Shape up or ship out. This is the writing on the wall for India's information technology (IT) services companies which have thrived on labour arbitrage due to low salaries of Indian workers. They need to change their business model or perish as the their world changes rapidly.
Aswath Damodaran, professor of finance at the NYU Stern School of Business, has sounded a warning to these companies. India’s information technology companies need to adapt in order to grow, as they reach a level of maturity in the market, Damodaran, known for his work on valuing companies and understanding stock investments, told BloombergQuint.
“Indian IT companies are not dying, but ageing,” he said, adding that companies like InfosysNSE 0.38 % Ltd. needed to come to terms with that. Other major companies in India's IT services sector are TCSNSE -0.10 %, Wipro and HCL Technologies.
According to industry body National Association of Software and Services Companies (Nasscom), India’s IT sector will see single-digit growth for the third-consecutive year and jobless growth for the second year as software exporters continue to struggle with declining business from traditional services.
Erosion of traditional business is a major reason behind the subdued growth forecast. Nasscom forecasts 7-9% growth in fiscal 2019 as it sees firms in India struggling with decline of traditional services that contribute three out of four dollars for India’s tech industry.
Management consulting firm Bain & Co has pointed out that new technology companies and open source platforms might emerge to provide competition to incumbent IT companies. This may not augur well for the $167-billion Indian IT-business process management industry, which accounts for 55% of the global outsourcing market and has been a predominant supplier of software implementation and maintenance to global businesses at a time when the local players are gearing up to embrace digital faster owing to changing client demand.
With the rise of technologies such as cloud computing, artificial intelligence and machine learning, demand is growing for new technology-based services. For example, banking and financial services companies are taking data analytics-driven decisions.
Chris Brahm, partner, Bain & Co told ET in an interview last month that the banking, financial services and insurance or BFSI sector is seeing a disruption over the possibility of blockchain technology replacing the current infrastructure.
Recently, CEO Salil Parekh, who took over after the controversial exit of Vishal Sikka, has acknowledged the need to transform the business model. Sikka too was trying to change the course of Infosys to adapt to the new business environment marked by technological as well as political challenges.
Infosys would have to sacrifice profit margins now by investing in advanced technology and skills in order to capture the opportunities of the ahead, Parekh told BloombergQuint. The company would have to pump more money into technologies such as the Internet of Things, retraining employees, localizing its workforce in the US and building up the sales staff, he said.