Indian tech companies have bigger problems than the Fed

The quarterly earnings season for Indian outsourcing companies started with cautious optimism. Tata Consultancy Services Ltd, the country’s largest software exporter, saw its net income rise 8%, better than expected. Its operating profit margin fell to a seven-year low of 23% in the three months to June, but it rose 1 percentage point as Mumbai-based TCS cut back on hiring.

From here, however, things can get challenging. European customers, who typically account for a quarter to a third of Indian companies’ sales, will almost certainly cut their technology budgets — at least until the war in Ukraine ends and energy supplies normalize. More important U.S. markets are also likely to disappoint as the Fed slows the economy to keep inflation in check.

Some U.S. companies may still look to information technology to cut costs as they prepare for a recession. This means new outsourcing orders. Yet pandemic-era profligacy on IT is now in the rear-view mirror for Indian suppliers. Since the global economy reopened, programmers they could easily hire during Covid-19 lockdowns have become restless due to a lack of career advancement. TCS had a turnover rate of over 21% last quarter.

All of these are temporary issues for an industry that sprang up at the beginning of the millennium – the millennium bug put India on the world map of tech services. Twenty years later, the publicly traded Indian software exporter has earned more than $100 billion in revenue, employed 2 million people and had a market capitalization of nearly $350 billion. TCS alone is more valuable than International Business Machines Corp.

But scale comes at the expense of agility. The outsourcing industry aims to help global companies reduce friction at work, and consulting firms have gotten better at this lately.

Indian IT companies still have a strong labor cost advantage in large enterprise software from tightly managed headquarters in Mumbai or Bangalore. However, the focus of demand is moving away from implementing SAP SE or Oracle’s technology. at the client’s premises. Demand for cloud-based workflow automation has boosted ServiceNow Inc.’s revenue sixfold since 2015, while San Francisco-based Atlassian Corp. has grown thanks to Jira, a cloud-based application for tracking projects. eight times.

Fast-growing German startup Celonis SE is a pioneer in so-called process mining, claiming to help customers “solve inefficiencies they don’t see.” Salesforce Inc., which owns business productivity tool Slack, accounted for a third of SAP’s revenue in 2017. Now it’s only reduced by 12%. Shopify Inc. had a 19 percent share of digital commerce software last year, compared with Oracle’s 6 percent, according to Bloomberg Intelligence.

Indian outsourcing firms lag far behind the likes of Accenture and Deloitte Consulting in implementing new-age IT platforms.

In 2015, Accenture acquired Cloud Sherpa, a small company with 1,100 employees, 500 of whom are Salesforce implementation consultants. Seven years later, cloud computing is a $26 billion business for Accenture, growing 48% annually. Indian outsourcing companies have also added cloud-based offerings, but they are struggling to scale popular new technologies, such as the human resources management system offered by Workday Inc.

Technology is now an important part of what consulting firms do. That’s why they need to drill down into the specifics of their customers’ operations — or at least improve their ability to do so. McKinsey & Company, which has acquired more than 20 tech-related companies in recent years, hired former Microsoft Corp. chief digital officer Jacky Wright as its first chief technology and platforms officer last month. Deloitte is actively recruiting programmers and investing in training them in new technologies.

Indian software vendors are at risk of falling further behind their consulting rivals as the lines between global companies’ business and technology increasingly blur. Outsourcing firms are happy to talk to the in-house tech czars of large enterprise clients. But functional leaders are increasingly calling the shots when determining priorities. And they don’t speak technical language. A related trend is the rise of citizen developers — non-IT professionals using so-called low-code platforms like Appian to develop automated applications for their teams.

Note that Salesforce and Workday implementations may not survive next year’s global recession: new IT players are also worried about demand. But at least they are more focused on the future of work — flexible, digital and often remote — than their traditional enterprise software rivals. The top Indian outsourcing companies should now have built multi-billion dollar franchises around implementing new platforms. To get back in the game, they’ll need to make a lot of acquisitions and take a hard look at how well their companies are doing, starting with rookie salaries that have stagnated at around 350,000 rupees ($4,250) a year for nearly two decades.

The Mint reported last week that entry-level jobs in India’s IT sector could be cut by 20 percent in the fiscal year starting next April. This may give outsourcing companies a little bit of relief in terms of profit margins. But focusing too much on the current slowdown can be unhealthy. This is the future they need to face — and bet big.

More views from Bloomberg:

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

• Pivot, or Godot?Markets bet the wait is over: John Others

• The labor market is about to profit — or worse: Jonathan Levine

This column does not necessarily reflect the opinions of the editorial board or 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.

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