Problems facing IT Services Companies

Of late there have been many news items in the press on layoffs in IT services companies. Main reason attributed for this is automation, machine learning and AI developments taking away jobs!

If the automation is the real cause, then it should have improved revenue per employee and operating margin for these companies, as less number of people producing the same level of revenue!

Today’s mint paper published the data on these two parameters for top 3 companies in India, which clearly indicate that both revenue per employee and operating margins have gone down, since the time these companies started reporting the revenue from digital services!

Hence, automation or technology replacing the jobs in these companies is not a valid argument for these layoffs. Then what are the reasons for this? It is partly media exaggeration, partly due to annual clean up companies do after appraisal cycle, and partly due to growth and margin pressures on these companies. What are the reasons behind growth and margin pressures?

Here are my thoughts, being an insider for long enough!

1. IT Services industry started with cost arbitrage as main competitive advantage, which has diminished over a period of time, as people costs increased significantly and other low cost countries have taken a slice of our cake!

2. Then these companies excelled in leveraging various processes such as ISO, SEI, Six Sigma, Lean to improve the efficiencies/productivity, and manage the scale, thereby protecting the margins, despite ever increasing salary costs. However, all these got matured by 2005, and thereafter there is not any new initiative to further improve productivity to offset rising salary costs. Though Agile methodology started a while ago, its impact on business/enterprise application development is minimal, while it seems to have made some impact in product engineering space.

3. Large Infrastructure management deals are no longer there, as cost of managing them has been coming down drastically with new technologies as demonstrated by companies such as ipsoft, blueprism etc. Most of the deals coming up for renewal are also getting unbundled and going to multiple vendors at much lesser cost!

4. BPO business for these companies has not scaled up as anticipated earlier, call center/customer support business is at the risk of getting automated completely with latest technologies. Even the transaction business has not scaled up as it requires deep business knowledge, which again is a weakness in Indian IT service providers! Robotic Process Automation could further dent the revenues from this business.

5. Large scale transformational programs have come down, as all the global and large enterprises have already implemented ERP, CRM, SCM and other enterprise applications. New age digital natives are getting this done in-house or leveraging few niche players, as opposed to traditional IT services players

6. Digital transformation did not result in large transformational deals for IT services companies, as most of these are affecting only front end user facing applications, while middle and back office applications still remain on the earlier technologies. As a result, the deal sizes of these projects are much smaller compared to previous era.

7. Time to market has become a critical success factor for any business today, which requires ready-made solutions and applications, as opposed to building from ground up. IT services companies have not moved into products or solutions space as yet, though all of them claim to have some platforms, but % of revenue from these platforms is very small compared to traditional services business.

8. While Big Data and Analytics business is growing, it being most critical for the business, most of it is being done in-house, and remaining going to niche analytics focused companies as opposed to large IT services companies

9. While lot of attention being given to AI, all the practical applications leverage the technologies that deal with text, image, audio, video varieties of data. IT services companies still don’t have capabilities to deal with these varieties of data, nor there are enough AI use cases using structured data that is available with enterprises. Chatbots deal with text data, digital assistants deal with voice, most of the deep learning applications deal with text, images, videos and voice.

10. While major part of Machine Learning uses structured data, it requires deep knowledge of mathematics, statistics, operations research to understand various algorithms and apply them in the right way. Understanding the data, relationships among them, Model building, validating the model, are all complex and require even deep domain understanding before any of these models can be deployed in production. IT services companies have a long way to get there, as they are still using various statistical packages available in the market, without really going into underlying foundational concepts behind these tools, nor they writing any native algorithms.

11. All the IT services providers claim to own platforms powered by AI, but a recent article published at “Analytics India magazine” featuring these platforms gives an impression of more of process automation capabilities than real AI capabilities!

12. While latest technology is disrupting existing business models across the industries, IT Services companies have not changed their business model. They still practice the same service delivery and pricing models they started in early 80s! They still expect 25%+ operating margin for their commodity services, they still have same T&M pricing, offshore centric leadership, get involved in only small part of the overall solution to the customer, they still have very little to offer on advisory/transformational services!

13. Most of the technology innovation is happening with development of new technologies, whereas IT services companies only focus on application of technology to solve business problems, rather than developing new technologies, tools, products, algorithms that can be patented to give sustainable competitive advantage. Indian Pharma companies follow the same model by focusing on generics rather than patented drugs. No wonder, they are also facing the same headwinds off late!!!

Amazon, Apple, Google, Facebook, MicroSoft, Tesla etc have been successful by developing new technologies, not by applying existing technologies, and business models driven by various patents and IPs. Even in application of technologies, IT services companies lack required domain depth. Historically, they depend on customers to define the problem and solution, and then implement required technology for that solution!

14. Talent is the single most limiting factor in changing the mind set and fortunes of IT services companies. Historically, these companies are staffed with engineers without any computer science background. Though all engineering colleges in India started computer science, information science, MCA courses, still majority of the people come to IT industry with other engineering disciplines. Even those graduates with computer science, information science or MCA don’t have adequate quality to innovate on new programming, design and architecture practices. Their ability to adopt to changes in technology landscape is also very limited. Hence, expecting them to develop new technologies is too much to ask!

15. Indian education system, despite weaknesses quoted above, has done reasonably good job in producing engineering graduates, but when it comes to soft skills(communication, presentation, problem solving, creativity, innovation, leadership, learning skills etc.) we are far behind what is required. When the pace of change is ever increasing, soft skills play a larger role in enabling people to adopt to the changes faster.

16. While all the analyst reports point to marginal increase in IT spends globally, it appears that outsourced part(what goes to IT Service providers) of the pie is reducing and in-house development component is increasing. It is also a reflection on service providers’ inability to adopt to new technologies and provide cost effective solutions to their customers, pro-actively!