Tough times for IT

Companies have to rejig their business model

As the spreading coronavirus pandemic takes its toll on globalised value chains, India’s most integrated sectors are clearly the most exposed to downside risks. Among those is the information technology enabled services sector (ITeS) stocked with national champions such as Infosys and Tata Consultancy Services (TCS). The global demand slowdown will obviously negatively impact their order book going forward. The 2008 global financial crisis had a strong effect on ITeS growth. The sector was expanding exports rapidly prior to the crisis, with 30 per cent growth in 2007-08, according to analyst reports from Nomura. But in the two subsequent financial year, growth dipped first to 17 per cent and then below 6 per cent. There was a massive reduction in discretionary spending by global companies that drove this revenue slowdown. 

It remains to be seen whether the demand destruction in the current crisis is on the same levels. Given the make-up of the ITeS customer base, there are reasons to worry. Analysts believe that the entire sector will grow its revenue only by 3 to 8 per cent, given that banking clients in the US will likely be unable to sign new contracts. In addition, there are major operational hurdles to be overcome. Infosys has told the media that 70 per cent of its global workforce of 240,000 are working from home, while the comparable figure for TCS is 40 per cent of its 400,000 employees worldwide. This comes at a time when their clients themselves will be concerned about the maintenance and continuity of their backbone IT systems, and the ITeS majors will have their work cut out to fulfil their demands, given the requirements of working from home. 

The question is whether this difficult period is only transitionary. The Indian ITeS sector emerged from the lean years after the global financial crisis hungry for greater market share. What will the longer-term impact of this moment be for the sector? There are reasons to believe that it may not be as positive. For one, the labour-heavy ITeS majors will be under pressure to maintain their workforces at this time of crisis. Cognizant has already committed to give two-thirds of its employees in India and many in the Philippines a 25 per cent bonus during the month of April, to be reviewed monthly. This interferes with the broader trend in the sector, which was to move towards a digital-first approach that may not require the same level of manpower as earlier. Of course, the political situation in the US, with growing anti-foreign worker sentiment in the administration, has already impacted the ITeS sector’s business. Pressure to move away from companies that operate using the ITeS sector’s current methods to leaner and more dispersed alternatives — whether ITeS marketplaces or global rivals — will only grow. The Indian ITeS sector has already twice proved — in the early 2000s and after 2008 — its ability to emerge from moments of crisis with renewed strength. This moment may be its most challenging yet. The Indian majors will have to massively retool their business model if they are to recover revenue growth.