Indian IT Services industry has benefited from a great run so far. In about five decades the industry has grown from few hundred million dollars to have over US$300 billion in revenue per year. The industry had handled with aplomb earlier challenges thrown at it, in fact, it has used technical disruptions like the Internet, Y2K, Mobile, Cloud and SaaS that came to its advantage to grow. Today it confronts massive changes from many directions, mainly from A.I. and Automation.
In this context, I look back on a workshop I conducted a few years ago for the members of NASSCOM, India’s premium association of software exporting firms. I started that program with a quote by Ernest Hemingway in The Sun Also Rises that is relevant for anyone in any business, especially for those in the services industry: “How did you go bankrupt?, Two ways. Gradually, then suddenly”. After that shock, I assured them that change was not new to the Indian IT outsourcing industry. It has revived itself several times – a seminal book to read on this subject will “ The Outsourcer – The Story of India`s IT Revolution (History of Computing)” written by Mr Dinesh C. Sharma. When it comes to ever changing world of underlying technology in our industry, it will do good to remember this quote from Nelson Jackson “I do not believe you can do today’s job with yesterday’s methods and be in business tomorrow.”. Think about it, you cannot be expecting to be a leader in using Artificial Intelligence like Generative AI and still charge your customers on a Time and Material model or for baseline maintenance.
In 2023, I acknowledge that there are strong headwinds that threaten the way the IT Services business works – including increased cost of reskilling the employees, lower margins, changing customer expectations, newer business models, political uncertainties, digital natives joining the workforce and many more. How can a small and medium-sized company operate and thrive in this environment?. The following seven sections can guide these companies to find their way and gain scale.
1. Funding
Over the last few years, startups in India who are into consumer apps space have seen their valuation skyrocket and investors pouring down money. We have seen many unicorns being created every year. Founders of IT outsourcing firms need to remember that their industry operates differently to this. Consumer (App) businesses are built for scale and investors too value them accordingly, whereas IT services is a mature industry and have almost become a lifestyle business. Gone are the days of 20-30% YoY growth. Today, a well run ‘niche’ IT services firm can expect to grow only in upper single digits (say 8-9%) YoY, with a profit margin only in the range of lower double digits (10-15%). There will be little to no interest in these businesses from an Angel or a VC – so don’t waste your time in courting them. This business just doesn’t work for their model. This is the reason why many of the smarter players in the space have moved or invested in Software-As-A-Service (SaaS) models.
“Startups are, by nature, a risky business – this is a feature and not a bug.”
Instead, you need to be bootstrapped, self-funded, or go after HNI (High Networth Individual) investors – there are quite a lot of industry veterans who are deep-pocketed and want to give back, or, be open for the M & A route – larger IT firms are keen at acquihire to quickly ramp their teams with focussed or specialised skills. Any funding exercise is not going to be an easy one. It is emotionally and physically draining, be open for it. For every successful round of funding, the founders go through multiple rounds of rejections, failures and disappointments. In my own experiences in one of my businesses I have had three unsuccessful negotiations before I was able to close the deal.
Dr Thillai Rajan of IIT Madras in presenting the 10th edition of the report on the startup ecosystem says in the period from 2000 to 2017, an eighteen year period, there were 1.26 Million companies that were registered in India. Out of which the potential for VC funding was for about 275,000 companies, out of which those who actually got funded was: 6,214 and those who got an exit was: 1,624. For 2023, it is expected about 1,000 companies will get funded and several thousands who will not get funded.
2. Pricing
More than ever, in 2023, the IT Services is a commodity business where either you keep growing, optimizing, cutting costs or be a super specialist to charge a premium.
Unlike, in the past business cycles, this time around, the quantum of ask from customers has not increased incrementally, but exponentially. They want their outsourced vendor to provide them with 10 times more features at 10 times lesser price – and a delivery time of weeks, not months. These are not unfair asks, as the productivity of service providers in recent years has improved phenomenally and going to improve exponentially due to newer platforms and tools including generative AI, Automation and easy availability of mature opensource toolchains and practises.
If you are NOT going to (or able to) meet these demands from your clients, you can be sure your competition will do it – and they will be doing it for a profit. One good thing for the industry has been the Rupee to Dollar exchange rates, which have been favourable for exports and is expected to remain the same, due to the American economy remaining strong with lowest rates of unemployment there.
3. Business Models
Today’s contracts expect the IT service player to be a “true” business enabler and not merely a system integrator. You can’t be scouting to do custom software development from scratch, those are going to be fewer and farther.
For existing vendors to transition from their FTE (Full-Time Employee equivalent) and T & M (Time and Material) model of pricing to the newer world of outcome-based pricing is going to be tough – there are no manuals available for doing this. All the stakeholders are feeling their way through.
The industry is seeing more of pilot projects, department-scoped projects happening, which are by nature smaller and shorter duration. The good news is that more of these are being created and as Rishad Premji (Chairman, Nasscom) has said: “Digital spend is industrializing a little bit, moving from pilots and PoC (proof of concepts) to big spends.”. With every company spending on projects involving AI, more pilots will be happening and good portion of them will get converted to production projects. Over time, many of the decades old business software will be transformed due to AI and will require reimagining and redevelopment, but the contracts are going to be coming with newer pricing models as well.
As applications are moving to the cloud, containers, and to SaaS platforms, the need for typical 24 x 7 support and baseline maintenance is quickly vanishing. For example, an application running on a cloud platform will require only a fraction of engineers for its support and enhancements. AI tools are going to drastically decrease even these numbers. It will be wiser to invest on building your own specialised tools here. In the case of digital transformation contracts (which are growing now), customers want to pay for the business outcome and not for the project completion.
“The snake that cannot shed its skin must die”, Friedrich Nietzsche
A relevant book in this regard will be the “Digital to the Core: Remastering Leadership for Your Industry” by Gartner, containing lots of successful case studies across industries.
4. Talent
Earlier, the IT industry was dependent on hiring fresh engineers in droves and a limited number of experienced engineers. Today, you need more experienced engineers, especially those who are familiar with newer technologies like AI, Automation, & Analytics – and hiring them is going to be inherently expensive. So, you need to be super smart on your employee mix and keep improving productivity.
You also need to look beyond engineering graduates. For example, for implementing a typical AI or Data Analytic projects, you require a team with cross-domain skills. That’s why you are seeing CTS, Infosys and others hiring usability experts, behavioural scientists, statisticians, economists and so on.
Even “fresh” engineering graduates are becoming expensive, though in the last few quarters the attrition has come down dramatically it is only going to be short lived as it is a correction to fix the pandemic rush. Product companies and startup today are offering entry level salaries of US$21,000 to $42,000 compared to the low salaries of US$6,000 to $10,000 that are being offered at services companies.
The above talents are not going to be available only from the metro cities of India like Bengaluru, Hyderabad, Delhi, Pune or Chennai. You need to look beyond the top cities. Even if you are a small firm you need to hire talent wherever they are available, which means your culture, collaboration process and toolsets have to be welcoming and have little friction. Work from home may be getting reversed in many firms, but remote working is here to stay. A great book on building a suitable culture for remote workers will be “The year without pants” written by Mr Scott Berkun, a former Microsoft manager, on his experience of working in the company behind WordPress that pioneered remote working more than a decade before it got the imagination of the software industry.
To learn on hiring and retaining talent, check on a talk by Mr Mahesh Murthy on “Managing today’s employees – Reinventing HR for the new enterprise” where he says “The true HR of a company is the CEO; I want to hire people who can have significant way with ambiguity”.
5. Marketing
Gone are the days, when you could be a Microsoft or a Google Partner or an AWS Partner, and if you are good on what you did, you could expect referrals from the principals or sub-contracted work from the biggies. Today, there are thousands and thousands of IT Services firms in India. Competition is coming from Vietnam, Philippines, Ukraine and Eastern European countries too. Vanilla cold calls have become almost useless. Google Ads, and Linked Ads are now yielding a lower and lower number of leads.
So your costs are increasing, which means you need to be innovative in your marketing and branding, to stand out from the crowd. To do that, get your marketing message/kit made as professional and as clear as possible. Spend “good” money on this, no shortcuts here. Potential clients have no time or energy to look at a shabby email. Be clear whether you are selling a product, a SaaS subscription or a custom development service. Be warned, “we will do anyway you want” is not an offering, no potential customer is searching for that in Google.
If your business plan or strategy reads something like below, stop and watch the brilliant talk by Simon Wardley on “Crossing the river by feeling the stones”:
Our strategy is cloud based. We will lead a collaborative effort of the market through our use of digital business and social media to build a growth. By being both agile and sustainable, our networked approach will drive learning organization throughout the organization. Synergies between our artificial intelligence and virtual reality will enable us to capture the upside by becoming innovative in an open world. These transformations combined with blockchain due to our data leaders will create a revolution through big data and leaders.
Instead of these non-sensical strategies, write something that is direct and short. Your marketing message should clearly answer the questions – what you are selling, how you are charging for it, what does it include and exclude, why should he/she buy from you and not ABC, and, finally, the most important item, address the issue of what’s in it for the reader?
Ms Jessie Paul, a marketing expert and author is passionate about simplicity in marketing. She says in India our businesses complicate on the options presented to their customers. They should make is short easy and less complicated. She advises the audience to come up individually with the following superlatives for their business:
I’m the best at —
I’m the only —
I’m the biggest — and so —
I’m the cheapest — because —
If you are on a tight budget for marketing (who is not?) then grab a copy of this book “Devil Does Care” by my friend Mr Pravin Shekar, on the secrets of doing Outlier marketing with a frugal budget.
6. Geography
When picking up a market, start with only one geography. As an SME you will not have the money for targeting say the USA, Singapore, Germany and India. Remember though the USA as a market is still attractive, but it is NOT one geography from a marketing perspective. Marketing to the USA is the most expensive, compared to many other markets for a company from India.
“Without geography you’re nowhere”, Jimmy Buffett
7. Statutory
Over the last decade, Governments around the world, especially Government of India has become strict on taxes and company law compliances – with the good intention of going after fraudulent and shell companies which finance the bad guys. But these have increased the cost of doing business.
I am aware that most of the founders, especially those with non-accounting backgrounds, tend to delegate all aspects of finance, taxes and legal compliance to others. While delegation is fine, as the founder the buck stops with you, which means you need to have a solid foundation on the basics and what you need to monitor, measure and ensure gets done regularly.
Remember, for every other country that you have a branch or a subsidiary, the compliances grow exponentially – even in the USA or Singapore, the compliance costs are increasing in recent years. You will do good by hiring a local expert in each of these countries even if it will cost you more than doing the filings yourself – also have a financial, a legal advisor in India who is well-aware on cross-border taxations and contracts. There are many small niche to help you with these.
Summary
The Indian IT services industry is at a crossroads, and companies that are able to adapt to the changing landscape and reinvent themselves will succeed in the future.
