Indian IT industry Staring at an Era of low margins :: The need to Innovate!

Today, I had received the following message from my investment advisory.

“The Indian IT industry has been the apple of investors’ eyes for quite some time. The industry’s spectacular growth rate was one reason. But a bigger attraction was the high margin that the top players were earning. Companies like TCS and Infosys have been earning margins in the range of 27% to 30%, every year historically. But unfortunately it looks like good times have come to an end. With increasing competition and higher costs, the days of high margins for the IT industry appear to be numbered. Sector companies have faced higher costs related to employees as they are unable to delink their revenues from people. 

As a result , to earn higher revenues, they have to invest more in people resources. At the same time, issues like currency volatility, higher visa fee will exert more pressure on the cost structure.

Combine this with the fact that the global crisis has clouded client companies, thus forcing pricing to either stagnate at current levels or come down in extreme cases. The combination of increased costs and lower prices would mean lower margins. It is a simple math! ”

The above message in my opinion has a profound impact for IT firms in the days to come.As indicated,There is an increasing need to delink their revenues from people. This means IT companies have to really strive hard to innovate and develop software products and assets that can bring value and new revenue streams (de-linked with people) with better margins. When I say,It is all about innovation and building assets, It’s not going to be easier unless such products of innovation are they are going to solve complex problems bringing immediate value or compete head on with other products or be disruptive.

The reason for me to share my thoughts here is that the emerging Cloud computing offers a playing ground and presents a significant opportunity to innovate and develop assets for IT firms to climb up the value chain.

It’s amazing when you look at small companies like Right-scale,OpsCode,Puppet Labs etc which has identified the need for simplification of the ITIL lifecyle on the cloud and has created niche software products ,solutions and business models in such a way that today they are a name to reckon in this field. Some times if you think, can’t products such as this be crafted out of our IT firms with 25,000 or 50,000+ people size? or even those with 1000 people?  CFEngine, the automation toolkit that powers several large scale computing clusters around the world and a player in the cloud computing space is an innovation and product of a single person! It’s time for the industry to think hard.

To Summarize, the Practice units,COE and Innovation Labs of Indian IT firms should have a bigger mandate with a significant/strategic role to play to innovate and create assets that can bring about a change to de-link pure-play people oriented business dependencies and thus create new forms of business and revenues combined with lower risks and higher margins. This will also help to stay competitive and differentiate well in the market especially for small to midsize IT players.

The emerging Cloud computing space provides ample opportunities for Indian IT players to innovate and create consumable assets for the market to realize this potential.Being at an earlier stage,This is the right time to start initiatives.


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