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5 Reasons Indian IT Companies May Lose Out

Updated on March 7, 2012

According to a recent NASSCOM Study, the combined revenue of Indian IT/BPO companies has crossed $100 billion. If business is all about making profits and growing Top-line, then they are good at it. But there is more to it than meets the eye. After having been there and done that, I feel sad about the precarious position of Indian IT firms. What is worse is that there is no indication that the tide will turn for good. They are churning out billions of dollars each year by replacing punctual and professional Americans by laborious and energetic Indian workforce. American workers don't deserve to lose out on quality but they are not very useful because they are costly. This is the only premise on which the Indian IT Industry is building their fortunes and may well turn into their Achilles' Heel in the time to come.

COMPANY NAME
Q3 REVENUES (IN $ MILLION)
R&D/PRODUCTS PERCENTAGE
TCS
2,586
3.8%
INFOSYS
1,806
4.8%
WIPRO
1,505
12.6%
PRODUCT DEVELOPMENT IN IT COMPANIES

1. Lack of Innovative Ideas & Product Development

I was appalled to look at one aspect of the Q3 Financial results of top 5 It firms, again. Revenues generated by Product Development is not more than 5% of the total for any of the Firms. And this is consistent. Despite CEOs talking about innovations, new technologies, product development and more expenditure on R&D, there is no hope of any achievements in the near future. A careful peep at the revenue components of majority of revenues by Top 5 IT companies (namely TCS, Infosys, Cognizant, Wipro and HCL) tells us that they earn most of their incomes from services like back-office maintenance, infrastructure support and custom application support and optimization. No wonder why a US senator took liberty to thrust the tag of 'Body Shops' at Indian Firms.

COMPANY
NORTH AMERICA* SHARE OF REVENUE
TCS
53%
INFOSYS
63.7
WIPRO
52.5%
* NORTH AMERICA - LACK OF DATA SEGMENTED DATA FOR USA

2. Lack of Diversification

Anticipating the reactions from the Big Apple's job losses, Indian firms have started to show signs of getting rid of the wall and ladder dependency on US of A. But they have not been able to find adequate markets outside USA because of lower cost advantages, low quality, high competition and the ghost of recession. Top IT companies struggle to shed American benevolence which persistently fills half the revenue chart.

COMPANY
MARKET SHARE IN INDIA
MARKET SHARE IN DEVELOPING WORLD
TCS
8.4%
18.1%
INFOSYS
2.1%
13.7%
WIPRO
NOT AVAILABLE
19.3%
EMERGING ECONOMIES MARKET SHARE

3. Inability to penetrate Local (Indian and Asian) markets

Asia is undergoing an industrial revolution and is also turning the tide of budding markets from West to East. India is the second fastest growing nation in the world with GDP touching $2 trillion. Asia houses 3 out of top 10 nations (in terms of GDP) in the world and accounts for a third of the world Gross Domestic Product. These numbers are only going to get stronger. History offers Indian IT companies a golden change to establish a near monopoly in the home market. But with the opportunities come greater responsibilities and risks and till now they are struggling to make the right move. They can't ignore this, it's a make or break situation. Top players need to show foresight to outline their approach for market orientation.

Dwindling Employee Trust
Dwindling Employee Trust | Source

4. Dwindling Employee and Investor Confidence

Embattled Employees

Stagnant salaries, irrational cost cuts, unregulated working hours and lack of safety nets to keep employees from finding better opportunities elsewhere is starting to hit hard on the top IT companies. Recent surveys of best companies to work for in India have replaced the top Indian companies from the top of their chart in favor of global players like Google, Paypal and even domestic hospitality companies like MakeMyTrip and Marriot Hotels have challenged the benefits of IT jobs. Salary increases have come down to conservative levels of single digits and low double digits. These levels of increments are barely able to meet the inflation levels.

Economic Times
Economic Times | Source

Worsening Financials

Gone are the days when IT companies shares used to double every other year. Only praise they earn these days is the frequent use of word 'Blue chips' in reference to them. Returns have gone down sharply which is partly due to recession. They are not even stand up to the competitive return offered by bank deposits. A careful study of Infosys stock prices over the last 5 years ( stock price has risen by 28% from 2241 to 2880) tells us that the annualized yield has reduced to paltry 5%. Add to it a 1.5% yield on dividend yields we get 6.5% which is far below government bond yields of 8% plus. Similar stories of other domestic firms only shows the helplessness of the industry.

Lack of skills and Bad decisions : Struggle with quality
Lack of skills and Bad decisions : Struggle with quality

5. Poor Quality of Services

Indian companies are still to do a lot of hard work in shoring up Quality of services. The cash flows are good but the channeling is very important. Building a skillful employee base and shoring it up by offering in-house training programs

Which of these companies is more likely to weather the recession faster?

See results

Indian companies are still to do a lot of hard work in shoring up Quality of services. The cash flows are good but the channeling is very important. Building a skillful employee base and shoring it up by offering in-house training programs does help, especially in a country like India where quality of higher education varies from white to black from college to college. Infosys has taken a good step in this regard by opening mass skill development center in Mysore. This should be supplemented by continuous education throughout the lifecycle of an employee. It not only keeps the work force up to date with skills but also motivates them to keep learning. Examples like these are hard to follow because of huge costs and uncertain results. However, this is the only way to make the intelligent Indian worker stand at the same footing with a trained global professional.

Sound management practices are the lynch-pins making the industry reach the next level. Cost cutting needs to be rationalized and employee productivity should be improved. Indiscriminate hiring in 2009-10 led to unexpectedly high bench strengths and low utilization which subsequently led to cost pressures and all round lay-offs (followed by freezing of fresh recruitments). This eventually led to high rate of attrition in 2011 because of demand surge and supply shortage of workforce. A lot of this could have been avoided had Top firms shown some nerves and followed sound HR policies during depression. It is a time to bring back F. W. Taylor, Henri Fayol and Max Weber to business.

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      Anuj 4 years ago from Mumbai

      Diversity, Employees from all around the world are important to have diversified business ideas and experiences.