Lead Story

Without Innovation, Indian IT Sector Is Stagnating

IT legends brought to the table innovation whether it was in quality, offshoring, engineering services outsourcing or software development. The new cycle of growth will be similar to what these pioneers did

I really like the new HCLTech brand campaign Supercharging Progress, which pitches accelerating digital transformation for enterprises or clients. One can actually apply the same thought for the Indian IT industry with a twist—Supercharge High Risk Disruption.

Presently, rising Inflation and macroeconomic headwinds in key markets, such as the US and Europe, do not augur well for the Indian IT industry. The slowdown in the Indian IT sector has been staring at us for some time now. We will be at the mercy of such headwinds if we do not disrupt. It is time to look inward for the industry’s own sake. Its performance will influence India’s overall journey towards being a superpower.

There have been some good growth numbers reported for the industry. According to the National Association of Software and Service Companies, the Indian IT industry’s revenue touched $ 227 billion in FY22, a 15.5% YoY growth, which is double the rate of growth of the Indian economy. The IT and business process management market accounts for 9.3% of India’s gross domestic product (GDP) and 56% of the global outsourcing market. But, the devil is in the detail. The Information Services Group data from January to March 2022 indicates that within managed services, IT outsourcing slumped 6% versus the prior year to $5.6 billion. This was caused by a weakness in Europe, a double-digit decline in infrastructure services and a sequential slowdown in application development and maintenance.

So, it begs the question whether the industry is growing right? Emerging technologies are growing at a much faster rate than the IT industry. A recent Counterpoint research shows that India’s internet-of-things module market grew at the fastest rate of 264% annually in Q2 of 2022. The growth was driven by IT hardware as well as applications. Are the Indian IT industry and its large players stuck and completely missing the next cycle of innovation? Or, are they expecting consistent stellar growth by doing the same thing again and again?

Companies like HP, CSC and IBM in the early part of this century did not innovate in the new ways of delivering services like remote infrastructure management or remote software development and they stagnated. This is exactly what is happening with the current leaders in the Indian IT industry.

The industry needs to do two things: first, reorient the old legacy business, which is shrinking because of automation; second, find new ways of gaining market share in new businesses like digital, artificial intelligence (AI) and data analytics that are growing.

Everywhere in the world, traditional businesses are facing pressure. For example, traditional global banks have not been able to reduce the cost per transaction for the customer in the way they should have. They have not been able to customise their offerings and still continue to deliver standard services and are slowly becoming less relevant.

Customers are migrating to new-age companies which have reduced the cost per transaction. But, typically, our leading IT companies have large outsourcing deals with traditional banks and hence their portfolios are reducing. On the other hand, the total spend on banking by customers is increasing.

Overall, total spends on IT are actually seeing a dramatic increase due to spends by new-age companies, and there is no slowdown. IT companies need to try harder and aggressively seek new-age companies with newer propositions. Such new opportunities will not be cost-based outsourcing, but they will be value-based services involving customised AI and analytics.

Currently, leading IT companies focus on old legacy issues that clients face, like vendor consolidation, which means consolidation of all old infrastructure, application outsourcing and development under one vendor for cost efficiency. The ticket size of such engagements is going down, thanks to technology and automation, and if Indian IT companies stick to this path, then, at best, they can maintain the market share, but will hardly grow.

New-age IT companies have completely bypassed vendor consolidation. They approach customers with a new proposition by enabling profitability on the revenue side, and not target the cost. They are enabling clients to sell more products per customer and providing insights. They are not competing with the big IT companies but creating new turfs. Vendor consolidation is not an ask by companies like Meta, LinkedIn and WhatsApp. Instead they ask their partners about how they can launch financial services or become a bank. Mantras like vendor consolidation and slowdown smells of legacy thinking, and if a vendor is not helping clients to create new revenue opportunities, it will be trapped in a legacy market.

IT legends like Shiv Nadar, N.R. Narayana Murthy, Azim Premji and F.C. Kohli brought to the table innovation whether it was in quality, offshoring, engineering services outsourcing or software development.

The new cycle of growth will be similar to what these pioneers did. The larger companies have to lead that innovation, which should not be incremental innovation but disruptive innovation. The giants have to wake up, because they have the money and the talent to turn the tide. They have to give up their legacy position of a quarter-on-quarter result seeking business proposition and do dramatic disruption of the kind that the pioneers did in the 1990s.

The CEOs of the top Indian IT companies are phenomenally good. I hope that their boards and the stock market will allow them to do some risk-taking disruptive innovation and break away from tradition, as otherwise the legacy business will go down despite pyramid restructuring, automation or offshoring. The industry needs a new mechanism of delivery, a new industry of delivery, which is high risk and needs high investment. The Indian IT industry has to go through this metamorphosis. Now.

Vineet Nayar, Former CEO, HCL Technologies