions. According to Sharma, Infosys, during the period of Vishal Sikka, was focusing on becoming more of a company that relied on AI, automation and other newer things, and at the same time being a platform. Later, they pulled back on that strategy deciding margins are more important and the focus is back on improving digital revenue. In fact, the incentive of its top six executives are linked to how much revenue the company generates from digital technologies.

While these internal leadership changes have cost Infosys, it hopes to win back some lost ground with its acquisitions in the digital technology space. After Parekh joined the company, Infosys made two acquisitions, US-based creative and consumer insights agency Wongdoody and the Nordic region-based Fluido, a Salesforce advisor and consulting partner for little over $150 million. Last year, the company acquired London-based Brilliant Basics, a product design and customer-experience company, whose capabilities are being integrated with Infy’s Finacle suite of banking solutions. 

HCL Technologies has also been snapping up companies rather aggressively over the past three years, spending over $1.27 billion on this and acquiring IP from IBM. HCL, which got almost 40% of its revenue from infrastructure management, saw its core business significantly impacted as clients moved from traditional data centres to the cloud. A large part of its growth in FY18 came from acquisitions, with organic growth accounting for only 7.45% of its 11.92% growth. Analysts say, while the company has been buying growth, the perception of HCL Technologies is that it is a one-trick pony. Sudin Apte, CEO, Offshore Insights, says, “I think capability-wise, there is a challenge when it comes to application and consulting, compared to others. They have been very strong in infrastructure and engineering services, but they are using their balance sheet to buy growth. At this point of time there is limited indication that they have the ingredients for change and will migrate successfully.”

Wipro, too, has been buying companies to make up for the sluggish growth in its core business. Over the past five years, the company has spent over $1 billion in buying firms such as DesignIT, a design consulting firm; Appirio, which is into cloud services; and HealthPlan, a healthcare technology services firm. But Apte notes that Wipro’s strategy is neither aligned with the new needs nor are they able to communicate it to the client. “Wipro seems to have a problem on the client-facing function because it is a more old-fashioned company which is not transforming as easily and quickly as some of its peers,” he says. The company has been struggling to keep up with its peers. Its recent 10-year contract win from US-based firm Alight Solutions, which provides technology-enabled health, wealth, HR and finance solutions, finally gave the company something to cheer about. In this deal, Wipro would enable Alight’s digital transformation across solutions and for doing that earn about $1.5 billion-1.6 billion over a 10-year period.

Apte believes half a dozen Indian firms including Infosys, despite their delayed start and subsequent struggles, have inherent capabilities required for the transformation — such as people, access to clients and money power to learn and deploy new technologies — and would hence be able to catch up with the others. “That said, the industry is at a crossroads and we will see a polarisation between those who are able to cross the threshold and go to the digital world, and those who will struggle,” he says.

Hard climb

Foreign firms have been aggressive with acquisitions. In the previous fiscal (September-August financial year), Accenture spent $1.7 billion buying 37 companies to add expertise in digital and emerging technology areas. Over the past three years, the company has spent over $3.4 billion acquiring 70 companies and 80% of them were in design, social, mobile analytics, cloud, security and IoT. 

Much of the incremental revenue growth has come from acquisitions and its ability to identify white spaces early. For instance, Accenture Interactive, which was set up in 2009, is now the world’s largest digital marketing agency by revenue. In 2017, it raked in nearly $6.5 billion and now works with big brands on their go-to market strategy and new ways in which these brands can connect with their consumers. It has been growing at 50% over the past two years and is on its way to becoming as large as Accenture’s overall digital business of $20.9 billion.

Schumacher feels Indian companies are not moving out of their comfort zone fast enough to capture new growth opportunities. “They have the advantage of their strong balance sheet and ability to generate a superior cash flow. But they are not aggressive enough. The digital interactive business is a good example. It will soon be $20 billion for Accenture and Indian companies are not even present in that space,” he points out. Digital interactive is now roughly a $50 billion-business worldwide.

Apart from acquisitions, central to Accenture’s digital strategy has been its investments in new technology areas as well as its global innovation hub opened in Bengaluru in 2017. The hub, of almost half a million square feet, covers 17 industries and was visited last year by 700 clients who co-innovate with the company. Among those visitors was a large production house which wanted to maximise their box-office collection. For them, Accenture developed an AI-based platform using machine learning to forecast ticket sales, with specific recommendations on target audience, date of release and opportunities to upsell. 

US-based Cognizant also has a co-laboratory where they partner with clients to design, prototype and scale digital products, and design new delivery models. The company, which is working on digital automation by creating bots, is increasing its digital revenue (currently at 29%) to improve its operating margin from around 20% to 22% in FY19.

As far as IBM is concerned, 48% of business today comes from its digital wing, which did not even exist a few years ago, says Shailesh Agarwal, chief strategy officer, IBM India. Agarwal does not share India specific numbers but says that they are not very different from global figures. Sharma of Forrester believes IBM was right in spotting the initial digital trends. So the company invested heavily in Watson and cognitive capabilities, but found themselves on the backfoot since the market wasn’t ready for that. “Customers were complaining that the solutions they were bringing to the market were not in line with their requirements. After some course correction, IBM is back on the growth path,” says Sharma. After almost six years of shrinking revenue, IBM is finally showing signs of revenue growth in the recent quarters including digital, which contributed around $36 billion to overall revenue in 2017.

Core disintegration

For larger, legacy businesses such as IBM, it became imperative to dilute the core and shift to digital with enhanced focus and aggression. “For large IT companies, though the core is not growing, it is still a huge market. (see: Upward bound) If you are a large incumbent, the pressure on you to transform is much higher than if you are a challenger,” says Sekhar. “The business model of Indian firms focused primarily on the developed market – US, Europe, Japan – and it was around displacing companies such as IBM, Accenture and the Big Five in their core business. In that sense, they were the disruptors,” says Sekhar. The sustained tailwind in the business made tier-I players a lot more complacent than they should have been. 

While they have been going through this somewhat protracted transition, the silver lining for them has been their increasing smaller ticket size ($1-10 million) client base. For instance, TCS had added nearly 400 clients in this category over the past four years. 

Having a wider client base has become more essential for tier-I firms now because they are facing competition not just from foreign companies, but also from their mid-tier counterparts, thanks to technology. With multi-year project rollouts starting to fade, the demand is more for nimble and fast projects where agility is key. 

According to Gupta of Nasscom, the nature of the service now offers a level playing field. “Earlier they would never be invited for large RFPs (Request for Proposal) because they were not big enough for the client. But, today the projects are not that large and small firms have the competency,” she says.

Even as there is agreement on the levelling of the playing field, with the onset of emerging technologies, Anand Deshpande, CEO, Persistent Systems, says that it all boils down to the customer. They decide if they want to stick with companies they have been working with for long or go to a new specialised company. “The benefit of large companies is that they have access to large customers, there are existing relationships,” he says. That said, the critical differentiating factor now is the clear business proposition that one pitches to the client, Deshpande says. “In the past, people would simply say, ‘I sell software’. That is not exciting anymore. You need to be a bit more specific,” he says. Persistent specialises in product engineering and IP-based software products which helps carve a niche among the tier I and tier II players. 

Srikar Reddy, CEO, Sonata Software, says what’s critical is to get the technology framework right so that a long-term platform-based business model is built. Sonata’s offering ‘Platformation’, which is a cloud and IP-based offering which takes into account 16 key parameters, does just that and helps create new digital business models. “We need tech-savvy CEOs to drive such an initiative,” he says.

Fleet-footed

Carving out niches for smaller players is where their leaders step in. Rostow Ravanan, CEO, Mindtree, says, “Specialised players like us can compete extremely well with large players. Traditionally, for a large infrastructure management opportunity, scale was important. Today, at Mindtree, we can use technology to solve a problem without depending on human effort alone,” he says.

Digital contributes about 47% of Mindtree’s $846.8 million revenue, up from 32% in FY15. The company, which has been growing at 9%, has seen double the growth rate for its digital business. Mindtree luckily has been working with lots of consumer-focused companies – retailers, content and e-commerce companies. “So they have got a headstart over their peers because their existing clients moved faster,” observes Apte. Despite the past couple of years that saw project delays, churn in its top 10 customers and troubles at its UK subsidiary Bluefin, the management says increasing digital revenue and larger deal wins will see the company post higher revenue and profit growth than its peers in FY19. 

The shift to digital also caused a switch in revenue model – upfront payments paved way for SaaS models (which are billed over time). The revenue of IT firms are now often tied to the revenue growth they can show to their customers. “Even when you are doing application maintenance and those kind of basic services, we are now using automation, AI (artificial intelligence) and ML (machine learning). The revenue model is great for us to drive these things. It means you have to be on your toes,” says Salil Godika, CEO of the $85-million Happiest Minds, which has a presence across digital business services, platform engineering, and agile infrastructure and security. 

Like their large peers, mid-tier firms may also not be able to sit back and relax henceforth. Mishra says, “They are strong in a particular geography where they are completely focused. Outside that, they struggle. Also, in terms of scaling up, we have seen many clients coming back and saying, ‘we hired them for their flexibility, but now it doesn’t look like they can handle that much growth’.” Gurnani agrees, “While start-ups or smaller specialised IT firms have the advantage of focus, agility and flexibility, they face challenges such as scaling up, a lack of exposure to the overall technology landscape of the customer making it difficult for them to integrate, and finally, reliability to offer a sustainable product.” 

Godika of Happiest Minds counters that there is an increased effort from mid-tier firms to collaborate with the larger ecosystem, like when they work together with companies such as Microsoft.

Microsoft India COO Meetul Patel agrees that even start-ups are now able to tap the kind of infrastructure the larger firms had access to, historically. “Today someone with a few clicks can start creating. They have global reach, access to customer and they understand scale,” he says. That said, he believes adoption of technology by bigger as well as smaller companies is more or less uniform now. 

Carving out win-win

It is this factor that leads to more collaborations. For instance, acquiring smaller firms for IP and skills are part of IBM’s digital capacity building strategy, which also includes skill transformation. “More innovation is happening in the garages of start-ups than in large organisations,” says Agarwal.

He explains how working together can benefit both big and small firms. “You can choose to compete but you are not going to win. They bring agility and innovation to the table. But to deploy their technology at scale, they require expertise while dealing with compliance, data privacy and security. So, you work along with them to adopt that.” For instance, Cateina Technologies collaborates with IBM to develop blockchain solutions for multiple clients. Last year, Yes Bank announced a multi-nodal blockchain to digitise vendor financing which was developed by Cateina using IBM Hyperledger. IBM and Cateina also developed a blockchain-based platform to host customer medical records for a life insurance consortium formed by 13 Indian insurance companies. 

According to Gurnani, digital transformation is more effective change management than pure technology implementation. So, the services of specialised firms have to be combined with the broader capability that companies such as Tech Mahindra offer. The company, towards the end of 2017, announced plans to identify 20-30 start-ups every year as partners, mainly in the field of communication technology, networking and virtual reality.

Tricky phase 

The companies are working to team up and to adapt, but can their employees keep up? According to Nasscom, over 40 million people are employed in the IT industry and at least 40% of them requires re-skilling in the next five years.

Patel of Microsoft says the nature of work will change. “We won’t need that many people constantly coding a custom solution,” he says. What would be needed, he adds, is the ability “to bring out very new and unique solutions”.

Accenture is focusing on driving innovation at the grassroot level. “Every consultant with Accenture should be talking innovation,” says Sekhar. Accenture has one-third of its 400,000 strong workforce based in India. In FY17, the company spent over $935 million on professional learning for its employees. “We are hiring different kinds of talent. Compared to the past, we have data scientists and PhD holders,” says Sekhar.

But, there is no dismissing the concern that the industry that was one of the biggest job generators earlier may cease to be so. Several global firms are also trying to build digital solutions in-house and are establishing ‘captives’ raising a challenge to the Indian outsourcing industry. Would Indian companies therefore lose sheen as a ‘low-cost destination’ and fail to absorb people? 

Agarwal is extremely confident that it wouldn’t because, he says, the labour arbitrage factor disappeared a few years ago. “Look at it this way — where can you get skills on this scale,” he says, adding that Indian companies have people who are skilled at writing cutting-edge code in AI and ML. “I think tech arbitrage will create a competitive advantage for India, because if the world is going to get recreated in code, then you have 3.7 million developers here.”

Prakash Mallya, managing director of Intel India’s sales and marketing group, too, believes Indian IT industry’s software skills will continue to lead. “The importance of software remains in a data-driven world. You were building software earlier with a frame in mind, now there is so much data coming in and the software needs to be made to make sense of that data. Talent and capabilities need to be invested in building data-driven algorithms,” he says. Intel recently announced that it has trained about 99,000 developers, students and professors in artificial AI in India since April 2017. 

Unknown-ready

Margins under pressure, diminishing cost advantage and rising protectionist tendencies from the west... the challenges before Indian IT firms are myriad. Nonetheless, Mishra says that there are definitely ways to get around. “Indian IT companies know how to circumvent risk when geography becomes history and are good at managing costs,” he says. Gurnani states, “The major challenges going forward will include skill development for the future, infusing consulting-led selling, and continuously engaging with start-ups. Disruption is the only means to survival.”

Gupta of Nasscom says the risk is whether large Indian IT companies would be able to move fast enough. “We have to see two to three years down the line,” she says. “Technology changes fast and adds an unknown risk. Times are such that we need to be ready for the unknown.”