The earnings season is back, and the country’s leading domestic IT services company, Tata Consultancy Services (TCS), was the first off the block to announce quarterly results early this week.
The redoubtable TCS crossed a rare milestone of achieving ₹10,000 crore net profit. An achievement that needs to be celebrated, but as the economic slowdown looms on the horizon, several challenges for the IT services sector are expected to emerge.
53% contribution to GDP
Infosys, Wipro and a few other IT services companies are expected to announce better-than-expected results. The services sector, of which the IT services sector is a part, remains the engine of growth for India’s economy and contributes around 53% to India’s GDP. The IT services sector alone contributes 7.7% to India’s GDP, signifying the enormous heft it carries in its economy. Nearly a quarter century ago, its contribution was an insignificant 1.2%. In FY22, its total revenues were $227 billion, per industry lobby group Nasscom.
But analysts aren’t sure whether FY24 (April 2023-March 2024) will continue to follow the growth trajectory of FY23. With the International Monetary Fund (IMF) painting a bleak picture of the global economy in its latest forecast, the three biggest economies in the world — the US, the EU and China — are expected to witness a significant slide.
While almost every sector in India is expected to see a contraction because of the recession, the IT services sector, which depends heavily on the US and Europe to fuel its growth, could see a sizable impact of the slowdown. Therefore, technology budget cuts are most likely to happen as one of the early measures to reduce the impact of the economic downturn.
But the slowdown may not be the only challenge the Indian IT services sector will face. As clients pull down their IT budgets, deeper underlying issues might surface in the next few years. While rising attrition is being viewed primarily as a result of a shortage of talent in the sector and perhaps a phenomenon that will last until the recession or any setback sets in, it remains to be seen which company will end up with better talent in this musical chair game.
Attrition has touched nearly a quarter of any IT services company’s workforce, resulting in a margin squeeze because of higher salary payouts and bonuses without a corresponding increase in deal structure.
High attrition rates
The era of $1 billion deals, which was the norm during the early days of Covid, has almost disappeared. For example, Infosys won its most significant order to date during the peak of Covid when it bagged a reported $3.2 billion deal from major automotive Daimler in December 2020. The deal, spread across eight years, topped the $1.5 billion contract from Vanguard that Infosys won in August of the same year. In addition, TCS bagged a $1.5 billion deal from the US-based wholesale and pharmacy major Walgreens in 2020, while Wipro bagged one for itself, wrapping up a $700 million contract from Metro AG around the same period.
The IT industry has been using quick-fix solutions to ease the pain of rising attrition and, to an extent, believes that it is a norm that the IT players will have to live with. The employers will have to dig deeper to find a long-term fix and create a work environment that gives employees enough stickiness to grow with the organisation.
The problem that has been rearing lately has been the issue of moonlighting, and a sledgehammer approach that an IT company resorted to may not be the best solution to get past the challenge. One out-of-the-box solution that can be looked at is the kind of skillsets that employees bring to the table, not necessarily college degrees, as they have been found wanting when it comes to job readiness.
While employers sang peans about how they made it easier for their employees to work from home (WFH) when Covid hit the world, it has now come back to haunt them, and they are finding it increasingly difficult to get their workforce back to offices. The WFH option demonstrates that it turned out to be another temporary solution, and the management across companies may not have considered the post-Covid scenario.
Furthermore, employees’ complaints about higher workloads and online meetings at odd hours have only grown, which shows that while rapid digitalisation has brought more contracts for IT services companies, there have been particular challenges that they were ill-equipped to handle.
Innovation need of the hour
Going forward, there must be a paradigm shift regarding creating new opportunities for IT services companies. A McKinsey survey reveals that service providers need to be far more innovative in their offerings than ever. “IT purchasers and providers will also need to reimagine the request-for-proposal (RFP) process as a “request for solution” process— an opportunity to jointly identify critical problems and define potential solutions,” the report from McKinsey said.
It cites the case of a provider which went beyond a simple outline of services it could provide; it suggested ways that the purchasing company could form a joint venture with the provider and go to market with a joint service offering. This proposal reframed service provision as an opportunity to generate revenue — an approach that turned heads and established the provider’s credentials with the purchaser. The joint-venture idea was not approved, but the provider eventually was rewarded with the services deal.
While the IT industry fared well during Covid and its aftermath, mitigating the effects of the global recession might prove more difficult.