Transformation in 2014 will determine IT companies' survival in 2020: Zinnov

Indian information technology (IT) service companies are facing existential challenges and their response to the current market conditions will be a key determinant for the industry going forward, advisory firm Zinnov said in its outlook for the Indian IT landscape in 2014 released today.

It said Indian IT players would need to make some drastic changes during 2014, which will take at least five years to show a full impact.

“With the industry at an inflection point – similar to the situation 13 years ago, service providers are facing existential challenges… In such a scenario, doing more of what they are doing currently will ill-serve Indian service providers,” Zinnov said. “Indian service providers need to urgently initiate a series of transformational initiatives across multiple dimensions – scale, talent, market, models and capabilities. It is critical to embark on these sooner rather than later, although this can be like walking on water while attempting to still deliver quarter-on-quarter numbers. For survival and growth into 2020, a resurgent and proactive IT industry in 2014 is a must.”

Among other things, Zinnov said, companies need to reorganise “possibly around region-wise P&L structures”, which will allow them to tap local sourcing opportunities and help them overcome any protectionist policies in overseas markets. Companies would also have to allow “young, ambitions and aggressive” leaders with sales orientation to take reins of their business, as the current leadership remains focused on delivery challenges.

“This will result in inevitable exits at the top level. Fresh talent will also need to work harder; as training costs are the largest component of acquisition; the onus of re-skilling and up-skilling will be on the employees rather than the employer,” Zinnov said. “Roles will also see a shift; as existing account-mining becomes a bigger priority, project managers will have to transform from being people-and-schedule managers alone to consultative sales leads as well.”

Additionally, Zinnov said, acquisitions in the IT sector would have to move from capability augmentation and be focused on building scale. This approach would also result in consolidation among tier II companies, it added.

Indian IT services companies, who have so far lagged in identifying and investing in new spaces both in terms of markets and technology, will need to develop new markets in 2014, Zinnov said.

“For example, we are still catching up in developing an ecosystem to build capacity in SMAC (social, mobile, analytics and cloud). While growing Europe and breaking into Japanese markets will be the topmost priority for investments, winning domestic business from global players will also be a focus area,” Zinnov said.

With the growth in commoditisation of services, Indian IT companies are likely to see a decline in margins, and 15-18% would be the “new normal” over the next few years, Zinnov said. Some of the large Indian IT services companies, including Tata Consultancy Services and Infosys, currently enjoy margins of over 20%.

The advisory firm also said that even as the industry will continue to see growth in volumes during 2014, there will be a change in the way IT is consumed and provisioned as emerging technologies take center stage.