The brouhaha over Donald Trump’s move to enforce tighter immigration laws and a stricter H-1B visa regime exposes the chinks in the business models adopted by the Indian IT services sector. For far too long, IT services companies have relied on shipping low-cost skilled labour to countries such as the US to drive higher margins. Approximately 57 per cent of the revenue is generated from on-site projects executed mostly through import of skilled labour from India. IT companies argue that shortage of STEM skills (science, technology, engineering and math) in the US dominates the list of reasons for sending people on work visas. The real reason is that most companies in the IT sector have become heavily dependent on sending workers to countries where there is profit to be made just on wage arbitrage. The US, for example, contributes 62 per cent of the $110 billion earned by IT firms from exports.

This model has led to a situation where Indian IT firms have become global experts in executing low-value projects but are finding it difficult to move up the value chain — switching over to new transformational platforms such as robotics, artificial intelligence and automation. These new technologies are enabling tectonic shifts in systems and processes that require different capabilities compared to implementing an enterprise-resource planning software. To be fair, a number of large IT firms have been trying to change their business models to be ready for these new technologies. But the shift has not been fast enough. Though most of the large IT firms do not disclose their income from such projects, clearly, revenues from these newer technologies are not offsetting the earnings lost from legacy business.

Therefore, Indian IT firms should see the tightening visa rules as a blessing in disguise. Instead of pleading with the US government for relaxation, Indian IT firms should look inward to do three things on priority. First, abandon the path of sending workers from India, and focus on near-shore delivery in key markets. Indian authorities would perhaps react similarly to Trump, if, for example, sub-contractors for its major infrastructure projects brought in shiploads of cheaper Chinese labour. Every country has the right to do what’s best for itself, so there’s no point complaining. Second, reduce dependence on a few countries by spreading the business to more geographies,including the domestic market. India accounts for less than 10 per cent of the revenues for most large IT companies. Third, adopt business models that are in tune with the changing paradigm. Now that it is clear that the US and countries in Europe are moving towards stricter immigration rules, IT services companies should use this as an opportunity to force a faster transformation in their delivery models. Otherwise, the sector, so far the poster boy of the growth story, could soon hear its death knell being rung.

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