Adapting to change

An unexpectedly strong performance by Tata Consultancy Services (TCS) in the fourth quarter of FY18 has secured a $100-billion market capitalisation for the company and pushed up the BSE IT index. For a market inured to disappointments from the IT majors in the last couple of years, their recent numbers have come as a pleasant surprise. TCS’ strong sequential growth rates — 3.8 per cent in revenues, 5.7 per cent in net profits — and its improving business mix enthused investors. Infosys, while delivering lower growth, beat expectations on deal wins and traction in new businesses. Management commentary from both IT firms has been unusually optimistic too, with the TCS CEO ‘committed to double-digit growth’ and Infosys guiding for a 7-9 per cent expansion.

As the IT industry’s growth rate spiralled down from 15-20 per cent to about 7 per cent in FY16, it attracted considerable criticism for clinging to archaic business models. Indian players were perceived as one-trick ponies over-reliant on just one geography (North America, 60 per cent of revenues) and one vertical (BFSI, 40 per cent). As automation made rapid inroads and protectionism reared its head, traditional services such as application development and maintenance, and software testing, which thrived mainly on labour cost arbitrage, hit a wall too. But the significant business transformation that the IT majors have wrought in just a year, shows that the dire prognoses about their survival were over-blown. Riding the tailwinds of global recovery, these firms have managed to expand their European footprints (25 per cent of revenues). With new deal wins in utilities, life sciences, manufacturing and retail, the BFSI vertical (33 per cent of revenues) is no longer the sole bread-winner. Digital offerings have made rapid strides, chipping in with a fourth of the service mix in the latest quarter. Embracing automation, they have pruned wage bills by hiking utilisation rates, re-skilling the workforce and drastically reducing new hires. TCS and Infosys made net additions of just 7,775 and 3,743 employees to their mammoth workforce of 3.9 lakh and 2 lakh respectively in FY18.

True, building on this transformation entails challenges and not all domestic players will be up to it. Bruising competition in the new areas is likely to pressure profit margins and force more on-site hiring. Nor does all this imply that the industry can get back to the 15-20 per cent growth rates it saw during its heydays. For a maturing industry with a revenue base of $150 billion plus, even a 10 per cent growth would be an achievement. But while the fittest in the industry may yet survive, it is India’s policymakers who now have to scrounge around for new ideas to deliver on white-collar employment and services exports, two critical components of the India growth story.

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