The biggest shift in the $50 billion software industry, it seems, has gone unnoticed. There were no covers in business magazines and the newspapers, as expected, missed the macro for the micro. Even the industry watchers did not catch it.
The top five Indian IT companies are witnessing the most significant shift seen since the Y2K boom. The previous boom allowed the Indian software services companies to get into the servers of the largest companies. Companies across the world were spooked by the scare that with Y2K their critical software would freeze, cutting them off from their data and networks. The lesson of how the Y2K scare was constructed and how the tech industry rolled in profits is a story that this generation of programmer and manager do not know. There are other lessons from Y2K but for a summary read the techie here.
The Y2K scare taught Indian companies how to scale up and hire by the hundreds. Companies in the industry, big and small alike, built massive recruitment engines. Several of these companies have since disappeared or are in coma. More significantly, it cemented the way that the business model of Indian IT companies has evolved. It has always been per employee billing, it is task and hours oriented and it is peaking and creaking.
The latest sign of the shift comes with Wipro embarking on a three-year exercise to pare its work force. To understand this, we need to compare Wipro, which has 1.47 lakh employees and revenues of $1.86 billion, in the April-Jun quarter with the smallest global top five company, NTT Data Corp, that has almost half of Wipro's employee base at just 75,000 and revenues almost double at $3.2 billion for the comparable period. Wipro said it wants to bring down its workforce by 30 percent to 100,000, and the story is about automation. The second was the announcement of a $2.7 billion acquisition of Trizetto by Cognizant.
These two actions are now buried among URLs but their importance is not realised by the industry watchers. The real story is that it signifies the biggest shift in the IT industry in recent times.
The real story when India's third largest IT company says that it will reduce workforce by 30 per cent, is that it is making major shift in its business model. It means a seismic shift has taken place. If the industry does not acknowledge it and tech journalists do not understand it, it is their failure.
It is not just Wipro, the same problem ails TCS, Infosys, HCL Tech and Tech Mahindra. TCS is hiding its flab behind growth which has blindsided the analysts and journalists. TCS' CEO, the marathon man, N Chandrasekaran must be spending sleepless nights after Wipro and Cognizant's announcement. TCS has 3 lakh people on its roll, double that of Wipro, and even more employees than Accenture which has 2.93 lakh employees. Accenture has revenues of $8.2 billion during its last quarter, while TCS has revenues of $3.3 billion in the same period. The difference is stark and the comparison is biased. Accenture is a consulting company that moved into outsourcing, while TCS is an outsourcing company that wants to become a consulting company.
Data compiled by Aranca Research for the last quarter April -June 2014-15
Indian IT companies have always rejected a straight comparison with global IT companies on manpower comparison. Their argument has been that their model is sustainable because of higher margins. The revenue per employee may not be comparable, but TCS profit per employee is comparable to that of Accenture. Infosys and HCL Tech's profit per employee is even higher than Accenture. But Wipro and Tech Mahindra profit per employee has been shrinking. Maybe a deeper study would show a much higher wage escalation for Wipro and Tech Mahindra.
But the issue is not wage inflation and shrinking margins, it is about scale and management. TCS has almost as many employees as HP and HP yesterday announced it was splitting its business into two. HP may not be a good comparison with TCS as the latter has services business while HP sells everything from PCs to printers. The split is also not because of the size of the employee base but dividing the low tech commodity business from its other business. What needs attention is how sustainable and scalable the software services model is.
How large an employee base is sustainable in a services company? IBM, the largest technology company that has both hardware and services, has 4.31 lakh employees and is the fourth largest company in the US. In the list, led by Walmart with 22 lakh employees, TCS would reach a credible ranking of 11th.
Wipro seems to have realised two things - one, it does not want to follow per employee billing model;second, it also believes that there is flab in the organization. Does it mean that there is no flab in TCS or Tech Mahindra? They are not acknowledging as yet, but they have all been hinting at reinventing themselves. In a way, the top deck has already hit reset button.
The trouble is that it is very difficult for a TCS, Infosys or a Tech Mahindra to convince the analysts about reset. The quarterly watchers do not want these companies to get off the treadmill of sequential growth. Moreover, CEOs in at least four of the top five are too engaged in operations and daily monitoring to do a reset. Only Vishal Sikka, as he is based out of California, is far more capable of ushering in the shift in the model. The model is not new for Infosys' last CEO Shibulal as he tried to usher in the shift by advocating Infosys 3.0. He failed to convince investors, inspire employees and did not tinker with the core revenue engine. End result: His initiatives did not last.
Now, Sikka has the responsibility to build a new revenue engine for Infosys, one that is not based upon throwing people after projects or man-hour billings. Can he reset a 1.64 lakh employee company with revenues of $2.13 billion?
The challenge for Sikka is external first and internal later. As soon as he starts talking about a reset, analysts will hound him about it and ask is the old model faulty. He cannot deride or criticize the founders so getting investors on board is as difficult for him as it was for Shibulal. But he has a better chance internally as an external force, will he shift the centre of gravity of Infosys to the US.
This is important for a company like Infosys to have its key team where its customers are. There is no need for its whole management team to be based in India. Marketing, sales, communication and key vertical leaders should be based outside. Only finance needs to be in the domestic market. Smaller firms like Genpact have realized this but the inertia in large firms is too much.
REACT OR ACT
Infosys has a new CEO, so does HCL Tech. Wipro will see changes at the board level soon. TCS and Tech Mahindra leadership has been with the company for long. Wipro and HCL Tech have a strength that others lack - the founders of both these companies have dominant shareholding, and may allow quarterly disruption in return for long term gains. Infosys founders do not have any meaningful shareholding in the company and TCS is too dependent on its market cap.
The stimulus for these companies to change the model has been there for years. They have not reacted as there was a disincentive to action so why stop the gravy train? The quarterly trackers do not see the need either. Wipro has been pruning for the last three years and even Cognizant seems to be doing so.
The question is what will they do and how will they go about doing it. The next level of growth will not come from doing what they have been doing well all these years. Small acquisitions, like that of Lodestone by Infosys, cannot changethe kind of revenues these companies need. Cognizant's growth has slowed down but it is acquiring revenues through Trizetto and giving an edge to its offering through Cadient.
Cognizant acquired Cadient Group and the release says it is a full-service digital marketing agency that serves a broad spectrum of life sciences companies in the pharmaceutical, biotechnology, consumer health, and medical device industries. Pennsylvania-based Cadient provides digital strategy, marketing, and technology and analytics solutions in the life sciences industry. Now this is an offering that Cognizant can take to clients and say, "Here we will help you grow your revenues, not cut costs or give returns on your technology investment".
It is a small acquisition but has the capability of changing the revenue model for the life science vertical of Cognizant. I am sure it is a result of Francisco, who has moved out from operational role maybe to focus on acquiring and building the new engine for Cognizant.
THOUGHT OR MOVEMENT
Now, let's return to the various phases of IT:the Y2K movement , the early e-biz models during the first dotcom boom, cloud computing and the latest Big Data. Every movement has been engineered very wisely by the US tech companies, while Indian companies just rode the wave. They have been worrying over thought leadership and pushing dollars into analyst firms to give them the gravitas.
Analyst firms covering tech buying decisions are necessary but not sufficient for a $50 billion industry. And this is where the failure of the industry body, Nasscom, comes to the fore. It has not been able to establish any movement marketing initiative that could help the whole industry. It does not have a full-time leadership that can effectively create a movement, or build an ecosystem of thought leaders from within or outside the industry.
Its flagship event has become a jamboree of sorts and it has fallen on failing Bollywood stars to attract crowds. It's surely not what its role should be at a crucial juncture for the industry. If Nasscom were to fulfill its role it would spend effort and resources on being the spearhead for the movement.
Movement marketing is the norm in the technology industry, the whole Big Data movement has a well-oiled machinery of publishers, writers, tech leaders and the marketing dollars of companies like IBM. If the $50 billion Indian industry cannot set aside $15 million to pump into a movement marketing initiative, then the future will that of a follower and not a leader.
This week Infosys will kick off the results season for ITservices, and for once if the analysts look beyond the whole noise of sequential growth, for once if they do not indulge the company CFOs on the great performance and ask sustainability questions, maybe, we will have a future for the largest job generator in India.
Yatish Rajawat is a senior journalist who has covered the booms and discovered the busts in the tech industry before. He tweets @yatishrajawat
Updated Date: Oct 08, 2014 16:07 PM