Wednesday, July 07, 2010

Indian IT companies - Time for a change in operating models

Indian IT services companies have been the darling of the masses for about a decade now. The clean and transparent administrative models that they brought to the table was quiet refreshing in the early 90's albeit much was from the corridors of the elite American industry. The large talent potential in India was attracted by the huge salaries that were been offered by the industry if you were a techie. Yet, rigorous entry criterion and high merit-based selection interviews models were used by the top management to hire employees.

The unique and highly profitable offshore-onsite was a win-win situation for both the Indian IT vendors and the clients. Since 95% of the revenues came from exports, the industry was able to achieve 25-30% as Profit After Tax(PAT). The geographical spread was as such that USA contibuted 65% of the revenues and Europe around 30%.This meant that the currency fluctuations was never a headwind. So, IT companies never really bothered about hedging practices. The traditional ADM model(Application Development and Maintanence) was bread and butter for most IT vendors. The companies kept bringing out customer specific outputs and never really focussed on R&D for customized services and tools which needed domain experts.

The economic crisis was a watershed moment for Indian IT industry. World economics have seen a sea change and the share of developing countries in the world economic growth is rising and will have an exponential growth in the years to come. The world is slowly changing and so should the Indian IT pack to sustain their growth. Its no longer the US and Europe markets. New markets like China, India, South Africa, Brazil and Russia should be the focus in the years to come. New markets mean new and diversified customer whose needs could be vastly different from say a client in US or Britain. So, careful study of these markets is critical for gaining a foothold in these geographies.

India is a growing economy. With growth, the choice for employment will also increase for the local skilled workforce. Already, many sectors like Infrastructure,tourism and financial services are seeing robust growth in India. So, young Indian graduate will become more choosy about his dream job with the attractive offers from many sectors. This in turn will only push the salaries demanded by the skilled workforce. So, margins of the IT companies could be hit due to higher salaries. Dont forget, one of the main reasons overseas clients flock towards India is due to their low salaried workforce. Higher salaries mean lesser profits for the company. This could be the major problem for the Indian companies going forward.So, carefully caliberated approach is needed on this account. Otherwise, the profit margins as in pre-2008 levels will become history and will never be achieved again.

The next big challenge is the ramp-ups that needs to be done in the R&D platform. Right now, Indian IT companies spend on an average 1% of their revenues towards R&D. More customized IT products should be delivered to catch up with the likes of the Microsofts and the Googles of today.New and emerging markets like Infrastructure, high-end defence and government sectors should be fostered apart from the known culprits like BFSI and retail.

So, change in approach should be the main focus for these doyens of the Indian industry to stay afloat and capture many more deals in a more competitive world with other rivals