Once the poster child of Indian resurgence, most of the IT Services industry is only registering a moderate growth. Thanks for copy cat policies, mindless cost cutting and lack of innovation, the industry has completely missed its potential.
It is a cliché to say that Indian software services companies are facing innumerable challenges. The growth has slipped from 30 per cent to 10-13 per cent. For companies like Infosys, growth is in single digits. The challenges are both internal (salary cost, attrition, talent crunch, not getting higher margin projects etc) and external (visa problems, economic slowdown, currency fluctuations etc). Former can be dealt with changes in business models of these companies. But later is more complicated and requires strategic hedging. Let us discuss each of these and others in details.
It has been more than two decades, since Indian IT services industry has been in the business. Still most of its projects are low end, low margin and manpower intensive. The industry has not been able to graduate to high end development and designing projects. Definitely, Indians have moved up the value chain, from testing to application maintenance, installation and customization. Still lucrative consulting and designing projects are begged by the Western majors only. Global technology majors have set up their offices in India, but most of the work here by them again is same as their Indian peers. Bottom line is Indian companies are getting most of their work because of cost arbitration, not because of skills and specialization.
Attrition is a big challenge for any company in any industry, but it is a bigger problem for service level companies. For IT companies, it has come down from what 20-25 per cent in early last decade to early teens. But it has not come down because of better HR policies or higher job satisfaction. Attrition rate is down because there are not many job opportunities in the market. The industry is still reeling under the impact of global economic slowdown. Lack of job opportunities in foreign countries is also a major contributor to this. Therefore once market conditions improve, attrition will boom once again.
Political backlash in many Western countries against IT outsourcing to India has led to a situation where Indian companies are not able to get enough visas for their Indian employees. That is why they have to hire more local employees, who obviously cost more than their Indian counterparts. Thus the margins of Indian companies dwindle heavily. In long run, such a practice ensures that others too have same capabilities as Indians.
Another main problem with Indian IT companies is that there are too many ‘me too’ companies. Since all of them are providing basically same thing. Now we have 1000s of web designing, Java coding and Oracle implementation companies. There is hardly any differentiation between these so-called experts. This is not a problem with just SMEs, but also with industry leaders. In order to expand their market and account size, companies venture into many new verticals. Some, like Persistent and Amdocs have been successful in creating their own distinct image, but most of the others have totally failed in the exercise.
Another big problem with Indian IT companies is that they do not focus on innovation. The R&D budget has been continuously decreasing since 2008. Right now it is only 0.8 per cent of the revenue. Intellectual property (IP) creation is not something remotely on their mind. Smartphone technology came into existence in last decade only, but Indian companies hardly did anything apart from developing apps for different operating systems. Same is the case with cloud technology and SaaS.
If you cannot beat them, buy them. Indian IT companies have bought specialized product software companies from abroad, but those have been very few if compared to spare cash each big company has. M&As are good means for quickly bridging the gaps in capabilities and expansion in new geographies. Problem here is that many cross border acquisitions failed due to lack of integration strategy taking into account cultural and work environment differences.
TCS has done much better than most Indian IT companies when it comes to innovations. It has trapped entrepreneurs and VCs from Silicon Valley to build strengths in latest technologies. TCS and Cognizant are trying to develop capabilities in mobile, analytics, artificial intelligence and online space. In contrast, most other IT companies rely on cost cutting and strengthening their core businesses to increase their revenue. Former is much better approach than later.
So far, India has developed itself as one of the favorite destination for IT outsourcing. It has developed a lot in last two decades, but still process has not completed. In the industry, utilization rates have increased, policies have matured, companies have gained scale and moved up the value chain.
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