In the first and second articles of this series, we covered how the recent spurt of growth in the Indian IT services industry is here to stay, and how demand for Indian IT services is seeing secular growth across industry sectors.
There are two big changes that Indian IT services companies need to prepare for: One, the evolving technology cycle as every industry digitalises rapidly, and, two, serving Europe, especially continental Europe, as it embraces outsourcing to Indian IT services companies like never before.
To capitalise on these opportunities and ensure sustained growth, IT services companies have to invest in the right capabilities in the right locations.
Evolving Technology Landscape
The technology cycle is continuously evolving with new trends across the technology stack. Let’s explore some examples and their implications for IT service companies.
Direct to consumer (D2C) is the need of the hour for most industries. IT services companies need to help clients enhance end consumer experience by personalising user journeys, providing next-generation contact centre services, and enabling true omni-channel support experience.
Hybrid cloud (a mix of public, private, and on-premises) is the buzzword of 2020–2021. Partnering with hyperscalers and building hybrid cloud capabilities is key for IT services companies.
Robotic process automation (RPA), business process management (BPM), and virtual assistants/bots continue to gain traction across industries. IT services companies need to build capabilities on new age low-code BPM platforms such as Appian and Mendix in addition to Pega.
To help clients manage data better, IT services companies need to leverage new age data warehousing and management tools such as Amazon Redshift and Snowflake.
In industries such as logistics and manufacturing, Operations Tech (OT) and Internet of Things (IoT) are seeing increasing traction in areas like warehouse management, fleet maintenance, manufacturing floor optimisation.
The bottom line is that IT services companies need expertise in many new capabilities and technologies to serve these evolving client needs.
Continental Europe is poised to be the next growth frontier for Indian IT services. IT outsourcing spending in Europe is expected to grow at 9–10 percent per year, more than the 6–7 percent growth expected in the United States between 2020 and 2024, according to Gartner estimates from ‘Forecast: IT Services, Worldwide, 2019-2025, 1Q21 Update’.
The good news is that this growth is likely to benefit Indian IT services companies, which have already seen an increase in market share over the last three to four years in most parts of Europe. This is also reflected in the financial results for fiscal year 2020–2021, which show that Europe has outperformed overall company growth for many Indian IT services companies.
At this juncture it is also important to look at the future implications for an IT service firm.
Mergers and acquisitions (M&A) are critical. The number of acquisitions per year has nearly doubled in the last five years, according to a recent analysis by Bain & Company of 260 acquisitions made by IT services companies.
Capability expansion (like digital, cloud, and IoT), particularly in product capabilities (like Salesforce and Temenos), was the primary driver of acquisition for more than 60 percent of all deals analysed. Geography expansion was the next biggest driver, with a particular focus on Europe.
Talent is the most important asset for IT services companies. With the latest wave of the pandemic, it is very clear that IT services companies need to invest in retaining existing talent and in innovating with their hiring processes. Some companies have already started experimenting with ideas such as skill-based bonuses to retain critical talent, and coding contests to hire niche talent.
Cross-skilling/upskilling internal talent continues to be important. In addition, firms need to build near-shore and on-shore presence, particularly in Europe. Of late, large Indian IT services companies have augmented their presence in Europe by opening delivery centres.
Lastly, ‘no-shore’ is a trend to watch for. Companies are looking to leverage the gig economy to meet increased demand. Large Indian IT services companies have already started experimenting with gig workers for skills such as coding, AI, data analytics, etc.
For Indian IT services firms, the imperatives are clear: Be a serial acquirer to expand capabilities and consciously work on rapidly integrating these acquisitions; revamp talent strategies, expand on-shore/near-shore presence, and experiment with ‘no-shore talent’.(This is the third article of a three-part series on the Indian IT services space.)