As the US and Europe open up, new IT challenges emerge for domestic businesses
With the pandemic in retrospect, the big challenge would be when customers start cutting digital transformation and cybersecurity budgets with the relaunch of contact-intensive services.
With the new taxation for Indian IT companies comes a new set of challenges as the economy opens up, especially in the West.
The pandemic has largely receded in several countries in Europe and the United States, as immunization levels rise there. One of the biggest challenges IT companies will face is when customers start to squeeze digital transformation and cybersecurity budgets with the relaunch of contact-intensive services.
In fiscal year 21, India’s TI-BPM industry generated US $ 194 billion in revenue (8% of India’s GDP) and employed 4.3 million people. Of that total, the United States contributed about two-thirds of total revenues, while Europe and other countries contributed the rest.
“Our analysis suggests that the demand for IT services remains intact as the consumption of software / services – as a percentage of GDP – is on the rise. The Indian IT industry is expected to continue to gain market share thanks to a strong talent base and a proven track record, ”Reliance Securities said in a recent note to its investors.
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However, ICICI Securities in a previous report had pointed out that the euphoria around the cloud and digital required a reality check. “Current mobility trends indicate that as economies recover and public transport picks up, activity in physical channels is already returning to pre-COVID levels. WFH (Work from Home) if perpetuated can be a head wind, not a tail wind. On the supply side, the initial (and misleading?) Success of the WFH raised some high expectations, viz. promote offshoring and increased margins. One-off factors behind the initial success (eg fear of layoffs) and a simultaneous increase in execution rates on crowdsourcing platforms (eg GitHub) make us skeptical, ”the note said.
One of the reasons for such skepticism is that the global economy has rebounded from disasters such as the Spanish flu, SARS and demonetization. There is no doubt that national IT companies will continue to perform well due to the strong environment for their services. In the future, it may need to reinvent itself as it did during the pandemic to grow its business.
Prabhudas Liladhar in his note to investors shows that there could be cause for concern in the future for the IT industry. He pointed out that Level 1 IT services revenue growth in the fourth quarter of FY21 was a little less than 3.7% quarter-on-quarter (US dollars) compared to the previous two quarters. But he expects demand for Indian IT companies to continue.
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“We believe that headwinds on the supply side can be partially offset by levers such as pyramid optimization, increased offshoring, attrition control and the leverage effect of revenue growth. “, says the note.
But a bigger and totally unexpected problem emerges for the IT industry as customers accelerate their digital journey. As IT companies win multi-billion dollar contracts, the demand for talent is emerging as a new battleground. Infosys, TCS, HCL Technologies and Wipro are experiencing high attrition rates never seen before. During the January to March 2021 quarter, the attrition rate was in the range of 7.2% to 15.2%. Infosys’ attrition rate peaked at 15.2 percent while that of Wipro was 12.1 percent.
This had a direct impact on the EBIT (earnings before interest and tax) margins of the leading companies. The margins of these companies were down by around 50 to 260 basis points, due to wage increases (Infosys and Wipro have already granted two wage increases this year to retain talent).
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The Reliance Securities analyst is currently reporting two concerns for the industry. It’s about the scarcity of talent in major offshore markets: inability to deliver digital talent (data analytics, customer experience, cloud and cyber) to key customers in a cost-effective manner. The other is the failure to scale up ecosystem partnerships / alliances. “The Indian IT industry has worked closely with various software developers and other ecosystem partners. Failure to scale up partnerships with new era software vendors and ecosystem partners (cloud vendors and virtualization partners, etc.) can hurt customer relevance, ”the report suggests.
Top management shows courage as they try to adjust to the new normal, but the point is, people in IT have never looked so good, even as the rest of the world struggles to overcome the impact of the pandemic.