In 2008, you could easily have been run out of town to suggest that within 10 years, CSC, EDS and HP Services would be one company. In 2017 we have DXC, and a onetime online bookseller is the dominant force in infrastructure management globally. DXC is still working to redefine, re-engage and renew itself internally, let alone from a customer and market facing perspective. It is two steps forward, one step back at the moment, DXC believes it will shift to forward march in the near future. The shift, job losses and disengagement with the core customer base over the last 10 years have been extremely dramatic and incredibly difficult for employees, past and present. At the same time, the likes of Cisco, IBM and remaining parts of Hewlett Packard are struggling to find the revenue to replace what has been lost to the cloud, and more nimble proactive competitors.
This must serve as a warning for the Indian IT services vendors, particularly the big four of Wipro, TCS, HCL and Infosys. Alongside the likes of CapGemini, Genpact, Atos and others, they, and their business model are next in the firing line.
The direction that technology and application services is heading with the shift toward cloud, automation, self-service, AI etc simply means that the demand for commodity offshore leveraged services and solutions will fall dramatically. This is not a passing trend. It is the present and future.
We are seeing it already. capioIT believes that the technology and business services market will rapidly shift to a model that will look like the model below. This is the most transformative issue to face the services market since the rise of offshore outsourcing starting about 20 years ago. It is not about adding people anymore it is about automation.
The structural weakness for the Indian vendors and the many that followed their once disruptive model is that they followed a business model whereby resources increased in lockstep with revenue. An increase of 15% in revenue was matched by a similar 15% headcount raise. Revenue per headcount didn’t shift, nor did labour flexibility. The model is unsustainable. Resources are not available to sustain it, retention, recruitment and training cannot cope. This is without regard to the challenges for the client of a business that can put limited training resources on site, or more likely, out of site in a delivery centre.
Some of the vendors have started to answer this challenge. HCL has had significant success in transforming to a more automated business model alongside developing strong partnerships with the likes of AWS. Accenture has had similar success. Infosys have had a significant focus on AI based innovation. This success proves that the technology required is not about job loss after job loss. Handled correctly it is about job transformation and retraining.
Two questions come from this. When will the consolidation happen and who will drive it. It will start more quickly than most people will consider. capioIT believes that by 2019, there will be moves to merge or acquire from one or more of the top 4 Indian providers, with the likes of CapGemini at risk of being caught up in it, given their business model is almost identical. Genpact is at risk as so much of what they do for the financial services sector will be driven by Machine Learning and Cognitive solutions. Of the big four Indian providers, whilst all have their strengths and weaknesses, it is likely that the most pressure will come towards Wipro. They have to be a first mover acquirer or they will be swallowed up.
Of the big four Indian providers, whilst all have their strengths and weaknesses, it is likely that the most pressure will come towards Wipro. They have to be a first mover acquirer or they will be swallowed up.
This perspective is based on financial factors such as their margin and Market Cap, which lags most of their Indian colleagues but most importantly from numerous discussions with partners and the ecosystem. HCL has already made good progress towards automation and has the strongest infrastructure capability. TCS, are TCS, so whilst not immune, have a unique position in the local market. Infosys is going through a leadership transition, but if it can navigate that successfully it should be able to be an aggressive player and drive its own future.
The IT and business services market is at an inflexion point that will completely redefine the industry. Cloud, Automation and other technologies, as well as increased client expectations, are working to ensure that the CSC, HP Services merger creating DXC is only the beginning of the consolidation in the sector.
The Indian vendors are the next to face the global spotlight. First mover advantage in both automation and acquisition will ensure that the winners can compete in the new ecosystem with models focused on client intimacy and automation. Failure to do so will leave vendors in very vulnerable positions. Given the speed in which the market is moving, there is not the time to wait and let it ride. Proactivity is required.
If you require further information, please contact Phil Hassey, CEO of capioIT. capioIT is an advisory firm focused on helping organisations to understand emerging technology as the world becomes Digital. Phil may be contacted easily in the digital and real world.