IT services: the coming storm and why India needs to be worried

Photo credit: Flickr user Ajith Kumar.

The IT services industry is facing significant headwinds of late. This is no secret. Most people tend to attribute this to the advent of “automation and artificial intelligence.” But that is a bit of a red herring and the technology industry should really be the last to use it. Automation and technology have consistently replaced low skill, repetitive jobs in industries across the ages. Agile businesses don’t shut down because of automation. They move up the value chain.

Agile businesses don’t shut down because of automation. They move up the value chain.

What we see here is the industry itself is getting disrupted and there seems to be little that the big players are able to do about it. This is something that India should worry deeply about.

Over the last few decades, the IT services industry has soaked up young, employable talent emerging out of engineering colleges like a sponge. But this scenario may not last long. We may soon be faced with serious challenges set off by rising rates of unemployment among the middle class.

Faced with a crisis of growth and profitability, the big offshoring firms are quick to point out that they have the perfect get out of jail card. “Digital,” they exclaim in unison, whenever asked how they plan to salvage falling fortunes. The reality, though is that most of the large players are poorly positioned to take advantage of the digital opportunity.

The poisoned pool

There was a time when they could have spent their large reserves of cash on serious upskilling and building future ready business models. Instead, most of them continued playing the labor arbitrage game and amassed fat margins at the expense of the future. After all, who wants to break a highly successful model when it seems to be working fine?

The downside was that the industry was constantly forced to “down-hire” for decades. Starting with talent from the elite IITs and top engineering colleges, they moved to just about any engineering college and then to regular graduation colleges, colleges from smaller cities and so on. Soon they were hiring droves of people almost blindly. Entire batches passing out were hired on the basis of rudimentary tests. Higher “volumes” and lower productivity became the de-facto business strategy.

The problem with this strategy is that it poisons the talent pool over time. Businesses end up employing masses of average talent with no one to inspire or direct them. They end up creating a culture of mediocrity. Over time, the same talent becomes mid and senior management. They have no incentive to change the status quo and actively resist any change that discomforts them.

Unlike earlier tides, digital is complicated, layered and difficult to manage because it integrates so many diverse competencies.

The other casualty tends to be front line sales. When the central promise of a business becomes mere predictability and scale sales folk also slowly become slothful order takers because there is really no extra edge that they can deliver or play on.

Over time this strategy simply stops working as smaller, nimbler firms start snapping at the heels of big firms. Customers learn the game and start setting up captive delivery centers. Technical disruptions inevitably came by and customer expectations start to shift. This is when the industry looking for the next tide to lift all sinking ships finds “digital”.

There is only one problem though.