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Summary

At NASSCOM 2017, IT service providers were asked to reimagine, not reengineer, their businesses for the digital era. More than imagining, we believe that service providers need to urgently reinvent their labor-intensive businesses for the digital world or risk becoming a footnote in the annals of business outsourcing history.

The delicate act of balancing man and machine

At the NASSCOM India Leadership Forum this year, luminaries such as Mukesh Ambani (chairman, Reliance Industries), Ginni Rometty (CEO, IBM), William Ruh (CDO, GE Digital), and Natarajan Chandrasekaran (CEO, Tata Consultancy Services), shared their thoughts on “Digital Inflection Point: Re-imagine not Re-engineer,” which was the theme of the event.

Perhaps as a reaction to current world economic and political headwinds, it seemed there was an underlying uneasiness about where the outsourcing industry was heading. Many Indian service providers would have already taken steps to mitigate the impact of a growing contraction of US H1-B visas, or the recent introduction of a US bill (the Lofgren Bill) that proposes doubling of the minimum wages of H-1B visa holders to $130,000 from $60,000. Any changes in the visa regime will spike operational costs and shrink the margins of the $150bn Indian outsourcing industry. By automating standardized prosaic work, these companies could possibly cope with the current bumpiness.

However, the danger with these fixes is that they don’t address two fundamental, interconnected problems: the industry’s reliance on labor arbitrage and its sluggish attempts to reinvent itself in the digital era. The solution to the first is to increase local hires with the right skillsets, especially in the US; but the costs of doing so (with a direct hit to margins) have made some stall for time. The second problem requires a rethink of the business itself: can these firms better compete by adopting advancements in automation, artificial intelligence, and other digital tools in a shift away from the first problem?

Lastly, there must be a concerted effort by Indian service providers to reduce their reliance on the US market by diversifying into other regions – notably Asia Pacific, Africa, and Latin America. Today, few of them see any meaningful revenue contributions from these regions.

The key issues are these: what will (or should) IT service providers look like in the digital era, and how will they make reinvention work in a sustainable manner?

Appendix

Further reading

“The next few years will see growth in the captive model of insourcing,” IT0019-003604 (January 2017)

“2017 will be a mixed bag for Indian IT services,” IT0019-003602 (January 2017)

“Outsourcers dealt double blow as US and UK propose raising cost of importing ‘cheap’ labor,” IT0019-003530 (January 2016)

Author

Clement Teo, Principal Analyst, IT Services

clement.teo@ovum.com

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