Pandemic positives for the IT sector

If the Y2K bug helped Indian information technology services companies catapult to the global stage, the disruption caused by the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) is giving them an opportunity to move into the next phase of growth. The pandemic has increased the pace of technology adoption across the globe as clients and their customers move to a digital environment. Even industries that were traditionally not IT-driven or had little dependence on IT are now adapting their businesses to the new normal as they feel the need for more agile digital solutions with a faster time to market. Digital transformation and migration to the cloud have become the need of the hour as it makes accessing and maintaining data from remote work places easier and quicker. Digital banking channels are seeing a surge in usage, and this is driving technology spending as well. The cost savings potential from the shift from physical to digital channels is also aiding technology spends. This augurs well for India’s IT industry, which has been facing severe headwinds over the past few quarters due to the slowing global economy and changing business models. The top IT services companies are confident of improved growth in the coming quarters mainly led by receding challenges on the supply side, the ramp-up of deals, vendor consolidation opportunities, and traction in BFSI.

But IT companies will have to do three things if they want to grab the opportunity at hand. First, IT companies must reduce over-reliance on big-ticket deals from traditional markets like the US and UK. The domestic market, for example, accounts for less than 5 per cent of the revenues for most large IT companies. Second, there should be a quick transformation into a distributed delivery architecture. The ongoing economic lockdown due to Covid-19 has disrupted the way IT companies function as more than 85 per cent of the workforce stays at home. From a centralised architecture, IT services companies have had to restructure their entire organisation and that is here to stay even after the lockdown ends. Under this delivery model, costs related to real estate and managing offices will go down over a period of time, but higher spending will go into collaboration and other kinds of productivity tools.

Third, dependence on H-1B visas has to be further reduced to overcome challenges related to tighter immigration laws under the current dispensation in the US. Tougher visa rules are already forcing many large Indian IT services firms to change their business model and ramp up onshore hiring. To cope with related higher costs, the IT companies are now beginning to move up the value chain in search of higher margins. New technologies are enabling tectonic shifts in systems and processes that require very different capabilities compared to implementing an enterprise resource planning software. The focus has to be on bagging transformational business contracts.

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