With AI on the rise, Indian IT runs into headwinds

Covid-19 gave a boost to the Indian information technology sector, which is now seeing a reversal, with clients becoming cautious about spending in the face of uncertainties over global economic growth. The diminished outlook for the sector is captured in poor fourth quarter results and the equally poor outlook for what is expected to happen in the near future.

The IT heavyweights now see a weak growth in the current financial year (2023-24). Accenture, which is headquartered in the US but has some of its advanced technology centres in India, accurately reflects both the global business sentiment and its impact on the Indian IT. It has cut its revenue growth forecast for the second time.

The outlook is the result of what is happening right now across the world. Businesses are halting projects, delaying starting new ones and even cancelling orders. Large deals, in particular, have been hit by the uncertain economic environment and fast-changing technological landscape. Plus, artificial intelligence is threatening to turn things upside down.

All this is causing clients to increase the scrutiny of their future plans. One specific fallout is what has just happened to TCS, India’s largest software company. A 10-year $2-billion deal with Transamerica Life Insurance has been terminated before the scheduled ending. This is not a flash in the pan. Earlier this year, the UK’s NEST (National Employment Savings Trust) ended a $1.8-billion deal for 18 years within just two years with a French company. This indicates that the headwinds that have hit the Indian IT players are not specific to the country but are affecting the IT scene across the world.

A large deal getting cancelled is rare. Usually, the opposite happens. An established vendor, after successfully completing a deal, usually goes on to secure an extension.

Other than the global economic and technological environment, the Indian IT companies are also being hit by the increasing popularity among offshore buyers of the idea of having their own centres in the country which used to be called ‘captives’ but are now labelled ‘global capability centres’ (GCC). Multinationals are coming round to the view that over time, getting their job done by their own centres will cost them less than outsourcing them to Indian IT services companies.

Multinational companies increasingly want their core technological agenda to remain inhouse (earlier standard products were acquired off the shelf), which makes for faster internal communication between those who use the products and those who develop them. Right now, artificial intelligence and cloud computing have become the core elements of the firms’ future visions of themselves. Giving first shape to digital ideas, it is increasingly being felt, is best done in-house.

Also, typically, Indian software companies delivered lower-end functions, like writing code and looking after maintenance. Today, they themselves are having to reorient their offerings to include functions like developing their clients’ IT capabilities to deliver future business growth.

However, the news is not entirely a one-way traffic. The same TCS which has seen a premature closing of a deal has entered into a fresh large one. It has concluded a $1.1-billion 10-year deal with NEST of the UK to digitally transform the organisation’s delivery processes so that members’ experience is enhanced by being made more personalised. It should do the national sentiment a world of good to know that the customer has switched suppliers, so to speak, from a French company to an Indian leader.

Business will revive for the IT firms, but for the Indian middle class, the bad news is that the sector will probably cease to be its saviour as the last resort. Over the last couple of decades, youngsters with a bit of engineering skills could look forward to an IT job and not have to compulsorily appear for the civil services examinations. Increasing automation, particularly with the advent of artificial intelligence, is taking away lower-end jobs like coding. New jobs are being created, but not in large numbers and requiring much more complex skills which are needed to develop the IT that has to accompany the clients’ new business processes.

Expectedly, hiring is down. Jobs on offer right now are less than last year. This is, in fact, not just a reaction to low-skill jobs disappearing but also to the hiring and attrition that took place during the Covid period when work-from-home and online shopping sharply hiked the demand for IT services and, correspondingly, the firms’ need to have more capacity to deliver the jobs at hand. This led to a period of sharp rise in compensation packages, with firms seeking to entice staff away from one another. With the Covid effect gone and the demand also slowing, firms are now busy cutting hiring to cut costs.

The mood in the Indian software companies is also down because even as they find that they themselves are going slow on hiring, the GCCs are upping their action as they are growing steadily in numbers and also in terms of what they do. What is more, the GCCs are hiring hands with some experience who are invariably weaned away from Indian IT companies. But the latter themselves need the expertise of a higher order than before as jobs are getting more specialised.

As if all this was not bad enough for the Indian IT sector, its image has taken a severe beating, with a massive Rs 100-crore bribes-for-jobs scandal being unearthed in TCS. Apparently, those handling its recruitment operations were favouring selected staffing agencies which kept the officials concerned happy. News reports indicate that several senior officials are in the process of losing their jobs and some staffing firms are going to be blacklisted. The matter has received headline treatment not only because TCS is the industry leader, it is also a part of the Tata group which lays great store by its business ethics.

Where do Indian software leaders go from here? The foremost task before them is to right-size their ‘bench’. The term refers to those who have finished their assignment to one project and are waiting for being assigned to another. Companies save on costs when they are able to cut down on the time that employees spend between jobs, essentially doing nothing. IT leaders are now trying to reduce their bench size by delaying joining by freshers, making appraisal tougher so that those who fare poorly have no option but to leave and reskilling those on the bench so that they can be easily absorbed in newer types of projects.

So, the Indian IT is a bit down right now, but by no means out and it can hope to go back to top gear in the medium term.