Indian tech companies have bigger problems than the Fed

The quarterly earnings season for Indian outsourcing companies has started on a cautiously optimistic note. Tata Consultancy Services Ltd., the country’s largest software exporter, reported better-than-expected 8% growth in net profit. Its operating margin, which had fallen to a seven-year low of 23% in the three months to June, rose 1 percentage point as Mumbai-based TCS cut new hires.

From now on, however, things can get tricky. European customers, who typically account for between a quarter and a third of Indian companies’ sales, are almost certain to reduce their technology budgets, at least until the end of the war in Ukraine and the normalization of energy supplies. The larger US market could also disappoint as the Federal Reserve slows the economy to bring inflation under control.

Some US companies may still turn to information technology to cut costs as they prepare for a recession. This means further outsourcing orders. However, the IT follies of the pandemic era are now in the rearview mirror of Indian vendors. Coders they could hire easily during the Covid-19 shutdowns have been fidgeting with a lack of career progression since the global economy reopened. TCS’ attrition rate last quarter was over 21%.

All of these issues are transitory for an industry that came into its own at the turn of the millennium – the Y2K bug put India on the global tech services map. Two decades later, Indian listed software exporters generate more than $100 billion in revenue, employ 2 million people and have a market capitalization of nearly $350 billion. TCS alone is worth more than International Business Machines Corp.

But size came at the expense of agility. The outsourcing industry is all about helping global companies reduce workplace friction, something consulting firms have been doing better lately.

Tightly managed from their headquarters in Mumbai or Bengaluru, Indian IT companies still have a strong labor cost advantage when it comes to large-scale enterprise software. The center of demand, however, is moving away from implementing technologies from SAP SE or Oracle Corp. at customer premises. Demand for cloud-based workflow automation has boosted ServiceNow Inc.’s revenue sixfold since 2015, while San Francisco-based Atlassian Corp.’s sales have grown eightfold thanks to Jira, a cloud-based application for project tracking.

Fast-growing German start-up Celonis SE, a pioneer in so-called process mining, claims to help customers “fix the inefficiencies they can’t see”. Salesforce Inc., which owns enterprise productivity tool Slack, made a third of SAP’s revenue in 2017. Today, it’s just 12% smaller. Shopify Inc. held a 19% market share in digital commerce software last year, compared to 6% for Oracle, according to Bloomberg Intelligence.

In implementing new era IT platforms, Indian outsourcing players are far behind Accenture Plc and Deloitte Consulting.

In 2015, Accenture acquired Cloud Sherpas, a small structure of 1,100 employees including 500 Salesforce implementation consultants. Seven years later, the cloud is a $26 billion business for Accenture, growing 48% annually. Indian outsourcing companies have also stepped up their cloud-based offerings, but they are struggling to expand into popular new technologies such as the human resource management system offered by Workday Inc.

Technology now occupies an important place in the activity of consulting firms. That’s why they’re getting into the cogs of their clients’ operations — or at least building their capacity to do so. McKinsey & Co., which has acquired more than 20 technology-related companies in recent years, last month hired Jacky Wright, formerly Microsoft Corp.’s chief digital officer, as its first-ever chief technology and platform officer. form. Deloitte actively recruits coders and invests in their training in new technologies.

As the line between business and technology blurs in global enterprises, Indian software companies risk falling even further behind their consulting rivals. Outsourcing companies are comfortable talking to the internal tech czars of large corporate clients. But when it comes to deciding priorities, functional managers are increasingly in the driver’s seat. And they don’t speak the language of technology. A related trend is the rise of citizen developers — non-IT professionals who deliver automation apps for their teams using so-called low-code platforms like Appian.

Note that the implementation of Salesforce and Workday may not offer a way out of a global recession next year: new IT players are also worried about demand. But at least they’re more connected to the future of work — flexible, digital, and often remote — than their traditional enterprise software rivals. Leading Indian outsourcing firms should by now have built billion dollar franchises around implementing the new platforms. To get back in the game, they’ll need substantial acquisitions and a close look at the state of labor at their own companies, starting with freshman salaries that have been stuck for nearly two decades or so. 350,000 rupees ($4,250) per year.

The Mint announced last week that entry-level positions in India’s IT industry could be cut by 20% in the fiscal year starting next April. This could give outsourcing companies some breathing room on profit margins. But focusing too much on the current downturn can be unhealthy. It is the future they must face and make bold bets.

More from Bloomberg Opinion:

• A US recession will also hit India’s tech hub: Andy Mukherjee

• Pivot or Godot? Markets betting the wait is almost over: John Authers

• The labor market is looking for margins – or worse: Jonathan Levin

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

More stories like this are available at bloomberg.com/opinion

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