The Indian IT services industry has been on a roll the past few years. Be it revenue, net profit, net headcount, upskilling, client roster, new services portfolio or any other growth metric, it has been a remarkable period for the industry.
But with the rekindling of recessionary fears, IT services companies — especially small and mid-tier ones — find themselves in a bind. While top economists, investment bankers and CEOs remain divided on the prospect, timing and magnitude of a recession, companies are better off modelling for probable scenarios based on past experience of downturns.
Yet, the moot question is: Can one instinctively extrapolate past learnings and apply them to today’s context given the massive changes that have taken place in the intervening period?
Digital technologies are redefining business, operating and financial models of companies. Investments in transformational programmes are no longer entirely discretionary. Further, in-house centres of global enterprises have grown to more than one million professionals in India. This could redefine what is done in-house and what gets farmed out to third-party providers.
Even in this changed context, whether it is a mild recession or a prolonged economic downturn, how companies manage their key stakeholders — clients, employees, partners and investors — would determine whether this was a crisis they capitalised on or simply wasted.
Based on our experience of tracking as well as navigating several downturns in the past 25 years, including the dotcom bust of 2001 and the financial meltdown of 2008, here is our 10-point recommendation.
First, look out for stalling or slowing of decision-making that could impede new or ongoing projects and discretionary tech spends.
Second, draw up a list of strategic clients — logo-wise and industry-wise — and do a sectoral deep dive to anticipate potential pressure points. For instance, in reading consumer spends to gauge the health of the retail sector, assess patterns in individual segments such as supermarkets, grocery, luxury goods, discount and convenience retailers to look beyond the contradictory picture presented by retail sector earnings in the US. Likewise, study the early signs of the US housing pullback caused by the steep climb in mortgage rates and home prices to factor in their cascading impact on allied industries. It would be critical for Indian IT services companies to assess their exposure to such vulnerable sectors and find ways to protect pricing integrity.
Third, client partners need to walk the hallways of clients every day. The pace of change in decision-making at the client-end can lead to various outcomes — consolidating vendors, opening up newer programs to niche vendors, moving work from onsite to offshore, negotiating prices, and so on. Unless client partners ‘smell’ the goings-on in real time, companies could lose out on existing or incremental business. If companies have the wherewithal to proactively advise clients on their potential choices to rationalise cost while driving efficiencies and effectiveness, they should get ahead of the curve and start doing it now.
Fourth, examine strategic clients for tell-tale signs of budget freezes across business units and re-calibrate hiring plans. For clients, this is usually the first line of defence to protect their in-house development teams. Concurrently, in many instances, companies that merely do staff augmentation work would be subjected to aggressive scrutiny as clients would like to restrict reliance on them.
Fifth, track and assess the impact of the hiring freeze that is starting to play out across FANG vendors, as also tech start-ups in the US. As this trend starts to wind its way through the tech ecosystem globally, it may be critical for Indian IT service companies, especially small and mid-tier players, to pause and take stock of the pace and quality of hiring and also tilt organisation-wide compensation towards higher variable pay linked to individual and company performance.
Sixth, never throw the contract document at the client for any deviations in scope, payment terms, and the like. Companies could lose that client for good. And given that client CXOs are highly networked, the collateral damage could be even higher. Focus on the spirit of the relationship and be as flexible as you possibly can. The more empathetic companies are, the more client evangelists they win.
Seventh, communicate and engage with your employees more than ever. Rally the entire workforce with a positive unifying message that gives confidence to them that the company will emerge much stronger. This has to be done at all levels of the company as employees tend to believe their direct managers more than the executive leadership.
Eighth, progressive companies don’t cut their way out. They invest even more to grow out of a crisis. For example, companies could double down on hiring the best talent otherwise not available during better times. Companies could also invest heavily in building out strategic capabilities and partnerships that could significantly help them in the medium- to long-term. Taking quirky decisions like rationalising employees or cutting down on training budgets just to protect a few basis points of margins can be detrimental. In the services business, such decisions could have serious long-term implications, especially in the ability to attract, retain and grow good talent.
Ninth, scan the market for compelling M&A targets that are a good strategic fit and attractively priced. Given that digital technologies have spawned hundreds of niche companies, bolt-on acquisitions could give that much needed edge.
Finally, engage with your strategic investors at a minimum of twice the usual frequency. Especially, if you are a publicly traded company, do as many investor events and webcasts for fair disclosure. The more transparent companies are, the stronger their relationship is with investors.
The ability of companies to turn challenges into opportunities with a laser-sharp focus is what winning stories are all about and investors set store by them. Investor webinars are a great platform to also communicate with clients, partners and employees to help them understand the company’s vision, roadmap and strategy in navigating the challenges for a better tomorrow.
If managed well, a recession is one of the finest opportunities to lay the foundation for the next phase of growth by strengthening relationships with clients, employees, partners and investors. The global delivery model that IT services companies have perfected over decades is a veritable antidote for companies looking to do more with less. Looking back a decade from now, this period could well be remembered as an inflexion point and a catalyst for the industry to go past the half-a-trillion-dollar revenue mark by 2030!
The writers are Partners at tech advisory firm Catalincs, and have decades of experience working for Cognizant