Indian IT companies are in distress and the seams at the board level are breaking. The tussle at Infosys between the board and the founder/promoters was out in the open and it was just an example of what is transpiring in every IT company. An uncertain future is making decisions difficult at board level.
On 20 February, TCS board okayed the decision on buyback of shares, while Infosys and Wirpo, too, are likely to follow suit, feel analysts. All these companies are said to be following in the footsteps of Cognizant which under pressure from shareholders announced a buyback. Though that is not entirely correct as Accenture, another US competitor, has been doing buybacks for years.
Buybacks conflicts with shareholders on performance, and future direction is the new reality of IT services companies, which for years have shown stellar growth. Now, they face headwinds with disruption in their basic business model due to shift in AI (artificial intelligence) and digitisation, and rise of protectionism in the US and UK. This means shipping engineers to solve IT problems or even hiring engineers does not make sense any more. In the new world - automation and bots using massive computing resources are expected to take over the bulk of the services that these companies provide.
These challenges have not come suddenly, the trend has been building up over the years. But the board of most of the domestic IT companies did not foresee the challenges coming in or were slow to adopt these changes. They did not even make any attempts to change their manpower intensive model and continued hiring at a rapid pace. Now, the CEO of CapGemini says 65 percent of the manpower cannot be retrained. There seems to be a complete lack of long-term planning in the Indian IT industry. These are companies which failed to predict the shift in technology. In a way these companies are now technologically obsolete.
Shareholders who invested in these companies can blame the board, promoters or the executives who run these companies in equal measures. In Infosys' case, the promoters have chosen to blame the board for taking an aggressive approach. Behind the smoke and mirrors the real issue is that Infosys CEO Vishal Sikka has decided to pursue an aggressive acquisition strategy for growth. His incentives have been structured to achieve those results. This approach is in conflict with the conservative approach of the founders who never acquired and let all the cash reserves reamin unutilised for decades. While Cognizant acquired ten companies in 2016, it has acquired more than 15 companies across the globe in last three years. Accenture also follows an acquisition-led growth strategy. Only Wipro followed it with its string of pearls strategy that is yet to make any meaningful impact on the overall balance sheet.
Growth is slowing down, business model is changing fast, huge cash reserves remaining idle for decades and boards of most IT companies have been blind to shareholders' recommendations for years. Top echelon of these companies is full of people who have little expertise in technology and global tectonic shifts. Most CEOs of Indian IT companies have never restructured businesses, cut manpower, retrained and re-skilled thousands. The sign of decline or the rise of mediocrity within the industry is fully represented in its industry association Nasscom. The industries challenge lies in US and Europe, its customers are global. While its industry association run by retired bureaucrats focuses on lobbying the Indian government. The failure of Nasscom can be gauged by the fact that this year for the first time in its history it could not forecast the growth for industry for the full year ahead.
Buybacks are not the solution to what ails the industry, although appeasing shareholders for the short term may work. But the crucial issue is that promoters need to take an active interest now in restructuring their companies. They will have to quickly resort to changing the market strategy, and actively look at acquisitions to restructure their specific business vertical. Acquisitions cannot be done just to shore up revenues or to show growth, they must also help the change in a specific vertical. It will not be an easy task as there will be more blood on the streets before any company actually implement it. Therefore, there will be more conflicts at the board level than every before. Maybe some of those conflicts may lead to political intervention as well due to possibility of some tough decisions companies may have to take on the retrenchment front.
The question is are these companies ready.
(The writer is digital strategist based in Delhi. He tweets @yatishrajawat)
Updated Date: Feb 22, 2017 15:58 PM