The future of India’s IT services industry

India’s IT industry has enjoyed an amazing run over the last two decades, with only a brief pause to catch its breath in 2001. All good things, it is said, must come to an end. Clearly, as in other industries, the scope for “super-normal profits” is a thing of the past. What does the future hold for the IT services industry? Answering this question is not simple; in fact, there are several forces at work, and the outcome will depend on their complex interplay.

1. As the US economy heads into what may be a prolonged slowdown,  domestic spnding will dry up. Companies will go into cost-cutting overdrive and hence many companies will embrace higher levels of outsourcing.
2. With the dollar continuing to weaken against the Rupee, shrinking IT budgets will be able to buy only a smaller amount of services priced in Rupees. New projects aimed at enhancing competitive advantage may be put on the back-burner, and companies will only want to “keep the lights on”.
3. It’s election year in the US and anti-outsourcing rhetoric will reach a crescendo. Companies will defer their outsourcing program, for fear of being called unpatriotic or responsible for domestic job losses.
4. As other industries start competing for talent in India, the IT industry will be forced to raise wages- but because of the margin pinch, this increase will be lower than what other sunrise industries like Retail and Construction can offer. The supply constraint thus caused will further impede India’s outsouricng companies in their abilities to deliver more projects- and thus drag revenue and possibly, margins.

The next 12 months will be critical for the entire industry, which is at an inflection point. Companies that reinvent themeselves to be able to deliver superior value in terms of newer offerings that can deliver “non-linear growth” (revenue growth graph that is not parallel to the graph showing increase in employees),  more IP-based  services (such as  true management consulting) or move into new types of knowledge-based outsourcing (such as outsourcing of marketing servcies, analytics, equity research etc.) will come out on top. For the others, well- there’s always the option of being taken over!