W Power 2024

This is the time for IT services to reinvent business models, say analysts

Discretionary spending will go away in the short to medium term, but the IT vendors must offer highly effective and targeted solutions to find opportunity in adversity

Harichandan Arakali
Published: Apr 24, 2020 11:11:15 AM IST
Updated: Apr 24, 2020 02:41:41 PM IST

This is the time for IT services to reinvent business models, say analystsImage: Manjunath Kiran/ AFP via Getty Images​

India’s IT companies reacted strongly to the immediate challenges of the Covid-19 pandemic. They swiftly enabled the bulk of their employees to work from home and avoided major disruptions of the services they provide global corporations worldwide. However, in the months to come, they will need to do much more, say analysts.

Discretionary spending—meaning spending on good-to-have tech, but not immediately necessary — will go away as clients focus on the here and now. However, the IT companies will also have to keep one eye on the future and come up with targeted solutions that win customers’ backing. Competition will be fierce for contracts and consolidation is likely, the analysts say.

“The Indian IT companies are entering into a challenging time,” says Peter Bendor-Samuel, founder of the consultancy Everest Group in the US. The global economy could be heading into a recession, and potentially a severe recession. This will eliminate much of the growth driven by discretionary spending.

Therefore, one can also expect a new round of price competition as companies look to lower cost. “We expect this to lead to a new round of portfolio consolidation, in which one vendor wins at the expense of the others,” Bendor-Samuel adds. Taken together this will be a challenging time to grow sales—in some cases, we could see revenues decline, he says.

“The medium-term outlook is flat to negative 5 percent growth in sales,” estimates Ray Wang, founder and principal analyst at Constellation Research in the US. Most of the IT services firms have put in contingency plans to support their clients. The challenge is that India is four to six weeks behind the rest of the world in the passing of the virus. Hopefully work-from-home policies will be enough for non-critical operations, he says.

“We expect that the second quarter of the calendar year (April-June) will be severely impacted but there will be a return to recovery starting in the third quarter,” Wang says.

In the medium term, post Covid-19, IT services will return to growth, which will be fuelled by higher adoption of remote work and increasingly digitised operations of enterprises, says Naveen Mishra, senior director and analyst at Gartner.

The big opportunity will be in digital transformation projects, which save the clients’ money. These contracts can often be quite large and there will be fierce competition to secure them, says Bendor Samuel.

Most Indian IT companies have done a good job adjusting their policies and partnering with customers to support work from home with sensitive and critical data policies. They have also struck good partnerships with customers to support new work environments and business scenarios, Wang says.

In a blogpost, Wang wrote, “We see a push to more automation, more analytics, more AI, and more digitisation.” Remote monitoring, testing, and single pane support are important. All companies—not just the IT companies—will have to build a detailed playbook for how they will operate in the post-pandemic world, Wang added. Companies will have to consider everything from AI to new leadership models to the possible rise of nationalism in the new normal, he wrote.

The job scenario

On hiring, clients are unlikely to expand their offshore positions making more labour-arbitrage-based growth difficult, according to Bendor-Samuel.

Wang at Constellation Research says he sees some increases as the value of IT improves. “However, a potential 20 percent loss of the Fortune 500 and Global 2000 to M&A, bankruptcy and consolidation will reduce the number of buy side customs. This will have the biggest impact on vendors including IT services providers,” he says.

CFOs of negatively impacted industries will put a hiring freeze on all open headcount in the short term. In the medium term, the hiring scene will slowly unfold with more targeted skills and job roles around recovery-enabling areas, says Gartner’s Mishra.

Post Covid-19, industry will slowly start see improvement in demand and enterprises will go through four phases of recovery, Mishra adds—the first being the immediate shock (current state) and the fourth being back to 2019 levels of demand. To be proactively prepared, IT services companies are beginning to calibrate their plans with balancing their portfolio across areas relevant to the recovery pattern, he says.

Big themes such as work from home, business continuity and cost optimisation will remain the underpinning drivers for this calibration. Customers will renegotiate their existing IT contracts, creating headwinds in the short-term, he says.

There will be increased focus on areas including infrastructure as a service, automation, artificial intelligence and machine learning, narrowly targeted robotics process automation and chatbots and business continuity. With cost concerns, areas such as applications, managed services, implementation services and business consulting will witness weaker demand in short to medium term, Mishra adds.

Post Covid-19, customers will see cloud services in a more strategic way and seek help on moving to the cloud while optimising the cost structure. Rather than long-term digital projects, IT services providers should position short-term targeted digital initiatives deploying automation and AI. This, in turn, will bring changes to how deals are structured and operationalised, he says.

There will be demand for digital skills and particularly digital engineering skills. However, the other talent areas may take a step back, Bendor-Samuel says. If Indian IT vendors can seize the day and pivot to the large digital transformation deals that save money, then there is a good avenue for growth. However, it will need to offset the losses in the discretionary spending categories, which are substantial, he says.

Wang reckons: “This is a very important time for the IT services firms to consider a reinvention of their business models and to consolidate.”

Post Your Comment
Required, will not be published
All comments are moderated