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Cloud Services Eat Up Indian IT Outsourcing Earnings

I’ve been bearish on IT in the longer term, and in a long post I explain why I think we are at an inflexion point for Indian IT. Over the last quarter, results have been pathetic: HCLTech, Wipro and Infy showed less than 5% earnings growth YoY, and TCS and Tech Mahindra actually showed -30% or lower earnings growth for the March quarter. While TCS had a one time component (bonus) we saw their recent results for the June quarter showing less than 5% earnings growth YoY.

And Wall Street Journal has a story on how cloud services are eating up IT sector earnings:

The value of outsourcing deals signed in 2014 shrank 17% to $120.4 billion from $145.5 billion a year earlier, according to consulting company KPMG LLC.

Indian companies are losing business to firms that have led the way into the cloud, such as International Business Machines Corp., Amazon.com Inc. and Accenture PLC.

T.K. Kurien, CEO of outsourcing pioneer Wipro, said in the past his company would typically send a team of 100 employees to write, install and provide support for clients’ accounting software. Wipro now does such projects with eight people, he said.

Wipro is planning to slim down its 158,000 workforce and is scrambling to retrain its software engineers so they can do more sophisticated cloud-related coding. Mr. Kurien estimates that around 40% of his employees don’t have the skills they need for cloud computing.

They also have statistics on 7 areas where we are seeing dramatically lower volumes or contract sizes in outsourcing deals, compared to 2010.

SAP, the worldwide ERP Software Giant, sees cloud revenues surpassing on-premise revenues by 2018. Oracle, another software giant, saw cloud sales up 32%, while total revenues were up 1%, showing you regular software sales lagged. Indian IT companies have a fairly large practice based on SAP/Oracle installations, configuration, consulting and support. The cloud reduces the human effort to do the real work (much of it is already available in the cloud) which means less business for the Indian outsourcing companies.

The traditional response is to say “We also do cloud services”. But as we are finding out, services like upwork are even offering cloud services…on the cloud.

  • Shashi says:

    Deepak,
    These companies have grown significantly in last 10-12 years and contributed significantly to the GDP and consumer spend.
    How will the lack of growth, or even negative growth, in IT services companies impact the rest of the economy?

  • Anonymous Coward says:

    Deepak,
    Do you really think that the cloud is the only contributor to this? Don’t you think the skills of the engineers are also bad? Every company says they are cloud ready? So what do you think is the differentiator? Skills?

    • I don’t doubt it could be skill issues also. In fact in the article linked, even the Wipro head says 40% of the employees aren’t skilled enough. But this isnot about skills, it’s about strategy.
      Do you tackle a cloud based threat by saying I will also provide services on the cloud, or do you radically change yourself and say, I own this awesome private cloud on which you can buy access to SAP and Oracle that I will provide at a monthly cost but also provide you with configuration etc. services that ensure I can turn this project around in a very very short time. Not one player is doing this. If they wanted to, they would have been buying out cloud companies. it’s not about skills, it’s about the strategy in itself, I think.

      • Anonymous Coward says:

        Deepak,
        Every one of these companies are offering a private cloud. Just google wipro/infosys/tcs private cloud, you get their colorful brochures with the promise of low turnaround time. It is just that the Indian IT companies are inefficient and the people heading and working are clueless as they have always been but now with the increasing competition it is coming into focus.

  • Ramki says:

    The Cloud did not come in some fine hour, it has evolved over last few years. The Indian IT Service Cos must have taken notice and made investments way back in 2009-11, when it was evolving. And yes, lack of money cannot be an excuse, the Big IT Majors had plenty of cash (and still have) and that too was in Hard Currency (Dollars).
    So maybe the real issue is one of mindset? Refusing to “Invest in Future”? Refuse to spend Capital without expecting results in the very next quarter? They could have tried and failed (Microsoft did/does it often) but did they try at all seriously? Someone can explain?

    • John says:

      I doubt any service company (particularly the indian it services ones) will make any big strategy changes. To be fair, Infosys did try with their 3.0 but had a timing issue or was a bad leadership in execution; we dont know. My guess is that most of them will wait and watch and take careful steps. They will loose a lot in stock market if they do anything very ambitious that backfires.
      Indian IT professionals should certainly take some strategic steps to leverage the new opportunities coming their way; especially the middle management layer that does nothing more than resource management, project status tracking and reporting and are living on borrowed time (to quote Ravi Venkatesan). Maybe the wipro boss is ref to this layer 🙂

  • kumar says:

    one should thoroughly research the methods a company named ORACLE is adopting to ‘cloud’ify its customers. it makes for interesting findings, and imagine if all tech. companies adopted the same method.
    cloud is an ephemeral concept, much like SAAS. Most tech concepts are bullshit coated with perfume, for a few years they do one thing, and then they do the exact opposite for a few years more. Lots of action, but nothing really revolutionary happens.
    And if someone tries to do something revolutionary, the big cash rich companies will buy out that person/company, and close it. When government agencies get involved, they just pass a law, and shut down that company.
    I wonder what will happen if the indian stock market imitates the chinese stock market.

  • Bhupesh says:

    Instead of looking short term deals signing, look how India IT would respond to changing IT landscape. Current disruption is not affecting only Indian IT companies. IT has transitioned well from one phase to another well Y2K > Java > J2EE > Packages. Should focus on answering.. Would global IT spending reduce? Would share of Indian IT firm in global IT spending reduce? How Indian IT companies and Govt can respond to the change.

  • John says:

    I’m not sure how exactly accenture or IBM(I’m assuming global services) are better prepared than Indian IT services counterparts. I think the reality is most big it services companies are nothing but highly organized staffing agencies that employ people in large numbers. They will still continue to thrive with all the legacy system work they do for the large clients but I doubt they will compete well with smaller companies that offer everthing in cloud. Toptal (http://www.toptal.com), upwork and https://codility.com/ are replacing the staffing agency needs and the cloud is amplifying the capabilities of small teams and they deliver work that large teams can do.
    I think we can’t simply blame the indian it services companies. They run for profits and are usually very risk averse in their DNA. I think the smart it professionals should look at leveraging the opportunity given to them. For the first time, we can deliver a lot of value just by working from home with a laptop and internet connection.

  • rnadarsh says:

    Incidentally I just had a conversation with a closer friend who is an expert in the IT sector as an analyst. He believes clouds services can incrementally bring revenues to outsourcing players n the next few years. It’s too early to write them off .
    In fact Indian IT players have being gearing up for cloud services and they have not been taken off guard.
    There are other services for mobiles , analytics etc. that will fill in.
    Will be interesting to see how this pans out.