Rajiv Vaid: What next for the IT industry? (business-standard)

 It has left the investors concerned about what to expect from the industry going forward. Nasscom has projected growth target of 11-14 %. The first reaction is, if this is good enough for a sector which has historically grown in strides? On the other hand, as one looks at the fragile status of the global economy, one began to wonder if double digit growth is even achievable. Investors wonder what the way forward for the IT industry is.

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It is interesting to look back and see the way this industry grew. They got the break out opportunity during the Y2K crisis. Indian engineers with superb IT skills were best suited to perform that time-critical work. The second wave of growth came during last decade when outsourcing became an accepted norm. The business model was that to grow more, one just needed to hire more. While this was quick way to grow, it also came with an inherent issue. There was a limit to which companies can grow by adding people, often called the linear growth. Beyond a point they become too large.  Hence most of the companies now want to innovate to grow in a non-linear way. This also goes well with their ambition to move up the value chain, both in terms of the value added in new business offerings, and contribution to the bottomline.

IT Industry

For the last few years, one can see many instances of the technology led innovation. This space has become so large that it cannot be ignored.  Number of young, small and nimble companies with lot of entrepreneurial energy are coming up and making a large impact. Take the example of Facebook, which has become newfound love of the investors. The valuation of Facebook is set to be around $85-95 billion. This is much more than combined valuation of TCS, Infosys and HCL Technologies, which comes to about $85 billion. Facebook has only about 3,500 employees, compared to about 470,000 employees in the three Indian IT companies altogether. This is the magnitude of impact of the non linear growth. These companies are getting formed all across and especially so in the Silicon Valley. IT companies have to make sure that they are part of the story and capitalize on the growth opportunities.  The IT industry has been gradually increasing the share of the intellectual property based high end work, which can provide higher revenues and margins. They have started penetrating into the parts of their client's business which are close to the core business. They have also gone into buying out the companies which have such capability. This is evident from the string of acquisition of the high end business units comprising Analytics or KPOs (Knowledge process outsourcing) or captive BPOs (business process outsourcing). This should have resulted in substantial shift to high margin business.  However this has not happened fast enough.