Top Actions Required in your Annual Plan to Survive IT Services Transformation

I am writing this blog as many of Indian IT companies finalizes its strategy for the FY ahead. Of course, many reports will tell you from one extreme with dooms day view of how economy is tough/ market is dull to other extreme with rosy picture that Digital transformation will open new doors of opportunity for you. Both extremes are only partly right, and hence totally wrong to consider as basis for strategy.

As we spoke to 400+ clients in last two months and discussed with/attended annual planning/strategy sessions with many of your global as well as Indian peers, I felt that many firms are reluctant to accept structural changes.  This industry is going through and are shying away from taking drastic steps required to survive long term seismic shifts – even if these changes mean disruption and temporary business challenges:

  1. Be Ready for one more year of muted growth  & know well that Digital hype won’t deliver much

 Trend:

  • While select verticals in US shows recovery, verticals like Energy, Telecom shadow overall numbers.
  • Europe will continue to be a problem. In addition to economy, geo-political and terrorism spoil European spend.
  • Hype of Digital and IOT will yield only smaller projects.

What it means?

  • Prepare for industry growth of 6% – 8%.
  • Margin pressures continue to mount.
  • Focus lot more on analytics.
  1. Re-jig Dely Org to suit millions of small projects

Trend:

  • Scale of technology acquisition reducing.
  • On one side deal sizes are dropping and on other hand all projects driven by new technology and functionality plug-ins are of smaller size.
  • New Dev Ops tools and platforms needs less people to do same task compared to five years ago.

What it Mean?

  • ODC and large/broad pyramid centric models are over.
  • Embrace Manufacturing best practices to run efficient project factory, not mere software engineering and accolades like CMMi.
  1. Need to re-skill about 60% of resources and reduce hiring coders and testers

Trend:

  • In rising world of Automation as well as Analytics, Clients need more help in deploying technologies interpreting insights.
  • Having detailed /minute  domain capability and experience and operating skills will be in demand.

What it means:

  • Organizations of Coders and testers need to augment with Users and installers (configuration/deploying etc).
  • Recruit non-engineers, end users from client side, and data scientists/experts more.
  1. Get to account level – research, strategy, solutions and message

Trend:

  • Current micro-vertical based strategy will not succeed. Horizontal services (like Digital, SMAC, and IOT) will fall even shorter than that. Actually these are not tech practices.
  • No two companies – even in same industry and geo – are facing same issues. Your one size fits all message won’t work.

What it means?

  • Start micro-strategy. Identify top accounts that will give over 60% revenue and work at account level (not by sales leaders, but at company level).
  • Your message need to be account specific and research based.
  1. Update current outdated Strategy, Marketing and Sales Support

Trend:

  • Every second Nasscom member has same story…. And still they believe they have differentiation.
  • Currently, these functions are mere plan facilitators, campaign managers, event planners, hosts for visiting clients /analysts, and collateral content creators.

What it Mean?

  • These functions need to provide account level actionable insights, talking points and help to create client conversation.
  • Strategy need to identify solution hot buttons that field and account teams can use to improve pipeline quality and deal strike rate.

Immigration Bill, Are You Really Prepared

Last month I was in the US aiming a direct communication with some of the top Offshore Buyers. About 60 odd representatives participated in this debate belonging to fortune 200 firms that bring business to Indian IT. What interested me most was the talk that went around Immigration Reform much more than anything else. This gave enough motivation for me to write a piece on what really has made Immigration reform a much appalling subject on either side of the seas.

What does the Reform Really Say? (And Mean)

Provisioning, or well not-so-provisioning, the reform speaks of three significant takeaways viz:

  • Limiting the proportion of H-1B/L-1 Visa workers to 50% to that of US employees
    -Our estimations show that current visa workers account to 60%-75% of that of US employees, clearly a big number that will either downsize a firm or expand it considerably
  • Modify the computation of prevailing wage benchmarks, along with this, increase application fees for H-1B and L-1 Visas
    -This clause will severely affect margins and hence the billing rate as I see a very likelihood of Indian firms re-strategizing around this
  • Limit outplacements on H-1Bs if they exceed 15% of total workforce
    -This would infer that offshore centric firms with an estimated 35%-60% of their US workforce would not be able to place their workers at client site
  • Going by the clauses, it is clear that this will have a chain reaction that will engulf both the buyers and the vendors. An interesting point to note here is that both the buyer and vendor will have to re-strategize till they completely adapt to this reform. Also note the deadline: FY17, Starting Oct 2016!

How will the Reform Impact Provider

Before explaining the scene let me do a walk through with an example of a leading IT service provider in India. TCS employs about 27000 staff in US of which 9000 of the population are US Citizens and Green card holders, the remaining approx 18000 are H-1Bs and L-1 combined. Should the bill gets passed in 2017, TCS’ US staff size would be estimated 35000-36000. This means it will need 18000 US citizens which includes 9000-10000 new recruits. This doesn’t stop here; TCS will have to stop issuing any H-1Bs in coming two years. Clearly a huge hit, as constraints like talent acquisition, billing rates, margin pressures and similar others are bound to affect its operations onsite.

On generic note, the provider community is likely to get face-to-face with two major setbacks:

Firstly: Local hires, as it seems the option for the situation, will cash-up more on wage costs. Though not to tag a notorious, but still onsite-local-crew will bring inflexibility in governance which not only lead to miss-management, but also underutilization of resources.

Secondly: The wage benchmark will get surpassed which means providers will have to pay more for US-based staff, not to forget the ‘visa’ price hike. Thus will be a huge blow to cost margins, as clear as a crystal, the cost of onsite placement will notch-up significantly.

On a broad spectrum, the business model established over years of iterations would need a serious over-haul. And the hike in ‘visa’ fees will only accentuate on-site deployment cost. It will be a rather hap-hazard race to maintain margins.

Will it Really Stir Discomfort Among the Vendors?

Desperate times may need desperate measures. But from where I see, there are a couple of options that vendors will look for.  Let’s analyze couple of options that vendors would/might/will retaliate:

Option Method Success Possibility
1 Vaguely termed as ‘use your connections’, try to leverage industry association to induce Law Makers for some leniency This will be a huge minority as one can expect a limited support from buyers to Indians in this scenario
2 Leverage your clients to support you especially in the outplacement clause; as they will equally be burned entities from the reform This might be a rare scenarios and we are expecting a them to go against the bill moreover against the Government, which would not succeed either
3 Seemingly inapproachable, but possibly taking help of Indian Government to intervene Well, this will lead to a geo-political negotiations and success will purely depend upon how Indian agencies open up sectors like Retail for US firms
4 As briefly mentioned earlier, firms can opt for some large scale acquisition ranging from $200M to $500M for 2000-3000 local head count It will definitely be a big leap but will bring in much awaited growth. So expect onshore Mergers and Acquisitions to go up
5 Make your onshore employees green card holders This may get started an time sooner

It does seem a tough road ahead but adopting the right option can undoubtedly scale-up the business effectively. Growth seems certain but will involve a greater risk to be tackled in a smart way.

But Is the Bill Really Feasible?

Throughout the talk we see both the parties viz the buyer and the provider might be equally wounded. On one hand vendor evaluation on local grounds will increase – notching up cost of services to buyers. While on the other, providers will be under heavy limitations and that only means a lower margin or in a worst case scenario, loss of important pipeline in near future. Let me just elaborate this further with two scenarios that will get you a clear idea on the feasibility of this reform.

Scenario one: Comply with the Bill

Expecting service buyers to continue working with existing Indian suppliers will not only put pressure on the billing rate but will also hamper margins significantly.  Why so, for every H-1B/L-1 work permit a firm adds, it has to recruit a local counterpart. With 3.5% Tech Unemployment and limited number of comp science graduates, it is really difficult to meet the industry demands. One may say the 3.5% may fulfill much of demand, but what should also be focused that skill set pool is diverse and hence cherry-picking select talent will again create a huge void to fill. And even though 2 years until 2017 still the gap will significantly be difficult to bridge.

Scenario two: Clients change their model & leverage local US firms

In this scenario MNCs based out of US will have significant advantage as resource base will be abundant.

How Will Clients React?

I see the situation seem equally turbulent for clients as we see for vendors. The big picture now seems that they aren’t much aware about the IT function as much as they are aware of its clauses. Hence it’s more of likelihood that they will sort help of legal counselors, CFOs and sourcing heads in this situation. The current projects due completion before the trigger dates will go on unfazed but decision about long term and large project would lag behind. Thus they are likely to adopt one of the following approaches

  Approach Possible Outcome
1 Call in vendors and ask them their strategy details in times of passage of reform Almost every client has considerable amount of awareness, hence validating provider on their strategy along with risk by finding out how many each firm has people on work permits
2 Just Wait and Watch Nearly 30% of clients are still clueless about their next foot, hence are dormant at this point
3 Consider In-sourcing Nearly 10-15% of folks I interacted with, showed inclination towards in-sourcing. But I believe that firms will face local recruitment crunch killing this initiative shortly after inception
4 Support service providers in tackling the situation However Unlikely that top firms would go against the bill but they could have some back room discussion.
5 Review possibility of leveraging local IT service firms Though not actively  explored today, might become a key option if the bill gets passed as is.

 

It’s however interesting to note that neither US firms (buyers) nor the service providers are sure about their next move, but as time is moving fast, there is much likely hood of dramatic changes in the strategy of both the parties. M&A might go high in number, Indian firms will start hunting for acquiring US based firms or will start campus drives in colleges across US and similar other activities.

But Then, A Word of Caution:

I have been asked on several occasions about the severity of impact that this reform might generate. But all that boils down to few simple yet tricky questions. The impact is however governed by parameters like available recruitable talent pool in US, cost margins, billing rates & negotiations, flexibility in project management, project size, current visa holders, such food for thoughts will definitely be taken into consideration. So keeping this thought in mind few questions that firms have to answer are:

  • Will there be some part of clause that will be relaxed? Especially outplacement clause
  • Will the Congress pass the bill As Is? Or it gets rejected opening up next round of process giving Indian providers much time to think?
  • Are these clauses are truly feasible? Is there enough employable staff locally?
  • If Indian firms do not comply with the bill, what will be its impact on end user clients?

 

Why NASSCOM need to transform

In last twenty years, as nascent offshore IT services market evolved and forayed into the mainstream, evolving client expectations and competitive realities are now forcing Indian IT companies to change. NASSCOM – the representative industry body has also evolved with the changing industry dynamics and is also now facing the urgent need to transform gain. Given massive structural changes in industry composition, market economics, and changing role of overall IT itself, the challenge this time, however, is of mammoth scale than ever in the past.

Before debating on what it needs to do to transition itself to the new role, NASSCOM should address a core issue– answer in an unambiguous way exactly whom it represents and whose cause it is expected to fight. While a large section of its 1250+ members are from its core constituency – IT services and software companies, a large number of its new members are not from the same pack. These new members such as online retailers/travel agencies and MNC’s back offices surely do business leveraging IT, but are not in business of IT outsourcing, software or BPO. They have started pulling NASSCOM’s agenda in multiple directions. A close review of its apex governing body (Executive Council), various forums it runs like internet working group and captives, its top sponsors at events it hosts, and NASSCOM’s own commentary on these various subjects clearly indicate NASSCOM’s multiplicity of goals. To remain relevant to its core constituency, it is of utmost importance that NASSCOM nails down its focus.

At the moment, I would like to assume that this top industry body – NASSCOM (that stand for National Association of Software and Services Companies – will primarily concentrate on its core territory- “Software and Services”. I feel there are six issues it needs to focus on as key objectives of its transformation.

  1. Extend its initiative of industry-academia collaboration. Irrespective of the hype around intellectual property based solutions, more than 95% of work India does today is people centric. Skills of college freshers are not aligned with industry requirements. Companies invest in training for almost six months before assigning the person on a client engagement. NASSCOM should work with technical colleges to align syllabus to newer requirements, ensure they have quality facilities and high standard faculty. The initiative needs to be continues and result oriented.
  2. Redefine its government interaction. While policy advocacy, working with authorities for industry benefits like tax benefits are important and should continue, NASSCOM should work with government to encourage, facilitate, and accelerate eGov or citizen services projects. It will not only create more opportunities for its members and help society, but will also boost the technology appreciation and penetration across country.
  3. Develop many more delivery locations within India. I know some steps are taken in this area. But looking at a few over-crowded locations like Bangalore, Delhi, or Pune, it is clear that much more needs to be done to develop several other locations like Nagpur, Mohali, Mangalore, Coimbatore, Ahmedabad, Bhubaneswar, etc. This will not only help in reducing costs of operation, but also help to manage staff attrition at lower levels.
  4. Help overall industry to upgrade their brand and international communication. While IT companies believe that the industry is moving up the value chain and the future lies in high end services and IP led solutions, most clients and governments abroad still look at the offshore industry as job stealers. The industry needs to be much more proactive to educate clients on the value it delivers and the innovation can bring to help companies become efficient. Today one sees weak arguments and limited branding exercises by industry and the association.
  5. Encourage small/medium sized member companies to build core functions like strategic marketing, corporate planning and international business operations. ‘Client-pushed’ business has stopped. There is intense competition for every dollar. Firms need to think more strategically and sophistication of value articulation needs to scale up. But there are limited trained resources and experienced executives available today. NASSCOM should take initiatives like creating marketing and strategy peer groups for building best practices (at least in non-competing areas) and leverage international institutions for producing business focused resources (and not mere technical resources).
  6. Create a new structure that meets aspirations of its key stakeholders, and build a model that allows partnerships with relevant groups that leverage IT, rather than trying to do it within NASSCOM. The association should play a role of an apex body and promote these new-age companies, back offices of MNCs, and other technology firms to create their own organizations. Rather than trying to serve every industry – be it US/European bank’s back office or online retailer, anyone that uses technology – it should collaborate with newer associations and working groups. This will allow NASSCOM to serve its core constituency better, while benefiting from working with these new-age companies which, strictly speaking, are not IT services/BPO or software companies.

NASSCOM’s signature event and AGM is around the corner, its election process to form new executive council is on, and study groups are submitting their recommendations on what shape the country’s top IT body should take. At the same time, its most core constituents are looking for more transparent debate on the subject and expect representation in decision making. Recent announcement of a group of 30 product companies (iSpirt) or rising aspirations of city level initiatives like HICC in Hyderabad or SEAP in Pune has clearly indicated that all their needs are not being addressed by NASSCOM in today’s form and function, and need to transform.

Trustworthy – Can it be a New USP for Offshore Vendors?

Sudin Apte

Ten years back most of the offshore clients used to talk very high about transparency and candidness of Indian IT companies. Frustrated with either high- handedness of firms such as Accenture or total opaque deals of EDS and IBM; they were pleasantly surprised with Indian providers’ upfront and sincere service approach. In fact many clients signed up with Indians because they found these new, though very small vendors, quite easy to work with. Apart from low cost and abundant talent, I believe, this honesty and simplicity helped Indians enter and grow in many accounts in late 90s.

As industry evolved, top firms grew to become multi-billion in revenues; projects became Continue reading

Will Outsourced Product Development Specialists Survive?

Prashant Raje

I have spent most of my career of thirty years in the software product development space. ‘Product Development’ and ‘Product Engineering’ had not been invented as labels for what we did when I started my career in 1981. I was called a ‘System Software Programmer’. Our tribe was rather small. But we were a proud tribe – proud of the kind of work that we did; and proud that we did not do ‘lesser’ work, like developing business applications! We believed that our work was ‘special’. We felt that we did the hard, creative, brainy work of creating platforms that others used for the ‘mundane’ job of developing business applications.

As I grew professionally, my love and bias for product development and engineering only grew stronger.

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Infosys story part 2: Leadership and process discipline – Has Infosys’ once strengths waned away?

Sudin Apte

The dollar I lost to George is repetitively making me think about Infosys. Here are three incidents that come to my mind today:

First incident – I don’t remember the exact date, but it has surely been 6-7 years. While debating on Infosys campaign based on Thom Friedman’s World Is Flat, Nandan Nilekani made one interesting statement. According to him, today Infosys can knock board room of any Global 2000 firms, and it gets opened. Possibly Nandan was right! With rising role in World Economic Forum, coveted positions like seat on Bill Clinton foundation, he surely was one of the most well connected Indian CEO.

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Infosys story part 1: Internal issues not tough market or visa row, may dwindle it down !

Sudin Apte

Everyday, Infosys is in news – rather negatively! What has triggered with missing revenue guidance, is not stopping for a moment. Be it Projecting its single digit growth, visa row and related legal suites, early signs of challenges in recruitment and consistent criticizing by financial or industry analysts (and its heavy reporting) – the list simply is never ending.

To assess where Infosys is heading, I tried to analyze the situation from multiple perspective. We surveyed 82 Infosys clients including 40+ strategic accounts ( We even spoke to over 60 TCS, 50+ Wipro and 40+ Wipro clients) in our latest survey of over 300 offshore clients. We also spoke to over two dozen current and ex-employees (mostly senior and/or long term), debated with select financial analysts and industry experts. Here are few key pointers that this exhaustive study has thrown up:

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How to handle raging, so called, “Offshore Backlash”?

Sudin Apte

As I participated in panel discussion on NDTV Profit today; I was joined by Som Mittal (Nasscom), Hari Bhartia (CII), and Mohan Das Pai (earlier in Infosys, now in Manipal University). The show’s backdrop was latest visit by Hillary Clinton and some of rhetoric in US elections.

Both the industry representatives argued that present situation is not extraordinary, as it happens during every election. They explained; Indian industry is creating jobs in US and we are moving in value chain so clients do not essentially come to Indian companies as low-cost sources. I have not yet read, but CII has published a report as well, that talks about investments made by Indian businesses and job opportunities created. I felt both of them were trying to stress that offshoring industry is not taking jobs away (according to them, it happens more in Manufacturing), rather are creating lot more.

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Infosys let me down – I lost a bet! (One of my very few wrong predictions)

Sudin Apte

Bangalore, October 2005; George Colony (Forrester’s Chairman and CEO) was in India. We finished our meeting with Infosys’ top brass – Murthy, Nandan and Kris and were on our way to Sarjapur Road to meet Mr. Premji. Earlier evening we were in the then new TCS facility at Banyan Park (Mumbai) to meet Mr. Ramadorai and the CTO.

We were discussing where Indian IT is heading and how these players will evolve. In his typical style, George asked me to stake my neck out and predict which company will be the first to cross US $10B mark. I thought Infosys will overtake TCS somewhere around 2009-10 and will be first to become 10 Billion dollar company. George thought other way round. This was how our $1 bet happened!

April 23, 2012; TCS announced its results and crossed the $10B mark.

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Five Reasons Why True Enterprise Mobility Is Still Unreal!

Sudin Apte

Since last eight to ten years, Information Technology industry has witnessed hype around particular technology – ERP, Y2K, E Business and now Enterprise Mobility.

What I see today is, a race amongst the Information Technology service providers.  Be it Indian or MNC, There is a tussle to gain initiators’ advantage in market for adopting the newest member amongst emerging technologies. High executive interest, direct involvement of CEOs, companies listing range of mobile devices within their organization circulating them amongst employees in projects. I even see service providers make new investment plans, set up centers of excellence, build partnership, and develop application store! It is a party! But factors for consideration are more than what meets the eye.

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