The interesting paradox of an imminent external problem is that it tends to obfuscate the underlying internal weaknesses that can have a long-term impact on the fortunes of an industry. With weak revenue growth numbers and anemic outlook seeming to be the norm in Quarter 2 results for the IT services pack, it would be easy to attribute the slowdown to the impact of the coming US elections and the Brexit problems. But that would be a folly, ignoring the very real transformation that is happening in the way IT is being designed and consumed in the global client base of our export-oriented industry and the demands it will place on the latter.
First the numbers. The slowdown in annual revenue growth percentages from the peak of high teens seen in 2011 to the mid to lower teens in the last couple of years and high single-digit outlook for this year has startled many. And while the response in the last few quarters has been to use the magic word “digital” in every announcement, most service providers in spite of frenetic mergers and acquisitions (M&A) and partnership searches have been finding it difficult to have true digital percentage of revenues touch 15-20%.
The magic word that our friends in the analyst community still find hard to recognise is ‘platforms’. A major financial services firm right here in India has created a vision for 2020 where all it will have as IT architecture will be three robust platforms—for customer journeys, partner engagement and employee learning. These platforms will be supported by micro-services and APIs, consumed as and when required from readily available sets.
To explain this in simple terms, the digital platform can be engineered as a set of business processes, infrastructure and applications for a variety of horizontal and vertical applications. And there will be little or no customisation need because the IT architecture of the future will provide for integration gateways that allow access to internal reusable services that ensure all the functionality needed, while the ability to open up interfaces to the external world will enable new services to be accessed from third parties in a seamless new information architecture for the enterprise.
A forecast by McKinsey & Co for the industry two years back had already pointed out the threat of up to 20% of existing revenues in the highly profitable areas of applications and infrastructure management either melting away or being grabbed by “digital attackers”. In the real world of clients, we have already seen the impact of a PayTM on traditional payment and banking models and Flipkart and Snapdeal, in spite of their own problems, have become a thorn in the flesh for brick-and-mortar retail. In the provider space, the continuing 20-25% CAGR of firms such as ePAM and Globant have to be a wake-up call for all incumbents. The nibbling away at clients would start with excitement created in the marketing or supply chain office but could very easily lead to the elimination of large new applications which have been the industry mainstay for over three decades.
In their own way, many global majors have already started the slow turn of their ships before they do a Titanic and hit the proverbial digital iceberg. IBM has its razor focus on Cognitive and the Watson API suite and Accenture has systematically built awesome capabilities in digital platforms across the interactive, mobility and analytics suite with vertical wrappers that enable deep customisation for the specific context. Both IBM and Accenture have also done acquisitions across the digital spectrum. The real benefit, for the doubters who believe digital deals tend to be in the sub-million-dollar category, is that they have pulled in digital transformation deals of over $200 million with regularity and built a multi-billion-dollar business in this area.
What stops our own industry from making this transformation? Nothing really for clairvoyant leaders who are willing to build the next sigmoid of digital even as the five-year sigmoid of managed services goes into decline. But it will need an approach that is truly deep and wide and not just “putting lipstick on the bulldog” where articulation and a few interactive agency and network security boutique acquisitions are seen as surrogates for true transformation.
Transformation will call for an honest assessment of true domain skills and the platform and new services strategy needed to serve the demands of industry-leading clients in their chosen domains. Beyond the commitment to new products, accelerators, platforms and services in the digital universe, deep thinking and robust action will also be needed to transform the delivery organisation to large-scale DevOps and Agile capabilities, change the go-to market model and re-skill business development teams to engage intelligently with operations folks and the CXO suite and finally ensure that talent, organisation culture, processes and design are re-architected to meet the demands of a new marketplace.
The industry has faced challenges before and emerged triumphant. If we make the right strategic choices now, we will still meet and exceed our commitments in 2020. The investor community will watch this transformation!
The writer is chairman of Global Talent Track and 5F World and an investor in start-ups, skills and