Many analysts and observers cite 2015 as one of the most challenging years for the IT industry. Financial performance was challenged relative to historical numbers.
Many analysts and observers cite 2015 as one of the most challenging years for the IT industry. Financial performance was challenged relative to historical numbers. Large players are struggling to fire up growth, and margin maintenance is becoming a significant challenge. With some notable exceptions such as Mindtree, Tier 2 and small companies are more severely impacted on both counts. The forecast of 12-14% growth seems, sadly, unachievable: high single digits is probably a more realistic number. Talent retention is on the agenda like never before and top technologists decamp for the greener pastures of the booming start up world. Then, there are the markets: aside from the relatively bright demand in the USA, global markets range from slow to downright grim.
These are symptoms of a more problematic phenomenon. History will judge 2015 as the year when the traditional high profit, high growth model of the industry started being dismantled. 2016 will see an acceleration of this fundamental disruption. The key driver is the industrialisation of the technology sector, massively disruptive innovation, and the resultant emergence of new ways of consuming IT.
The digital transformation wave has pervaded corporations globally. The IDC Digital Transformation Maturityscape Index, built on more than 2500 assessments globally, shows that more than 60% of the companies are at Stage 2 or 3 on a 1-5 scale. Many are still struggling to get off the starting blocks, but realise it’s a game of survival. Practically every company we speak with, anywhere geographically and across vertical industries, is actively investing to understand and leverage digital technologies, processes and methods to drive superior business performance.
Consequently, in 2015, 120% of industry growth has been driven by these investments: traditional IT, though 70% of total spending, is shrinking by 4.5%. In other words, what the IT services industry is best at doing is in secular recession.
The challenge for the Indian companies is that these programmes are driven through high engagement and high iteration projects, which do not lend themselves to offshoring. So, the traditional advantage they brought to the table is substantially reduced. Organisations are building front-end or “on site” teams to be able to give clients the assurance of service, and to demonstrate capabilities.
As digital transformation starts with customer facing processes, the software underlying these programmes tends to be design-led. A capability that fundamentally does not exist in the engineer-dominated industry which failed to see the wave coming, and steadfastly ignored all leading indicators till it was too late. Now, it is collectively scrambling to buy this capability, often at premium prices and with post-acquisition integration challenges such as salesforce integration and enablement, cultural fits and margin dilution issues.
Finally, engaging clients on digital transformation initiatives demands depth of end-user industry knowledge and consulting capability which is rare: to partner with a bank on retail banking customer transformation programmes, for example, demands a depth of understanding of retail banking processes, customer preferences, channel migration issues and digital marketing disciplines which even the largest organisations find themselves challenged with. Consulting and domain teams are being invested in to overcome this challenge. Tuck in acquisitions buttress existing capability.
All in all, digital transformation programmes remain a challenging business for the industry to dominate. It has ceded ground to the likes of Accenture, Razorfish and others who are significantly outperforming the industry from a growth performance perspective.
The second mega-trend which will hit the industry in 2016 is the emergence of what IDC calls the Innovation Accelerators. As the third platform of computing, built on the four pillars of SMAC, has matured, it is spawning new technologies. We have identified six which will take hold in 2016 and beyond: Internet of Things, augmented & virtual reality (AR), next generation security, 3D printing, cognitive systems and robotics. We are seeing
organisations already start the adoption process in varying degrees: our research indicates a significant and sustained acceleration of this process in 2016, and beyond.
As an example, we are seeing 73% of companies either already deploying IoT or looking to deploy within 2016 as per the global IDC Internet of Things Decision Makers Survey. Not just this, 58% of the 2500 respondents considered it a strategic initiative. IDC expects the worldwide market for IoT solutions to grow at a 20% CAGR from $1.9 trillion in 2013 to $7.1 trillion in 2020, although the IT services component of this is a small fraction. Nonetheless, it is a significant opportunity for those who can leverage it.These technologies will drive the next wave of business transformation even as organisations continue on their digital transformation journey. Their impact is quite dramatic: for instance, complex aerospace component prototypes are being 3D printed, driving manifold reduction in product design cycles while robots are revolutionising warehouse management for a host of retailers. The US military is already doing soldier training using AR while IBM is building an entirely new business in the weather sector using its cognitive technologies.
Innovation Accelerators will start to take a part of the spending pie, probably about 5% in 2016, accelerating to something in the range of 10% in 2017 when seen through the lens of the IT Services companies. But they’re going to see little or none of it. Primarily because the industry has little capability in these areas, and because of acute talent shortages. Also, because much of this spending is driven by CXOs who don’t know the industry well. Unlike the digital space, it is not going to be possible for the industry to collectively buy their way into the market. The players who are in this space are either the very large companies, IBM and Qualcomm being two examples, or startups with sky-high valuations which the Boards would not countenance paying for. Unless the industry starts investing aggressively to understand Innovation Accelerators and build the required capabilities to play in this space, it risks playing catch in this domain too. Which is something it in can ill-afford.
There is an urgent need to start the process of building, and wherever sensible, buying tuck-in capabilities, in this space. There will be at least three agenda items every board will therefore have to invest time in:
* The need to build or buy new capabilities to address the opportunities presented by the onset of the digital transformation and Innovation Accelerators waves. This will present knotty “ build or buy” challenges that will need to be dealt with
* How to manage the painful restructuring that will be necessitated by technology obsolescence where they are heavily invested: in some cases, from a skills perspective, thousands of employees might find themselves misaligned with market demand
* The political and regulatory environment is adversarial to the interests of the industry. The recent doubling of H1-B visa costs to $8,000 in the USA is symptomatic of the attitudes of western governments who still mistakenly view Indian IT companies as job takers rather than job creators. Boards will need to engage with senior bureaucrats and political leaders in key markets to reverse this trend. Investments are urgently required in lobbying efforts in the USA and other countries.
By Jaideep Mehta
The writer is MD, IDC India & South Asia