It would probably be an understatement to say the IT services industry is spooked by the recent financial results reported by major IT services providers. Both the top and the bottom lines have been under pressure. The medium-term future, and even the shorter term, have become unpredictable. Results are inconsistent, and companies have softened their guidance on future growth rates.
At the same time, tech spend around the world is increasing. At the NASSCOM Product Conclave in Bangalore a couple of months ago, I was struck by the buoyancy of the start-up market. India alone is home to more than 5,000 start-ups, and this number is slated to more than double by 2020. There is no doubt the tech love affair will continue to heat up as new innovations continue to spring from both unlikely garages and sophisticated computer labs alike.
So, why this mood of doom and gloom from the IT services providers?
The industry is in the throes of a shift that is further compounded by macroeconomic factors. In my mind, there are two pertinent questions for IT services providers today.
Are these circumstances temporary or permanent?
Of course, like most complex situations, some elements of the current circumstances are temporary, and others are more structural.
The impact of the sudden weakening of the British pound, the aftermath of the Brexit vote, the outcome of the U.S. elections, lower-than-normal interest rates and a general slowdown in economic growth are factors beyond the control of any industry, let alone the IT services industry. The good news is these economic issues are the kind that tend to fade or reverse over time. We have seen it happen many times over.
The fundamental changes affecting the industry are more permanent in nature, encompassing the much-talked-about rapid adoption of digital technologies, the accelerating shift of workloads to the cloud (Amazon Web Services reporting revenue growth at 55 percent CAGR), the widespread use of smartphones in conjunction with widespread access to broadband that enables consumers to trade and avail themselves of services from their handheld devices. These developments are real, and they are here to stay.
No industry—traditional or new—will remain untouched by this digital revolution. As automation and competition create a non-trivial squeeze on legacy IT spend, companies are quickly shifting dollars to transformational projects.
What will it take to succeed in the future?
To continue to succeed in this industry going forward, IT services providers will need to play by a new set of rules:
1. Play the legacy game in line with the new expectations and possibilities.
Employ automation and productivity tools proactively and aggressively, and release budgets for customers to help them spend on new models/solutions. The entire new spend can’t be incremental; the businesses can’t afford it.
2. Play the new game with a new DNA and culture.
- IT services providers, especially India-based providers, have developed a strong culture of simply throwing people at problems to solve them. They are not used to identifying problems proactively despite their technical and industry domain knowledge. Shifting the way they think won’t be an easy, but an elephant can dance, and, in this case, it’s a necessary change.
- Since demand is transitioning to a solutions approach, the market is morphing into an ecosystem play for service providers. Providers need to buy, build or partner for innovative solutions and stitch them together to solve industry-specific issues for customers. This will require providers to move up the food chain and create strong business and IT consulting capabilities so they can engage with business leaders beyond CIOs.
- Create a culture that rewards failure as often as it does success and encourages experiments and creativity.
- In a world of unknown outcomes, build trust and collaboration into relationships. These will assume greater relevance than they have ever had.
- Service providers will need to get comfortable with the concept of self-cannibalization of their revenue or products to yield new outcomes. The hi-tech industry and the IT products industry are very well acquainted with this phenomenon. Sometimes you have to let go of assured revenue to search for new revenue to stay ahead in a rapidly changing world.
In the end, there seems to be little reason for doom and gloom despite the temporary macro factors impacting growth. The disproportionate share of the pie will go to those who can successfully navigate the shift in the midst of a changing game. Now is the time to get on your marks.