Software faces its biggest challenge ever

Subir Roy | Updated on January 12, 2018


It is a serious, but not an existential crisis; companies must address this by transforming their business models

Through nearly two decades of stellar growth, India’s export-driven software and services sector has both given a boost to exports and, perhaps more importantly, changed global perceptions about India.

From being seen as an undifferentiated poor country relying on bulk commodity exports, India has come to be acknowledged as a source of globally competitive technology skills normally associated with developed countries.

But the future of this dream run of Indian software is challenged and its immediate impact is visible in the latest results of Indian software leaders. The challenge is two-fold. One comes from the thought process of US president-elect Donald Trump, who has threatened to change visa rules so that import of cheap technical manpower does not take away jobs from Americans.

The other challenge is the revolution taking place within the field of information technology itself, which threatens the highly successful traditional business model of Indian software.

Trump, and tech

Of the two, the first one coming from Trump looks large today but may not turn out to be as destructive by the time the dust settles and election rhetoric catches up with reality. The US has carefully set up an elaborate regime of importing skills through the issue of H1B visas because US corporations want these cheap imports and have secured them through successfully lobbying Congress.

Just as it remains to be seen how many manufacturing jobs US car majors genuinely bring back from Mexico, severely restricting the scope of H1B visas is still a long way off, if it at all happens. Besides, it is not as if US software workers are facing acute unemployment. Their part of the job market is in fact quite buoyant. What is resented is that Indian engineers work for lower pay than they would. The issue became emotive when Disney laid-off US workers to train Indians who were replacing them.

The technology changes sweeping the world of IT is another matter. Not only are they fundamental, they are there to stay. And Indian IT firms have to drastically reinvent themselves if they are to survive.

First, the immediate impact on them. In the latest quarter ended December, both TCS and Infosys have recorded topline growth of a little over 8 per cent, when in the years following the blip in 2009-10 caused by the global financial crisis, both had grown by over 20 per cent. The falling growth rate has led to downward revision of guidance and also industry forecasts. This has been accompanied by a slowdown in hiring. In the September quarter, the top four Indian IT companies cut their hiring by as much as 43 per cent.

The technology change underlying this is captured in words like automation, cloud and digital. Indian companies traditionally offered development (writing code) and maintenance services through time and material contracts. This was delivered both offshore (Indian firms first devised the globally distributed development model) and onshore (at client sites to help with installation). But a lot of these jobs are now being automated. So IT firms have to offer clients something more.

They have to help clients innovate and find new solutions that will enable them to be part of the digital revolution sweeping the world. Companies are racing to capture in digital form every bit of information they generate (not just financial and inventory but processes and state of hardware too) and developing applications to glean insights from them.

Cloud game

Along with this is taking place the move to cloud. Companies earlier would mostly host their own hardware, enterprise solutions and applications which would need to be installed and maintained. Today, a good part of this is being uploaded to servers through the internet and IT functions from warehousing data to accessing and using applications are being executed through the internet and servers which are neither on a firm’s premises nor owned by it. Cost savings take place because enterprise solutions and applications are not owned but paid for per use.

How is Indian IT coping with this technology change? Leading firms are training their staff to work with clients with the help of new dedicated platforms and frameworks to help them automate routine functions and innovate new processes.

They are also constantly looking at their own numbers to see how much of their revenue is generated form digital work. In the last quarter, TCS recorded a 30 per cent jump in its digital revenue. It is not as if the entire industry is as quick footed and forward looking as the leaders are and those unable to learn new tricks can only be left behind.

IT takes a beating

But there are several reasons why the industry should see all this as an existential crisis. One, the slowdown in growth during financial 2016-17 can in good part be attributed to the global IT spending scenario. According to Gartner, global IT spending contracted for two successive years, by -5.8 per cent in 2015 and -0.3 per cent in 2016. But there is good news ahead as it expects global IT spending to go up by 2.9 per cent in 2017. This rising tide should also help Indian firms to pick up on topline growth during 2017-18.

Plus, there is ample evidence that Indians are not lacking in innovation. One sign is the frenetic pace of development in the world of startups in general and e-commerce in particular. There are inevitable ups and downs in venture capital funding for the startups but the ferment in new thinking to find solutions, many of them geared to specific poor country needs in areas like healthcare and agricultural marketing, point to an abundance of innovative energy. Inevitably, some energy gets diverted in wrong directions. India, for example, is emerging as a hot centre for online financial fraud.

The task ahead is twofold. As the level of skills required by IT firms has gone up (routine tasks are being automated), the government has to play a big role in training more skilled engineers. And for their part, entrepreneurs have to devise new businesses which can make the best use of the new skills. And the middle class has to bid goodbye to the notion that a software job will be easy to find with even a mediocre engineering degree.

The writer is a senior journalist and the author of Made in India: A Study of Emerging Competitiveness

Published on January 18, 2017

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