Thursday, May 18, 2017

The Surprising 'Crisis' of Indian IT

Indian IT is in a crisis, or so the newsmen claim. 

A string of layoffs, some at very senior level, and the new and proposed visa measures in the United States, United Kingdom, Australia and Singapore have contributed to a sense of seize. 

But, while this headline story has its merits, but the sense of crisis and the connections with US Visa changes are certainly overblown. The problem with this crisis-mongering is that this diverts attention from the structural challenges that the sector faces.

The Indian IT has had mixed fortunes for some years, and the salaries, at the entry and mid level, were stagnant for some time now. 

There are a number of reasons for this. 

First is the 'productisation' of IT - this whole phenomena captured in the expression 'there is an app for that!' - that challenged the custom development model that the big Indian IT companies are usually accustomed with. The trend, which started in the Consumer sector, is rapidly spreading to enterprise, and the custom development market is increasingly being eaten away by purpose-built products, or plug-and-play environments.

Second, with a transition to cloud and newer technologies, the business of application maintenance - which is perhaps an ever bigger chunk of IT Services business - contracted. When an application moves to Cloud, it needs less people to maintain it: These people need to have different skills too. And, with Cloud, comes a different set of security concerns and data ownership issues, creating a trend towards near-shoring.

Third, there is the impact of automation too, and this is not just about Robots and intelligent machines. Machine-readable forms and automated routines for everyday tasks eat away more jobs than the more glamourous aspects of automation. There were an army of people in the Indian IT sector doing routine maintenance work - backing up and restoring data, managing user privileges, attending to breakdown situations - and a number of these tasks are now being done through relatively simple computer programmes.

Fourth, the costs of operating in India has been rising. This is primarily as the cost of living was rising fast in the key cities, driven by high real estate prices and consumer price inflation. Though India is far from being a middle income country, the IT companies were caught in an equivalent of a middle-income trap, as they failed to move out of certain key cities, and drove up the costs in those areas. The availability and quality of manpower has also become an issue - partly the IT industry was a victim of its own success - and this has contributed to rising costs.

These factors were in play for a long time. I would recall Vivek Wadhwa writing about the unsustainability of Indian IT Business Models in around 2011, where he lamented that the senior managers, though acutely aware of these challenges, were failing to drive change in their companies.

The Trump Administration's rhetoric about curbs on H1B visas, and layoff announcements by top Indian IT companies, have resulted in a perfect storm of news. The hyperactive Indian media found its demons all too easily: Indian IT bosses for their collective lack of foresight, and the Trump Administration for making it difficult for the Indian IT sector. 

However, it is perhaps unfair to say that the Indian IT companies were sleepwalking. Many of them were reducing headcount (remember the fuss about TCS layoffs a couple of years ago), freezing recruitment or moving to other, lower cost, locations, like the Philippines. There was also a range of measures to expand the recruitment pool, with extensive pre-recruitment training and deeper engagement with select colleges to get students ready early, aimed at combatting the cost-disease.

Besides, while it is easy for outside observers to notice and point out the business model challenges, it is not easy for executives running large, publicly-listed companies to change tack easily. 

Besides, one must also recognise that the shifts in the global market not only a visa issue, but part of a wider shift in the process of globalisation. This challenges not just the business models of Indian IT companies - using relatively low-paid Indian engineers to implement business IT applications for customers worldwide - but essentially the role India sought to play, and positioned itself for, in the globalised world. 

In summary, it is exceedingly difficult for the Indian IT companies to shift away from their proposition of building and maintaining IT applications at a low cost and start building products without a profound change in overall context. The sector does not have access to the educational infrastructure, local demand or start-up ecosystem that can help build a different kind of business models. The teeming millions in Indian Engineering colleges are trained, in best cases, to follow instructions, not to innovate and think for themselves; the culture of the Indian workplaces favour being the Manager - with better pay - than accumulation of technical expertise by working in an area over many years; start-ups are frowned upon by middle class families with background in Government employment, which most Indian middle class families have, but even a lowly maintenance job in a publicly listed company gets more attention socially. There are relatively little enthusiasm about art and design - those areas are 'feminised' in India and kept at arms length from Engineering and Business - and the relatively disengaged world of the Indian middle classes rule out imagining new solutions to social problems. These, and other, ideas, approaches and engagements have to change before Indian IT sector can suddenly start becoming great technology companies. The IT companies, for all their size and resources, are at the mercy of their return-seeking shareholders: Initiatives that will bring difficult-to-measure rewards are not usually welcome in the stock markets.

Also, the Trump Administration is not the first administration that talked about tightening H1B and other visas: This was in conversation ever since George W Bush's time, and any other president would have talked about reviewing the long outdated (like $65,000 salary threshold for a skilled worker) norms. Besides, many other countries are already revising the norms for the kind of visas Indian IT companies use - Australia and Singapore have already done it, and UK is going to make significant changes after the June elections - and Trump administration would only be doing catchup. Trump's encouragement to weak dollar should be a bigger issue for Indian IT than his rhetoric around the visas, which should be treated as a part of the business environment.

In fact, by talking up the crisis and blaming Trump, the Indian media is looking at the wrong problems. The big Indian IT companies are no longer 'Indian' - they have global footprint and Infosys' plan to offer 10,000 American workers is a sign of what they are going to do - and Mr Modi can do little to solve the bigger problem (though he is being urged to influence Theresa May and Donald Trump on visa issues). There are complex issues on the table - of a new kind of education, of regional re-balancing, of developing a larger ecosystem of smaller cities (as opposed to pushing a few metropolises to unsustainable size) - and the easy globalisation that benefited India for last 20 years is over. The conversation that we need to have now should be about how to change course, not of a company or of a sector, but for the country as a whole.


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