How IT Services can find gold in adversity

Most IT services have put in place business continuity plans to serve their clients, but they will have to innovate in the post-Covid-19 world

India’s IT companies reacted swiftly to ensure business continuity during the Covid-19 pandemic, enabling employees to work from home so as to ensure disruption-free services to corporations worldwide. Organisations will have go a step further in the quarters to come, say  analysts and top industry executives, given that competition will be fierce, and consolidation of vendors and customers is likely.

Discretionary spending—meaning spending on good-to-have tech, but not immediately necessary—will go away as clients focus on the here and now. So companies will have to keep an eye on the future and come up with targeted solutions that win customers’ backing.

“Just as Y2K served as an inflection point for the IT services industry, I believe we are now living through another period of significant change and opportunity,” says Brian Humphries, CEO of Cognizant Technology Solutions. “This pandemic is creating new rules and a new normal.”

Clients will seek companies addressing universal needs. In the short-term, they are reviewing everything: From solutions to bolster their liquidity and modern workplace solutions to omni channel and ecommerce enablement.

There will be an acceleration toward industry-aligned solutions, such as virtualised claims adjudication and virtualised medicine. Virtual agile will be embraced at scale [‘agile’ refers to software development methods that are iterative, and deliver speed and flexibility]. Cloud adoption will accelerate. Data modernisation will be prioritised. In short, companies are now entering the world of mobile, virtual and personal solutions, Humphries says, believing that in the process, some companies will undoubtedly emerge stronger than the others.

Most organisations are conserving cash, and will reorient spends to improve the ‘here and now’ that will help them navigate the next 12-18 months, says Jatin Dalal, president and CFO at Wipro. In the short to medium term, he expects opportunities to increase in areas, including modernisation, cyber security services, and robotic process automation. According to him, the focus will be on enterprise efficiency offerings.

The financial services sector could see an increase in spends, triggered by the stimulus provided by the government. Wipro anticipates investments in the new ways of distributed/virtual working through various collaboration tools. Today, organisations are looking for point solutions rather than large-scale transformation. For example, Wipro sees demand for solutions around ‘speed planning’. This involves building an environment to support real-time access and planning of data to take quicker decisions.

Dalal says Wipro will aim to expand its market share as he expects a pick-up in vendor consolidation. Large organisations will use this opportunity to accelerate their transformation journey to emerge stronger and leaner. This could open up huge opportunities for business transformation offerings.

Unlike the 2008 global financial crisis, the issue this time is the lockdown of economic activity across industries, which is why all of them are muted at present, says NG Subramaniam, chief operating officer at Tata Consultancy Services, India’s largest IT services provider. “Our belief is that when revival happens, most of the industry segments will recover almost simultaneously and instantly,” he says.

All things digital will accelerate in the medium to long term, be it automation, agility, resilience or cloud computing. “We have clients who are looking to accelerate their shift to cloud, pace up their digital and automation capabilities,” Subramaniam says.

Another opportunity that TCS expects will come up in the medium to long term scenario is mergers and acquisitions, both in the IT sector and on the customers’ side. As a technology partner, the company expects to participate in the consolidations its customers pursue. Subramaniam says it will be worth looking at an increase in intellectual properties and patents, besides industry-specific offerings of resilience and digital ecosystems.

In the first quarter of calendar year 2020, the tech services industry did very well before the effect of the pandemic on the economy started becoming apparent by the second half of March. Data from tech market researcher ISG, which tracks all outsourcing contracts with annual contract value (ACV) of $5 million (`37.5 crore) or more, shows first-quarter ACV for contracts given out in the January-March period rose by 7 percent, to a quarterly record of $14.8 billion (`37.5 crore). The pandemic is expected to completely reverse the trend.

ISG expects the ACV of managed services (tech services managed by IT vendors) to decline by 17 percent sequentially in the April-June period as overall spending slows in response to the pandemic. For the full year, ISG projects traditional outsourcing spending will be down by 7 percent from $27.7 billion for 2019. This compares with ISG’s preliminary forecast in January of 3.2 percent annual growth for 2020.

ISG expects 60 percent of its enterprise clients to delay their planned technology spending for at least 90 days, in response to COVID-19 concerns.

“Indian IT companies are entering a challenging time,” says Peter Bendor-Samuel, founder of consultancy Everest Group in the US. The global economy could be heading into a potentially severe recession. This will eliminate much of the growth that has been driven by discretionary spending.

One can also expect a new round of price competition as companies look to lower cost. “We expect this to lead to a new round of portfolio consolidation in which one vendor wins at the expense of the others,” Bendor-Samuel says. This will be a challenging time to grow sales, and in some cases, one could see revenue decline, he adds.

“The medium-term outlook is flat to negative 5 percent growth in sales,” estimates Ray Wang, founder and principal analyst at Constellation Research in the US. Most IT services firms have put in business continuity plans to support their clients. The challenge is that India is four to six weeks behind the rest of the world in the passing of the virus. Hopefully work-from-home policies will be enough for non-critical operations, he says.

“We expect that the second quarter (April-June) of the calendar year will be severely impacted, but there will be a return to recovery starting in the third quarter,” Wang explains.

In the medium-term post Covid-19, IT services will be fuelled by higher adoption of remote work and increasingly digitised operations of enterprises, says Naveen Mishra, senior director and analyst at Gartner.

The big opportunity will be in digital transformation projects which save the clients’ money. These contracts can often be quite large and there will be fierce competition to secure them, says Bendor Samuel. He adds that clients are unlikely to expand their offshore positions by hiring, making more labour-arbitrage-based growth difficult.

Post Covid-19, customers will seek help on moving to the cloud while optimising the cost structure. Rather than long-term digital projects, IT services providers should position short-term targeted digital initiatives deploying automation and artificial intelligence (AI). This, in turn, will bring changes to how deals are structured and operationalised, says Mishra.

Most Indian IT companies have done a good job adjusting their policies and partnering with customers to support work from home with sensitive and critical data policies. They have also struck good partnerships with customers to support new work environments and business scenarios, Wang says. “We see a push to more automation, more analytics, more AI, and more digitisation.” 

Remote monitoring, testing, and single pane support are important.

All companies—not just the IT companies —will have to build a detailed playbook for how they will operate in the post-pandemic world, Wang wrote in a recent blogpost. Companies will have to consider everything from AI to new leadership models to the possible rise of nationalism in the new normal, he wrote.

On hiring, Bendor Samuel believes that clients are unlikely to expand their offshore positions, making more labour-arbitrage-based growth difficult.

Wang sees some increases as the value of IT improves. “However, a potential 20 percent loss of the Fortune 500 and Global 2000 to mergers and acquisitions, bankruptcy and consolidation will reduce the number of buy side customs.” This will have the biggest impact on vendors, including IT services providers, he says.

Negatively impacted industries will put a hiring freeze on all open headcount in the short term. In the medium term, the hiring scene will slowly unfold with more targeted skills and job roles around recovery-enabling areas/technologies, says Gartner’s Mishra.

Post Covid-19, enterprises will go through four phases of recovery, he adds. To be proactively prepared, IT services companies are beginning to calibrate their plans by balancing their portfolio across areas relevant to the recovery pattern, he says.

There will be increased focus on areas like infrastructure as a service, automation, AI and machine learning, narrowly targeted robotics process automation, chatbots and business continuity. With cost concerns, areas such as applications, managed services, implementation services and business consulting will witness weaker demand in short to medium term, Mishra adds.

There will be demand for digital skills, particularly digital engineering skills, while other talent areas may take a step back, Bendor-Samuel says. If the Indian IT vendors can seize the day and pivot to the large digital transformation deals that save money, there is a good avenue for growth. However, it will need to offset the losses in the discretionary spending categories, which are substantial, he adds.

Wang reckons: “This is an important time for the IT services firms to consider a reinvention of their business models and to consolidate.”