The Inflexion Point for the IT Service Industry (Long)

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This is a long post. It’s meant as weekend reading, and I would love to hear your thoughts: deepakshenoy at capitalmind.in or comment on this page. I’ve written too much, but I’m sure I’ve not written enough. 

Indian traditional IT sector jobs are going through a massive inflexion point. I’ve said this many times, even on a TV interview with ET Now, that IT service companies are in a soup: they are darlings of inefficiencies rather than efficiencies.

Whoa. Explain.

The IT business has traditionally consisted of billing for headcount. That means you put X people on the project and you get revenues that are a multiple of X. That multiple can be $25 per hour, $100 per hour or even as low as $7 per hour, depending on the kind of work needed. Typically, the idea is to get work done by “freshers” or people with low levels of experience, with oversight by someone who’s experienced (a “project lead”).

Most work is process oriented – you have a checklist to set up and maintain servers, or manage infrastructure requests. Or you take IT infrastructure of a large company which has thousands of computers, servers, backup jobs etc. and do it remotely for way cheaper. (read this TCS Case Study) Or, and maybe what might survive, build software solutions for customers. And then, implement solutions like SAP or Siebel or Oracle or such solutions for customers.

For a long time, US and European companies were happy to send this work to India, because people locally were too expensive to do this kind of work. India was cheaper, even if it put more people on the job than absolutely required. There was no need for efficiency for the likes of TCS and Infy. Even at $20 an hour and Rs. 36 to a dollar (in 1996) the income potential was Rs. 115,200 a month for a 160 hour employee on a project. This is when I started off in IT services, getting paid the grand sum of Rs. 6,500 per month. Even at Rs. 10,000 per month, the company was ludicrously profitable – for every person on a project it could have five on the bench and still make 50% gross margins. (Also, remember, there was no income tax for software exports then).

This skewed the dynamics. The higher margins allowed IT Service exporters to offer higher relative wages (to other sectors), way lower costs to customers (whose equivalent costs were $50 per hour plus insurance plus holidays plus what not) but still maintain great profitability. Guess what? Everyone and his uncle joined the IT service business. In my batch in KREC/NIT Surathkal, in 1996, more than 200 out of a batch of 360 joined the likes of IBM Services, TCS, Infy and the like. It didn’t matter what branch you studied in. (And I made some pocket money by teaching my fellow students COBOL for a test they had to pass to land the job)

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Over time, the rupee weakened to 45 in the wake of the dotcom bust, and these companies continued their hiring; they might have lost some business, but as the global economy recovered, what it was for the other countries was a jobless recovery in many ways; the jobs then lost were outsourced to India because it was just cheaper. This was the 2003 to 2008 period when the IT Business absolutely thrived.

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Within the IT companies, the path to glory was common:

  • Go through training program which was essentially what-else-to-do-when-on-bench
  • Be assigned to a project. You’re “sold” to a client saying you know X and Y, when you probably don’t
  • Piggyback on project lead to learn stuff that’s important for the project
  • Code, document, test, learn to write proper emails
  • Get promoted to project lead, when you’ll be helping others do the above steps
  • In three years, make project manager. Now you don’t “code”. Yuck.
  • Your tools of choice are word, excel, powerpoint and outlook.
  • Scale up the management tree of the organization, with your power being how many people report to you

This was a given. You work in a company for three years and still code? You must have no skills whatsoever. The idea was that people would mature this way, and many did, and scaled up all the way to even CEOs. As the business grew, the “workers” – the freshers hired at low salaries – were extremely cheap, and hired in the thousands. The guys moving up the ladder made for the middle tier, and so on. Natural attrition into other IT companies kept the middle layer lean (you could double your salary moving to a different job), and the bottom layer saw enough attrition and massive hiring to keep growing. A “pyramid”.

The Paradigm Just Shifted

While this was happening, the carpet was getting yanked out from under the IT companies’ legs, in slow motion. Infra management was changing rapidly, and moving to the cloud. Companies with 3,000 servers could move them to an Amazon or Rackspace or private cloud, which was remotely managed by a handful of very talented engineers and massive layers of automation. Siebel and SAP offered customers cloud based solutions where the whole thing was already setup – all you needed to do was configure your company’s details in, which was complex, but needed 5 people rather than the 50 person teams that would have been needed.

A project manager, a client manager and what not who were usually assigned to customers were no longer efficient; they would now need to manage more projects made of smaller teams.

Alongside, the massive hiring and natural scaling up of the hires in the 2003-2008 period meant in 2014 that you had a large number of people in the middle management as project managers and senior consultants and so on.

The natural “pyramid” had gone out of shape. There were just too many in middle management.[Tweet This]

Salaries, with high inflation, had also gone up substantially. The mid-managers were drawing upwards of Rs. 15 lakh per year, and many were quite happy to see the regular increases year after year.

And then came the assault of the product companies and funded startups. Companies like Google, Facebook and Amazon were hiring for their stuff and they weren’t doing projects for others – they were using the teams to build their own products. The likes of Flipkart and Ola and Zomato also were hiring the best people from colleges and so on. The middle managers couldn’t work here; they had no serious programming skills left, and product management was a different beast altogether. No employee handbooks, no ISO 9000 and no real comfort zone of saying you wanted to be allocated to a different project. So the IT folks, by and large, didn’t join the startup revolution, and distanced themselves from the newer technologies that involved doing great things with smaller teams. And that has been a fatal mistake.

Other IT companies emerged that made themselves niche. A Mu Sigma, for instance, could charge a huge premium, at hundreds of dollars per hour, because they have massive analytics investments that helps their teams deliver solutions to customers faster. Druva, a software company started in Pune, offers automated transparent backup products for computers, mobile devices and servers, on the cloud, at the fraction of the cost it would take to hire a large IT service company.

Worse, the rupee at 63 would also be no help. The Rupee has actually appreciated against the Euro, the Yen and the British Pound. The Ruble just devalued from 30 to 60 in a year, and they have great programmers. Against other Asian and Latin American currencies, the Rupee has appreciated substantially.

The EndGame Begins: The Stalled Salary Hikes and IT Firing

As the inefficiencies became apparent, companies tried different ways to do things. Infy, for instance, stopped all salary raises with many quarters of tepid growth. This gave them “natural attrition” as the mid managers found jobs in other IT companies. Some smartly shifted to the more efficient startups.

Companies in western markets have started to shift away to other countries who now have a cost advantage. Faster and smaller projects are in vogue, with the cloud being a huge factor in adoption of customizable products like Salesforce, and has even prompted the SAPs and and Siebels to move to the cloud.

The IT companies had very few product investments. They became nobodies in the space that grew the fastest – search, online advertising, social media and anything to do with cloud/open-source technologies. This would have cannibalized their existing customer base – imagine going to a customer and saying that instead of having a large team of 20, let’s just use this software that’ll do the same work with 5. Eventually the customers saw the cost advantages and reduced sizes anyway.

The fat middle layer, and customer moves to more efficient software solutions meant things had to change and fast. While Infy lost much of its middle layer naturally, the other IT giants were still saddled with them. Then Wipro announced that they wanted a lean middle, moving from a pyramid to “an hour-glass kind of structure“, and would cut workforce by about 33%. Recently TCS is in the limelight for actually firing underperformers (the horror!) which will cut their workforce by over 25,000 people, if numbers are to be believed.

This is just the natural endgame and TCS is likely to be leading the pack.

Where Do People Go?

Roubini talks about this: Where Will All The Workers Go? This was a question they asked in the US when manufacturing jobs left for China, and then service jobs left for India (BPO, IT Services and so on). This is insane. Technology will displace people from jobs, and has done so forever. We IT people took away the jobs of some manual process worker somewhere. Cars took away the jobs of horse drawn buggies. Mobiles destroyed the whole “Public Call Office (PCO)” ecosystem. Online e-commerce will hurt retail. Uber and Ola will hurt the autorickshaw.

The outrage of the IT worker is largely misplaced. The technology we build is designed to cannibalize everything. Tomorrow people will get programs that write themselves without the need for complex programming too. 

But the question should be human. Where do these people go? 15 to 20 years of experience and they will get that pink slip.

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There is a point to saying people need to be let go better – giving them a month (or six!) of severance rather than having them resign, helping them find other jobs, and in general, accept that you’re not just hurting one person but their families and kids and so on. And it’s incredulous to fire people without providing them money, when you’re hugely profitable, so it’s all the more reason to give people a few more months of money as severance.

What Really Needs To Change

But there’s more to this than a few months of severance. Middle managers – and I know I am in that exact age bracket – need to reinvent themselves. This could be one or more of:

  • learn a new skill – either back to code and processes in newer technologies, or in a completely different domain. This could take months or years, but it’s necessary.
  • invest and create alternate sources of income
  • keep debt manageable so a job loss will leave you with at least a year’s expenses in the bank
  • stay humble: the people who reported to you could be your next boss.

To stick with this might be a better approach than going out on the streets and demanding that TCS hire them back while not hiring freshers instead. Because that is simply not going to happen; if you force it, the IT industry will shut down even faster. Unions and government intervention are the wrong answers.

The broader impact is on real estate and discretionary spends (like cars) and local economies (like Bangalore). But that will need a different post altogether.

I just wanted to highlight the inflexion point in the industry and how it came to be. It was not something you can just blame on higher management. They didn’t see this coming, because to have acted proactively meant loss of revenue and that would have gotten you fired then, not now.

At one level this is a bubble that is now going bust; the great Indian IT service bubble. It was fuelled by the relatively low tax rates by the government – such companies didn’t have to pay taxes till nearly 2010. This maintained that all the juiciest jobs were in IT services. Not in products – you couldn’t get the tax benefits if you built software for India. That created extremely skewed dynamics for everyone that graduated from an engineering college between 1996 and 2008. We could blame the government, but that wouldn’t do us any good either.

It’s time to reinvent ourselves.

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161 COMMENTS

  1. Deepak, very well captured, in fact inflection point has reached around 2012 only with adoption on enterprise digital channels (SMAC) by business cost of overall software development has reduced to less than 50% of pre internet era of software development. I used to and keep telling myself of you have 12+ years of experience in IT , you are nearing expiry date of your current career , this is is truth , either find alternate career or get ready for less pay package . New trend by western companies of insourcing will keep job market live for some more time but industry is moving towards maturity now

  2. You make very important points, which ironically the IT Services companies (and employees) themselves should have been asking of themselves. The hierarchical social structure of India also fuelled the desire of folks to aspire the “manager” phrase in their titles – and thereby get to the zone of just roaming around with a clipboard checking boxes. Even those who chose to stick to individual contributor roles became tech architects, very few of which actually wrote code – they were experts in boxes-and-arrows. The companies did little to impart the right skills to their employees. You mention Mu Sigma, which is currently a media darling but perhaps – and I’d love to hear your thoughts on this – it stands at where say an INFY was it its early stages of evolution. The wage arbitrage has shifted from qualified engineers to qualified statisticians (called Data Scientists in the valley)
    Industry bodies and community groups must double down at this stage to focus on building awareness, skills and an ecosystem to promote software product creation skills. And my worry is that enough is not getting done systematically
    PS: A colleague of mine once, about to leave for an onsite project as project manager of a T&M project, asked the boss – “would I get a higher rating if I finished the project on time or if I delayed it substantially”. Talk of perverse incentives!

    • Mu Sigma is at an earlier part of that inflexion point I think. That is also a service business and eventually product businesses will eat their lunch. Probably not in the next year, but possibly before 2020.

      There’s also another choice I didn’t want to mention: voluntarily taking a lower salary so that you won’t be downsized :) But that’s not something easily doable…

  3. This is what is happening in the services sector. In the startup space too, we have big VC funded companies bleeding away like crazy. If both bubbles burst close to each other, the impact on Bangalore’s economy will be quite terrible. As far the impact on real estate is concerned dont the ready reckoner rates provide a floor below which prices will not go ? Now with TDS on transactions above 50L sellers might be vary of selling below even if desperate.

  4. Made some excellent points!! One more point I would like to bring about the irrevelance of a service industry .. Many clients themselves are setting up their own firms back in India .. Many banks , auto sector, pharma have set up back offices in India ..

  5. Great post Deepak. It is not the economic side which has to be taken notice of. It is all about change that is taking place around us. And intriguingly, the speed at which it takes place. We were, are and will be living in a fool’s paradise without knowing or understanding what is going on. Is it fate or just our arrogance? I don’t know.

  6. I work in Oil and Gas industry and it needs IT services permanently for its requirement with frequent upgradation. Obviously entire service is outsourced including upgradation. It can not rely on small & medium IT services because, you never know when they would flee or doubts about having sufficient working capital requirement.

    I have a contra view. To cut the cost, most of the sectors be it auto, O&G, aviation, banking, manufacturing, medical or any field, need to outsource to save the costs. There is no alternative for this model. Added to this, more and more geographies are emerging. For example, massive potential is still to be tapped in Asia and Africa.

    The only worry factor is bit of competition which Indian IT companies can continue to offer low cost through additional working hours, skilled manpower and low wages. In US, a fresher is offered with 48K minimum and for the same price you can get a team in India.

    Long live IT services in India. You have created a unique model with no alternate anywhere in the world. Whatever we might forecast, this business is eternal and TCS, INFY, WIPRO would continue to march ahead.

    • I think you have missed the point of the article, This is not about anti-outsourcing at all but how the outsourcing firms themselves are behaving and have to change with the times. As you rightly say, most of the firms across sectors need to outsource to save the costs. And there may not be an alternative to this model. However, what the article really is saying is that outsourcers themselves won’t need so many people as they have now.
      And India may not be the destination a company chooses to outsource. In US, a fresher is offered with 48K minimum and for the same price you can get a team in India. But if u really consider, u can get probably 50% more resources in Russia (who by the way are really good programmers and have learnt English over the years) or Phillipines than you would in India. Probably, TCS, INFY, WIPRO would continue to march ahead but with far lesser people than what they have now.
      Moral of the story as I understand it is that u need people who work smart and not hard, and hence less in number. The key thing is to ensure that you are one of those working smart and not hard.

  7. so Deepak what to do with IT biggies like TCS? shud v sell or hold these stocks?
    what about india cost advantage in terms of cheap demographic dividend;cheap college education; lower rentals of offices vs Developed Nations? does Indian IT have any future in short medium n long term?

    • Speaking purely economically, this is great for TCS, the stock. The company will have massive savings (Rs. 15 lakh multiplied by say 30,000 people is Rs. 4500 cr. saved per year!) and possibly be able to get leaner and meaner. But no, in reality I think unless they change into IT products and start buying product cos they will not prosper hugely.

      Speaking of your other stuff – Brazil, Philippines, Indonesia, Malaysia and even Sri Lanka are cheaper….

      • You forgot eastern Europe. There are not only good developers but some awesome designer there. I have seen several companies outsource to Eastern Europe as well. All the BPO/Call centre business is going to Philippines though.

          • Easter Europe has always had an upper hand over Indian in game development, they will now compete for enterprise software

          • Eastern Europe and Ireland have one more advantage in the form of EU-Data protection laws which mandate that the data is handled only from EU datacenters. A lot of maintenance work for EU customers is moving to Ireland or other eastern European countries.

      • Deepak,

        While you have mentioned countries which are cheaper than India and even Eastern Europe countries I think what these countries lack is scale. What are the chances of having a TCS like company in Sri Lanka or Malaysia. While MNC can certainly outsource small projects to these countries, you cant expect them to outsource their entire operations to a company in them.

        While I agree with a lot of what you said and I work in cloud space, I think the Indian model still has 5 years to reinvent itself. Not all outsourced work would go away. However requirement for number of coders would go down significantly and experience and quality of code shall be valued more than the number of heads you can throw at it. I think more people shall be required to understand the businesses and functionality.

        The Govt is also trying to move to making India the data hub and I guess its part of the FTA being negotiated with EU atleast.

      • Great Article Deepak, you picked the right nerves, But by saying ” “The company will have massive savings (Rs. 15 lakh multiplied by say 30,000 people is Rs. 4500 cr. saved per year!)” ” you are invalidating your first point “”That means you put X people on the project and you get revenues that are a multiple of X.”” …

        A simple truth has been shared by Krish that “there are many areas/industry /geography still to explored where IT has much scope and
        which can not be achieved by the freshers , It need the skill set/ experience / hands on ..And by raising the attrition rate the way TCS or Wipro is doing is not a solution for IT industry to Survive,

        Yes in some extent it is required for those who has impression about TCS or Wipro is Govt company and they have a Permanent jobs, and either they need to be filtered out or make him well understood that IT industry is all about every day inching forward to grab/learn new skill sets either domain/technical/ techno functional…

        • Ajay – the reason for the contradiction is: a) Time based model is fast changing over to a fixed price model (I didnt mention this factor though) and b) that many of the project manager types are not entirely billable.

          You’re right – it’s time for all people to learn that jobs are not sacrosanct.

      • Companies have tried to move business from India to Philippines and Malaysia and not found it too compelling on one vital factor- people. There aren’t enough people like in India.

      • In the long run the people sacked from big IT companies will join smaller companies at reduced pay.The end result will be even smaller companies will bid aggressively and since now they have experienced hands,they will execute successfully too.At the end of the day the big service companies r nothing more than labour contractors,for that matter clients can even directly reach these experienced resource.The services companies r in for a tough time.

  8. This Time & Materials business carried the seed of its own destruction. But it has taken a while to happen. An ex-boss of mine pointed out 5-6 yrs back that for testing projects done by GE partner companies in India, the rate was same as for folks who flip burgers in high wages states in the US like MA, CA etc. The service cos in India have literally destroyed a good white collar profession. If they had at least ended this IT boom on a high note – being known for something it would have been OK. But everyone outside of the stupid and clueless trade press knows how horrible Indian IT service cos are in general with few notable exceptions.

    The big myth that got busted along the way was “We will first do services, then transition to products” – We are still waiting. The most successful Indian product companies have been for the most part startups from the beginning though they might have done some consulting on the side to sustain themselves.

    The industry leaves behind a horrible legacy – greedy landlords who are still unaware that the boom is over, spoilt middle class brats suffering from a severe sense of entitlement but with no matching skills, tasteless builders and their mega projects, myths about programming and mathematical skills, myths about Indians beating the Americans at their own game – the list is endless. Perhaps the worst legacy is the same service industry guys now pretending to be startuppers – some are even VCs.

    Since you say that coolies are obliterated by technology consider construction workers in India – they are working like their predecessors did decades back. It is still a labour intensive industry. Whereas in the US you sometimes see a walmart under construction in the morning and by evening it is either complete or nearly so. But with software competition and true globalization seem to be much more true than with say the construction industry. It is very difficult to escape the effects of technology in the software industry.

    • Ram. Brilliant comment.

      Resource arbitrage is not a differentiating factor anymore. And we will pay a high price for this shortly.

      People keep giving lip service to “innovation” and the best we come up with is frikking “juggad”.

      As long as we remain a largely unimaginative society, innovation will pass us by while we pray that familiar career paths and conventional choices will offer us prosperity.

      I really fear for people who’s lifestyles have expanded to meet salaries which they may not be entitled to.

  9. It is better to junk your own obsolete products, services, and models than have someone else do it for you.

    Companies need to realise this, but corporate ego will not let them do it in most cases. This isn’t something new; it’s been happening for ages. Just ask industries like typewriters, pagers, etc.

  10. Nice Post many important pointNice post .I just want say one thing imagine that only one finger in our hand grows very faster than other finger. Is it good ? this applicable for our economy also the massive pay by MNC’s as well as it companies created a big gap between IT People and society so it is natural that this has to reduce. Then what will be future of sacked employees? my answer would be most of them already know this kind of situation much earlier they should must have invested at some where to secure their future since last decade they enjoyed at least 4 to 5 times higher pay in IT comparing to similar level post in other industry.
    When I came to stock market I saw many medical professional invested in stock market now I am seeing more and more IT Peoples in stock market who are looking for some alternate income. It is gone days when a person knows coding in coming days only machines will to that kind of job.
    tocu

  11. Couldn’t agree more on it. In fact the inflection point was reached a year or two ago.

    As you alluded the issue is multi-dimensional. The “quality” of programmers suffered a huge deal because trespassers were recruited.

    Most of them want to be “managers”. It’s common to have 4-5 levels of managers viz. project managers, programme managers, practice managers, delivery managers, resource managers (oh boy! They were innovative).

    Very few exhibits “passion” for their art (computer programming).

    The sad part is that, none of these IT giants invested enough in developing software products for non-linear growth while collecting large piles of profits. May be the above three points to be blamed for it. :)

  12. This big jolt may trigger 3 major changes.

    1. A shift towards products over services,

    Talent will now be attracted towards exciting spaces like startup’s not just in IT space but in other sectors too. For a long time now all engineers have taken up software jobs, it time to look at other sectors too and start applying our minds there.

    2. Hiring Practices

    Hiring purely on number of years of experience on your resume will hopefully end. Engineers will be expected to show more than just a experience letter in interviews. There will more incentives to actually code and not just please your managers. Search for talent will become harder but it will move in the right direction.

    3. Management Practices

    Accountability will increase across the board. No more messenger jobs, if you do not add value to the product you won’t be required. If engineers are accountable for their work, the false respect for managers will end. They will only respect those who bring value to the company and to the individual being managed. This set the standards for management very high, clears out 80% of the useless roles created in the companies now. Titles will matter less and less, its what you know that counts

  13. @Deepak,
    “It was not something you can just blame on higher management. They didn’t see this coming,”

    how would you read Infy promoters selling close to 20%-25% of their remaining stake? ;-) use the proceeds to join the “philanthropic” bandwagon?

    • That is good, they are cashing out after years. Many employees have done so earlier. Philantropy is a reason they gave, but they don’t have to give it. I don’t care if they blow it up on single malt whiskeys :) Their money!

      • in the same vein, why then do they deserve the credit for spotting the coming IT trend before Y2K? :-)

  14. Intersting post.

    The observations can also be seen as part of general trend that technology is trying to eat into job market.

    There is an interesting TED talk “The wonderful and terrifying implications of computers that can learn” on this subject.

    Technology is becoming very pervasive and intelligent over a period of time. In its relentless march, one of the causality will be routine jobs.

    As was rightly pointed out, in the period between 1995-2005, there were many engineers(rather I would say people with engineering degree) shifted to coding to get a job and improve their lot. This helped indian middle class boom and bring many out of poverty.

    But the tide is turning. Technology is being developed to handle the routine day to day jobs, making routine/low skill jobs redundant.

    Thus the threat is not only to IT professionals, but also to low key worker.

    Only way out will be, as was pointed out, reinvent self by learning new skills and add passive income stream.

  15. Deepak,

    I have been in the industry for more than 15 years, and much of that in the company that suddenly finds itself in the limelight. A lot has been said on this topic, and I have not bothered to respond to the people who seem to have an axe to grind with the IT folks. I have followed your blog for 7 years now and have great respect for your work. I have some dissenting notes:

    1. Every corporation, be it in IT, iron mining, soap manufacturing, has middle management. The middle management is the soul of the company. I am not saying they are good/skilled, just that they are important for the company to exist. Otherwise, we can run a company with a million freshers and one owner/chairman. If Capitalmind scales up, I am sure you will also have middle management :)

    2. The IT industry needs management and sales skills. Just coding skills alone is not enough. I have seen enough projects fail because of lack of management skill/experience. So please do not stress too much on the “learn coding” part. Does the GM of a hotel know cooking? We need management skills too. Yes, the Excel, Outlook, PowerPoint people.

    3. Poor performance is found everywhere, in every country. Indian IT industry is not the sole owner of that. I have seen inefficiency in many countries, and even in other industries in India!

    4. What miracle occurred in Ukraine, Russia or any other country now, to suddenly wake up and give competition to Indian ITs? Couldn’t they do it earlier? Is there a macro-economic event that I am missing? Remember even the Indian IT companies made a beeline to China in 2000-2004. I am sure Chinese students have the same skills as we do (or better).

    5. For an industry that prides itself to look after its employees, both by bandying about holding company’s name, as well as plastering CMM level 5 gyan on the walls, shouldn’t they have handled it better? This whole incident appears to be a set back in the long term. Reputation counts in an industry that bills its employees.

    6. Some people seem to be opposed to the employees seeking help from the government. Everyone deserves a fair hearing, don’t they? Also, by giving tax sops to IT, cheap real estate, granting permits to open a million “engineering” colleges, the government is already neck deep in this, don’t you think?

    7. While accepting the press releases and pink paper articles verbatim, think of that one guy who really did good work, just stuck to his job and may have got fired? Remember one corporate is the judge, jury and much more here. Layoffs are, in the end, all about numbers. The outrage is largely because of this.

    8. As for the capitalist purist, who opposes the idea of an employee union, I have one word. Nassco# :)

    9. Many people are bringing out their pent up feelings about IT folks after this news. Its as if its ’08 all over again! Well, everyone is in this. If this industry goes down I am not sure it will be just the “poor performer” guy who will end up in the street. Everything in India has changed because of IT services industry. Taxes, schools, lifestyles, real estate, politics, entrepreneurship,.. all will see an impact. Especially jobs because it doesn’t look like the other industries or Government have created much jobs lately. So IMHO there will be a big ripple effect, and they are naive who think they can just watch along the sidelines.

    10. In the end, its all about market saturation. We have one huge supplier and only one major market (US). The irony is that even India has not made the most of its own major export yet.

    Thank you for your good work in analyzing macroeconomics and sharing it with us. Your advice is relevant for all times, for everyone. I have benefited because of your articles.

    • I don’t say a middle manager is not needed. I just say we have probably too many middle managers. Most middle managers overrate their skills. Mid-managers in Google and even Microsoft continue to code till today – if you don’t know how to cook at all, building a great restaurant is probably going to be tough (unless you find a cofounder who knows cooking well enough etc).

      Macro event – you’re missing a few things: their learning of English (which is slow but happening), the massive reliability of the internet worldwide, and the massive currency devaluation in some of these countries (see Russia for instance).

      I agree the event could have / should have been handled better. The employees can go to the government of course, but that will not and should not yield anything more than “give them three months severance”. Any thing more would be a disaster, IMHO.

      People get fired all the time, sometimes even good performers, for petty reasons like politics. In a situation like this, some good people will go, that’s just collateral damage. A job is not anyone’s birthright and the employer can and should be able to fire someone with 3 month notice or such.

      Thanks for the comments! Always good to have debate…

      • Interesting points. I was until recently, in a middle manger kind of position with a large mnc and left because i had to scratch the tech itch. east europe and russia and china are definitely challengers. But in my experience working with them, i think the talent centre saturates quickly.. if you are opening a centre in budapest (and i believe tcs has one there), you will very quickly find that your top talent is only about 500 people and all the top guys are chasing them. the middle talent is not much better (or worse) than the one in india. they have large language and cultural barriers too.

        The presence of middle management is not a burden per se. But Deepak is absolutely right that they cannot be stagnant. They have to offer real value and not merely track activity. Measuring value addition is of course an extremely difficult challenge and everyone thinks they are doing just that.

        If the indian govt takes up on IT in a big way (and there is some hope NaMo’s message really goes through) some chunk will actually do value addition back home itself. That would be an interesting outcome.

        In terms of impact of a tech services bubble bursting – I believe that it will be threefold. Real estate will stagnate, secondary jobs like hair stylists, interior decorators, furniture etc will be impacted as many will tighten belts and reduce discretionary spend and finally wages will stagnate for several years until the industry finds a new equilibrim.

        There is every possibility that some of the tech service companies will not survive. In the US, IBM is probably not the only one under threat. In India, it will probably not be the behemoths but ones like Mastek / Polaris etc who will bear the brunt. Would be interesting to see if a shorting strategy can be developed for them.

        • I’d be wary of using just this data point to short them. Like I’ve said this will probably help margins when they fire expensive people. So teh stock market will like it.

          In the longer term, margins will decline if they don’t reinvent themselves. That will start appearing in slowing revenue growth and slowing order growth. They can however use their cash to buy companies and grow inorganically, but no one has that kind of DNA (except maybe HCLTech which seems to be able to change its DNA very fast!)

    • I was once in a big US based IT product company’s India office. For a staff strength of 900 people, they had 100 managers! And if you count HR, admin and other assorted jokers, you can see the problem.

    • Good reply :-). All the allied industries will fall with the fall of IT experienced people. Now all the industries are using IT for their day to day business.

  16. Please see below, what I wrote on July 8, 2013 at http://www.safalniveshak.com/stocktalk-tcs/

    Here are my two cents in relation to IT industry risks…

    Note:

    * I’m talking about IT service companies like TCS and Infosys. Not Indian IT sector or MNC’s in India.
    * In fact I believe the IT sector has a bright future in India with more and more MNC’s directly opening their shops domestically.
    * I might be biased on my opinion or might be thinking in a narrow way. One can debate this to come to conclusion.

    On Technology:

    * The “software as a service” model is taking off the shelves in a big way in US. Instead of million companies building the same components again and again, they are opting for SOS with pay by year subscription that would cut down development cost, maintenance cost and enhancement costs in big way. Our service companies are employing lot of labor in these areas, when the labor is cut, their margins would erode over time.

    * The previous version of software process was complex. Therefore our service companies had lot of managers who managed their teams. Also the old model was like “don’t reveal your secrets”, but with new open source platforms, I can see the process itself is straightforward and will cut down this part of labor and their margins. There will be a group of technical teams with one or two level hierarchy.

    * Every client of TCS or other companies only outsourced their non-secret, non-proprietary tasks and kept their important things in house. When these open source and “software a service” gets more popular, those service operations will opt for that platform.

    * For example, initially every bank had their own software, later they standardize it. here the credit unions all have same platforms inside different themed websites.

    * Think about PC sales, they are declining… the mobiles require simple coding, and management. More than that, they don’t need these many teams to build vast products which might not be even used. They can build as the demand arises or can even go and buy the small teams that have readily built it.

    * Earlier the industry had to build the software and release it in structured way. They required lot of testers, developers, designers. With internet a lot if changing, you can develop on the go, fix code on the go.

    * Better software process/tools and techniques are really increasing the productivity. If a team was taking ‘x’ hours to build a product earlier, it now takes only ‘x/2’ hours. That’s a major change. I feel our service companies have been sitting comfortably for a long time with not increasing the productivity, the cheap labor in comparison to developed countries so far might have allowed them to fill that gap. With declared youth unemployment of 40% in Spain, that might not be case anymore.

    * Our companies have built less product brands like “Oracle” or “SAP”. They can build it now, but now everything is online, it needs less resource to build it, and it can be built from anywhere, the factor is productivity. Again I am not arguing that our people are less productive, but there are too many structures in IT service company that blocks it.

    On Macro:

    * The wage advantage that India had is no more. One chart even said, when we see the rupee devaluation in terms of dollar, adjusted to inflation in US and India, rupee actually gained 6% even at INR 60 to $1.

    * The purchasing power in developed countries are gone or even lesser than in India. Therefore the IT expenditure will go low.

    * The smart phones are even going to take away the “helpdesk” “call center” tasks. With mobile app, the company can understand the behavior of their customer in a big way and update their app to get less customer queries over time.

    * I believe a lot of clean up has to take place before seeing growth back

  17. Having said above, Whats now?

    In my view, many US companies are benefiting hugely from open source revolution.

    Before, the companies have their own implementation of software, so they have to do everything from ground up. Today companies can easily adopt matured frameworks (for Non-IT folks, you can think framework as some foundry template) and start something in less than a week.

    Why some one would share their code with some one else, when they have originally spent their dollars to build it?
    They aren’t releasing their business functions. They just share their building elements (frameworks/stack) that are used to create these business functions.

    Why? By showing off the code to public, they get an opportunity from the community to make their code even better. For free. As they realized the community not just use the shared code, but refine them, fixes the bug, make it better and re-share it. The company which originally shared the code there by gets the company to write code / work for them for free. This is a huge cost advantage, keeps their IT cost low.

    Is it just the money? No, When some one refines it, what that means it is they are making the code or some process efficient.
    Instead of hiding their code, the companies which is open sourcing their code have realized that they now get change to improve their thing, which otherwise would have happened with the high talent acquisition cost. Also, for IT company, better code and process is the life blood, the open source make them to identify the better things, sooner (or worst, they would not even know they can improve their code), which makes them to go ahead of the game or stay alive in the game.

    How about maintenance cost is going down?
    a. The open source community deploys automation scripts which, when any one runs, can update their code base by themselves.
    b. Earlier a company would run 5 versions of oracle server because every one is scared of what would go down when they update something. With cloud, you simply pay for service, they do everything.

    What are the opportunities in India?
    There is still a huge opportunity, not from the companies, but from SME. But to tap it, we can’t sell something, but we have to be with them and build something and show them the value and cost savings. In other words, there are millions who needs technology, but don’t even know that they can take advantage of them. Housing companies, Small foundry shops, A person who sells pets, A car repair company. These opportunities can also evolve into a big opportunity.

  18. Lower rent
    no second house purchase
    no frequent volvo bus usage during weekend
    less credit card usage
    core sector gets good engineers
    lower auto sector growth
    ….

  19. Good post in a while, thanks for sharing your thoughts.

    Shift won’t happen drastically unless there is a massive change event.

    – Lot of IT jobs were lost in US during 2000 due to DOT COM bust – many of these jobs never came back
    – Lot of jobs in various sectors were lost in US during 2008-2009 due to financial crisis – many of these jobs never came back
    Above events forced the jobless work force to look for alternatives and learn new skills, which also gave birth to innovators and new start-ups

    Considering current economic cycle in India, we are entering the golden age of MEGA BULL market which shall last for another 2-3 years. In other words, economy would grow and all sectors would benefit which means NO substantial job loss in near term. Also, lets not forget that current generation (20s-30s) has yet to experience a recession or deflationary period hence they are simply NOT aware of hardships in terms of finding decent job with decent salary the way it was back up to 1992. They will be in a BIG shock.

    Once the growth cycle is near its end say around 2017 or so and when NO ONE is expecting any major problems that’s when it will hit hard:
    – massive job loss in all sectors and IT being the biggest sector will also take the biggest hit
    – experienced folks will be forced to cut back on expenses and reset salary expectations, look for job anywhere they can find
    – at the same time real estate bust will happen as many of these folks will default on their mortgage loans

    Overall, a repeat of what happened in US during 2008-2009. BUT how bad will it get remains to be seen. Government will step in at some point to stop the bleeding.

    No matter what, equilibrium will be restored either way….

      • We will be in a bull market for next 20 years.All macro economic factors are in place .The commodity super cycle has ended ,inflation is headed down and there is a dynamic PM.Of course there will be corrections,.However i welcome contrarions ,thats what makes a market and also gives me opportunities to buy cheaper.Mark my words from 2015 onwards DII money is going to come in a major way.Even with last years rally the sensex valuation currently @17 PE forward 1 year is not expensive.i m 90% equities ,oh by the way i m an IT employee too.

      • in 2015 !!?? what will it do to stock markets?which sectors most impacted? just RE or others as well?

  20. Hi Deepak
    Good capture. I am almost in same bracket. What saved me was what got into it at first place- love for computers and technology. So when my bosses almost forced me into big (10+) man management responsibility and insisted on not doing any coding, I had to quit. Left out the nice hike which might have come.
    Thw archaic indian feudal system was evident in IT industry, where your lordship was measured by number od people managed. Not just Indian IT companies, but the offshore centre of MNCs too.
    Fortunately lot of people in my circle didn’t go this way. We remain technologist. We still do not have second REA investment in bangalore or chennai etc neither we envisage spending few months abroad as some coordinator.
    I am happy for this change to happen. IT and progrmming is a skill , like any other skill in market, you are as good as your expertise. Number of years hardly matters. When do we pay carpenters, mechanics, cooks on their experience!
    Hopefully this change will bring maturity to IT folks. They will go back honing their skill or looking for other one. The change will not be orderly tho.
    My gut feel says , next we have MBA holders in line. Just too many with jargons and sales pitch without actuall skill or capablity for job. Somehow both these (IT and MBA) became into social status and life style which it should not have been. Met a few MBAs and branch managers trying to sell me financial product, I managed to destroy their entire pitch with calculator or excel sheet within an hour. Oh boy, being financial technologist is such a fun !!

  21. Deepak,

    Very well articulated article. I assume the same change would be visible in Indian banking industry…atleast to start with in private sector banks first. With 24×7 e-branches which accepts cash, cheque, disburses money, accepts payments etc. without any human intervention. The banking staff too will get leaner day by day and only relationship based jobs will survive in the industry. Also, netbanking and mobile banking has been penetrating very fast with internet and smartphone penetration.

    For stocks I think this will result into lower cost income ratio, lower audit cost (since most things will be automated), higher fees revenue and incremental revenue from relationship based services like wealth management.

    • Great point. Already with ADF and other RBI initiatives, most reporting to RBI is automatic, saving a ton of resources in that area (some banks needed to submit 200+ reports, regularly to RBI)

      Already we are hearing from the grapevine that tellers are being told about targets on other product sales etc. That is definitely going to continue!

  22. Paraphrased snippet from an informal conversation I had with a client (CXO of a tier 2 IT Services Co.) a few years ago, as we shared a cab to the airport:
    CXO: “…IT has given jobs to an entire generation of Indian Engineering graduates”
    I: “..maybe it also did a disservice by drawing talent away from other sectors like manufacturing, and also made young graduates complacent by guaranteeing them decent-paying jobs?”
    CXO: thoughtfully “….You could say that”

    And I thought this was going to be a sedate Sunday morning. Excellent article that touched many chords as I read through!

    Context: I’m an erstwhile IT programmer, graduate from 2000 when I joined the market’s darling, Infosys, worked there for about 4 years before quitting to pursue a management degree and since then have been a management consultant where, among others, have worked on a couple of interesting assignments for IT services companies.

    Planting the seeds of their own destruction
    Back in the late 90’s, the IT majors only hired from the cream of India’s Engg colleges like the IITs and NITs. Becoming a programmer at Infosys et al was a big deal. The reason simply was you needed some of the brightest to determine what kind of system needed to be built (or modified) and to develop it while also learning whatever technology was involved. As these companies grew at astonishing rates, to sustain their need for manpower, they needed to broaden their hiring base to lower tiered colleges.

    This meant a need for “process”. And boy did they get good at it. Everything you did needed a template and a BoK (Body of Knowledge). Traceability matrices, High-Level Design, Detailed-Design docs were just a few I remember. This ability to “dumb down” the act of delivering a piece of code was one of the biggest achievements the Indian IT industry can lay claim to. CMMI level 5 was defined as a certification of being able to make the whole process idiot-proof.

    This meant a ton of redundancies in the process, with quality checks and reviews built in which added the inefficiencies you speak of. By the mid 2000’s, it was not unheard of to be a specialist “unit tester” who did nothing but run tests on what other teams had written!

    Notice the circularity of this probem. Motivated learners quickly found this environment uninspiring and therefore the input quality became more mediocre further stressing the need for “process”

    Bottomline: While your point about the need for inculcating a learning mindset is well-taken at the individual level, it might be harsh to say the industry got it completely wrong and is paying the price. It’s largely a process of evolution where the ability to offer mediocre skill-sets at scale which has been their mainstay will undergo change over the next 5-10 years.

    • Great points. Thanks for the comment.

      I think you have hit the nail on the head. The problem with offering mediocre skillsets is that they can easily be made redundant. Mediocre carpenters got replaced by lathes and machine manufacturing. (Only the skillful survive, and they do darn well, but it’s not longer a mass business). If you can process-ize anything with talent that only has to check boxes, it’s probably a matter of time before you can get technology to make them also redundant.

      The problem is: the industry not getting it right is a bad thing because they are seeing the automation everywhere and doing anything about it.

      Again, the problem is not that this industry is dying. It is that it has to reinvent. Either be mediocre and keep losing margins going forward, or get into a productized approach, or like they’re doing now, get really lean and mean.

  23. Deepak – nice one for the new year and a warning that I could be one of the casualties as well :) the points you make in general I subscribe to but I think the demise of the IT model is some way off. Before the demise of the service companies – the CIO’s organization in the buyer company and the overall enterprise IT ecosystem (MS, Oracle, SAP, Dell, Intel) – have to fundamentally transform. I dont currently see that transformational speed of change underway in enterprise IT or the CIO organization, though the trends are definitely emerging with mobile devices in enterprise, social communication with consumers, data in the cloud and corporate functions bypassing the CIO in purchasing and defining their IT spends. Where I do agree more is that the individual in these companies needs to be careful about their potential redundancy – but here again the natural depreciation of the indian currency every year, is always going to delay the change that individuals and organizations need to make. My experience in the IT industry is that the average $ cost per resource is gradually increasing but they are going to be able to defend the average $ profit per resource.

    • Good points. Macro change, however, will probably take years to trickle down to earnings and to individual projects at larger companies. THe service companies aren’t going into demise – remember, they are just getting more efficient and that’s why they are firing. Their actual demise may take a decade because they have tons of cash and can stay out for a long time to fine tune their business; and if they do change course they can still be very relevant.

  24. It looks a strange situation. I have been into IT for near 20 years. When i was having around 9-10 years experience then i showed interest to continue in coding, design etc then my seniors looked down upon me. At that experience level i am suppose to take high end roles like PL/PM etc. But alas! now its changing altogether if you can learn new things and code too then its highly desirable. Industry desperately wants a domain experts who are multi-skilled and highly experienced individual contributors.Now middle mgmt is considered as labor contractors and an overhead….
    Best would be that IT companies should communicate this trend to their employees and help them to adapt to what organizations want them to do. Those who adapt should continue and those who are rigid should be shown the door. Just kicking some % off in the name of performance is not ethical. But money has any ethics? I don’t think so!

    In short IT sector is now like Modelling Career, as long as you are young and hot then industry needs you :-).

  25. Added to all this is the big change coming to enterprise software. The BFSI industry has been the bread and butter for our IT industry. But the BFSI players too are now slowly replacing deep proprietary technology stacks with greater use of open source software. Software, like hardware, is getting commoditized. Smart people will be still be needed to stitch these together and build innovative stuff, but in smaller numbers

  26. Product development business employs only 15% of staff; rest is service business even in a product company. If they do it for them self or for others does not matter. Fundamental change in IT industry is because of Cloud/*aaS, this is where IT industry is getting tremendous productivity boost. It is going to reduce service component in the IT business but that is going to impact in medium term. Cloud has also changed buying behavior of IT consumer. It is now easy to start and fail on a project so innovation cycle is getting much faster, probably more work from that side also. As of now IT companies are clue less of impact cloud model on IT scenario, so trying get leaner as much possible.
    Two problem of Indian IT industry are:
    1) Excessive service focus, they could not make use of their cash for building products.
    2) Pay discrepancies between a 2 year experienced and a 12 year experienced vs 20 year experienced engineer vs same difference in US market. While in India it is like 100 – 400 – 800, in US it is 80- 120 – 150
    First problem is getting taken care by the people who got bored with job, got pink-slip, people got money to deploy to an extent. Correction for second and changing IT model is what we are seeing in big IT companies in India. It is not going to get over in 2-3 year. it is long process to continue, slow pace of IT growth will make it happen faster.

  27. Very nice and aptly compiled points in the article. Simply compelled to share my professional life after reading this. I am sure many have a similar story to tell. I worked in one of the “3 biggies” IT services company for 6 years. I joined that company at 3 years of experience as a “raw-dirty hands on coder”. Naturally after 1 year in the organization I started demanding “onsite” from my managers. My blood boiled with the thought “Woh? Usko bhej diya onsite?” when I would sweat it out here at offshore. Finally after around 2 years of “struggle” I was “onsite”. But luckily the only thing for me has always been, “Keep coding and keep learning new technologies or the domain around it”. My belief was even more concretized when I saw how people in the age group of 40-45 years abroad as a “software engineer” essentially writing code or solving complex architectural problems. This was also the primary reason why I had to leave “the biggie” after 6 years. There was no “technical job” left there. Every appraisal was like, “Tu ab logon ko manage kar… Lead level par dekh”. I am worst off in that so had to leave. Also there was this famous “60-40 ratio” concept of the management. Every year a whole layer below would simply vanish and be replaced by freshers. I have then switched job twice and happy to say that not only has my pay-package doubled (actually a little more than doubled) but also I still code. (Ok I do not code in the agile team but still I indulge in writing stuff that I feel is complicated enough for the agile team to make a mess of it)

  28. Very interesting article Deepak. As usual, you articulate a pretty complex issue in simple easy to understand layman’s language!

    About the transition happening in IT: It’s not totally an end to outsourcing that’s happening here. The business complexities of clients of IT industry are only growing and IT is playing an important part in deploying their own products & services in the entire value chain. There’s still demand for software development (which includes mobile application development as well now – the M in SMAC). They still don’t want to get into doing this work themselves. They primarily want their IT solutions to be compliant to Cloud, Mobility and Social Media. Of course that’s SMAC minus the A of Analytics. This “A” actually demands another set of qualities & competencies which are not really technology skills, but a blend of statistics & DBMS. So essentially, Indian IT companies need fresh talent for SMAC. It’s more difficult to train the middle management in these skills than to train fresh talent, though Infy is doing that aggressively (ET article – http://articles.economictimes.indiatimes.com/2014-12-26/news/57420379_1_ceo-vishal-sikka-binod-hampapur-12-executive-vice-presidents).

    Any knee-jerk adoption of a new technology would have always hit the middle management. This adoption is in the SMAC portfolio currently. And to do that effectively, the Indian IT companies will prefer to train fresh talent – because they learn faster, and of course are cheaper. TCS while firing middle management and existing resources (many of them could’ve been on bench), has said it will hire 35000 freshers in FY16. Even if they hire only half of these, that’s more than the number of people they might end up firing right now.

    I also saw someone mention the long awaited “services to products” story. I sense this was just a buzzword and will remain so for long. Fact of the matter is: US & Europe account for 80% of Indian IT companies’ revenues. These US/EU companies do NOT consider Indian firms worthy of being Product companies. Apart from racist issues (yes, they are there), there are other valid reasons – our relative proximity to & understanding of their business needs and above all, propensity of IT companies to take risks in product development – which requires an entrepreneurial culture and not a process oriented one.

    Okay, I’ll end my 2 cents here. But before that, let me pat my own back before I end this comment. I had partly predicted what’s happening today long back in the summer of 2004, when I was just 2 years into IT. That’s when I decided to escape from IT. Reasons for my escape were 2 fold: One, the exit would always come as a shock whenever it comes. Second, when it comes, it’ll need a challenging skill acquisition, that too in technology field, at an age when the younger generation can do it much better. Ok, enough of I told you so…

    Great article, Deepak!

    • Great stuff, thanks! I’ve been there too – figured I needed to change in 2007, moved to understanding finance better. I still code. But it’s not like i’m a big success and all yet…

  29. Good note Deepak, my question is roughly how many people would be in this situation ? I have seen something similar play out in financial services post the 2007 bust there, most are still in same pay as in 2007 some are jobless even today especially in broking. Secondly does this help lower inflation anyway or is the impact too little?

  30. I don’t see a problem Deepak. All along I believed that post the birth there is a period of growth..followed by time of maturity. Once the system or company is mature it needs to evolve. .This is the tough process and this is where major slips happen..because I believe when you evolve it results in a new birth and the cycle starts. Imagine if the pupae decides to mature as pupae it’s just vanishes..For it to continue to exist, it has to evolve into a butterfly. ..Our companies may it be IT or the chemistry outsource companies..the likes of Syngene, GVK Bio etc where the evolution of butterfly is waiting to happen..else however sad this might look it’s destined to happen.

  31. Very well summarized. This is a wake up call for all IT folks out there. Few months ago I was one of the casualty of that bubble after 16 odd years in IT but luckily had options covered for rainy days and now doing what I wanted most and importantly enjoying this new venture which is way out of IT radar. Income is not on par with IT but very happy and stress free. My advise to folks who are still in IT is start working on second income you never know when you are in that bubble list.

  32. Deepak, let us put some realism into the picture of scare prophesy. Back in the early 80s when computers were getting to become more popular the ‘Left’ started a hue and cry spreading the dread that all jobs will be taken away and workers would starve. What is the reality on ground? With tech advances there would be inevitable growth and more opportunities. Your cry is legitimate but a wee bit frightened. Things are bound to fall in place buddy. (I am not part of your crowd, just turning 80)

    • I’m not frightened. I left the industry many years ago :)

      Things will be okay of course. The guys who lose their jobs may not find new jobs if they don’t see the writing on the wall and retrain NOW.

  33. Great points Deepak and agree that inflexion point has been reached for IT services companies.
    There are two things here, one is IT services companies and second is IT employees. The future of IT companies is shaky but so is that of even a company like Google. Let’s not forget what happened to Nokia. Leader in 2008, disappeared in 2012 !! So no company is safe in this ever changing world. Our IT services company pioneered a model that worked great for more than a decade. They have huge cash at their disposal and they need to use it to reinvent. At least one of them will probably survive with minor modifications to model but others have to adapt. Infosys is trying to steer to a new road and we will see how it goes.Either ways we should not be surprised nor dispair at demise of these giants. They did their bit and will be remembered.
    On the other hand I am much more optimistic about the future of IT workers. IT is becoming more and more strategic for businesses and the continued advances in technology means continuous and faster upgrades. The Indian IT market itself will grow substantially in the next decades and the uniqueness of our market will need uniquely Indian products. All this will need a large number of people skilled in IT. I expect a large number of current employees to re skill and be ready to serve the changing needs. Some people who refuse to change will loose out but most will make the transition.
    Indian IT and Bangalore will grow and I am Bullish for sure.

  34. Hi,

    Interesting post (though long). Job losses in IT sector will severly hit the real estate sector (bangalore for sure) and also the car market and indirectly the banks (due to NPA is in housing loans). It may or may not happen. I am not from IT sector, so cant speak much. But one thing for sure, a Engineering Graduate’s growth in other sectors is much lower in comparison to IT sector and now I see from your post it is not real engineering after several years in IT sector you end up with MS office stuff only and no real engineering.

  35. Hello Deepak, this was a well rounded article with points on IT industry dynamics, quality management and monetary factors. But it lacked the one major aspect that drives competition in all trades – game theory. Supposedly, the Indian IT industry is a person (Kumar) and was being pursued by the “Bear” (the beast that you have conjured up – tech advances, appreciating rupee et al). Does Kumar have to run faster than the speed of the Bear in order to survive? NO. Kumar only has to run faster than the others – Ivan (Eastern Europe), Juan (Latin America) – in order to escape the Bear’s pursuit. The Bear will maul Ivan and Juan before it gets to maul Kumar. All of Kumar’s competitors – Juan, Ivan – suffer from the same causal factors that are affecting Kumar right now. In fact, Kumar has evolved to the point where he hires Juans and Ivans to do the running for him. So I will end this badly illustrated example here and challenge you to revisit your conclusions at the end of 2015. Have a great year ahead!!!

    • Happy to revisit it :) But here’s the thing; I would be happy to hire a Juan and Ivan, in the place of Kumar here. That still means Kumar has no job, no? Unless Kumar becomes an entrepreneur….which is the change I mention is important to make..

      • not easy for all pink slipped employes turn entrepreneurs.entrepreneurship is a different beast all together.

  36. Bangalore needs a break from this IT/BPO hyper growth. This (coming) turmoil in IT industry could be a blessing in disguise (at the cost of experienced IT employees). A crash in real estate is coming? With it gold, black money issues get resolved? Hopefully traffic and infrastructure improves??

      • I would love to see that but its unlikely to happen. Real estate won’t collapse. In Mumbai, we were hoping this happen for 30 years but it didn’t. Even in Bangalore, its non-IT people who rule. Yes., Vast majority of BMWs,Mercs in Bangalore are owned by non-IT people. All big villas(read 1 crore+) are owned by non-IT people. It is this business class(Restaurant-Darshini owners,medical shops,Samsung/HTC dealers,petrol bunk dealers) who actually control the city financially.
        There will be some impact on restaurants, shopping malls to some extent.

  37. I regard this was a welcoming change
    1. The real estate bubble built up unnecessarily over the years will be pricked
    2. Huge spending in luxury items (some luxury over the years have transitioned into necessities) like the yearning of Honda City
    3. Meaner IT industry not drooling over the class structure created by age old customs
    4. Right resources will be allocated to the right industries – more people opting for traditional courses rather than corporate doctored engineering courses
    5. Investment in cutting edge technologies
    6. More investement in mass transit as disposable incomes will fail
    7. Growth in core industries and manufacturing
    8. INcreased savings in banks which will them to re invest this amount in the industry

    Thanks
    Sid

  38. Good overview but the concern is overdone. IT services operated in the closest we have to a free market and most people know the risks. Techies and their managers are generally smart people and will follow the money. So if IT services go bust, they will naturally gravitate to other revenue opportunities. And there are plenty of industries with huge headroom for growth — medical and general tourism is a ready example. And for those who think that engineers won’t join such industries, think again — the brightest engineers even now do an MBA and sell soap and shampoo!

  39. Hi Deepak,
    Nice article and these are the same lines that I mention to my friends, relatives who work in the IT sectors. All the bubble has to be bust one day. It is definitely going to affect the people that have been so complacent with an IT job, no matter what their experience is. In fact I am in IT field for 12 years now and I am trying different ways to setup my own business, get that secondary source of income so I don’t have to depend on my job. The only thing I want to say in this “soon to be changing times” is those who possess the right skill in such trying times would be able to survive.

    To make things easier, don’t get yourself over debt with loans like housing, automobile, get less greedy on your investment and returns. The silver lining though is the change that we gonna see in the housing market, the un-real estate would turn into real estate. I am not sure how big this is going to be, however by seeing the numbers in TCS it is really something that is going to lead way for some new things to happen. After all change is something that is always going to exist.

  40. Deepak – great stuff. but one way its the system that was setup in Indian IT service industry is at fault. The guy starts with programmer, after few years he gets into project lead, and the system forces them that you are not going to “code” anymore (unless it is product company), you will just review the code, then he becomes project manager after 2+yrs. Why on earth techie guy forced into manager level? the system says, you have only 2 options either you get into Architect or manager. but the salary disparities forces the guy becomes into manager level. Where as programmer in other countries, he can chose to continue to be a programmer till he retire. But in India, the programmer joining into a company in 5+yrs he will get into middle management as a manager (who does only power point, emails, xls) , so you got huge stack piling up at this level. IT services industry must put their thoughts otherwise every company will get into the similar crisis where the middle management team is keep increasing at move into a point, you need to cut these unwanted force.

  41. Great Article Deepak. I think one other thing to note is that a lot of these so called “Product Companies” are all smoke and mirrors anyway when it comes to both the coding and the actual product especially in the consumer product facing space (when compared to similar startup from say Silicon Valley). Like you mentioned also, some of the “managers” from the old world IT end up in these product companies bringing the same malaise that infects the current services IT to the product world. In other cases, with no real historical precedent to follow, other product companies are forced to “make-it-up” on the fly which leaves the door open for a lot of trial and error and failure. This would actually be a good thing, but for the fact that the environment and Indian society in general is not too forgiving of failure. IMO this is another bubble waiting to burst, and might aggravate things further …..

  42. Nice article. I work for a US based product company and even within our company paradigms are shifting. The want middle managers to become more technical – They are no longer just people managers and working with project management to assign resources. They are now strategic product owners working closely with product managers and architects to provide technical leadership and directions.
    The teams are smaller and required to take on more diverse responsibilities (for e.g. there is no longer a functional test team, that responsibility is now on the development teams themselves).

    IT Service industry in India thrived mainly due to lower salaries and easy access to a large pool of English speaking engineers. There are now other countries (eastern Europe, China) that fit the bill and therefore India’s advantage is eroding.

  43. In many ways, this is something I have felt is long overdue. The Indian IT Services business probably deserves to fail – and the bigger the failure and the earlier it happens, it probably will be better for the long run.

    An industry that takes pride on its ability to absorb 40-45,000 freshers EACH YEAR, train them, and make them billable, has to realize at some point that in 3-4 years time, all these freshers of today will either seek middle management roles, or will have to quit on their own, or face the eventual pink slip. That is an inevitable and inescapable destiny. There is no way any company can have so many thousands in middle management levels.

    But the problem doesnt lie there – it lies in the fact that people who quit early are invariably the great guys – who can get a job easily. These are the guys Infosys needs to retain – but can’t – because beyond a point, money won’t make much of a difference. So Infosys ends up with negative selection – where the sieve allows all the good rice to escape, and just retains the chaff!

    For quite some time, as the good guys left, and they were replaced by young freshers, Infosys and the analyst community celebrated the increasing margins. Of course this model had to end some day – whether it happens because of not having enough of the good employees, or because Infosys could no longer reasonably hire freshers by the 10’s of thousands, or because of competition from others, locally and from cheaper foreign locations, or simply because business itself started to decline. Unfortunately for Infosys, all of these have happened at the same time. Call it quadruple witching.

    When there was talk of 20% attrition in Infosys last year, one of my friends was telling me – don’t think of this as 20% attrition – if you ignore the huge number of people who were hired in the last 3 years (who weren’t yet at a level that their quitting would be a loss to Infosys), and just look at the 5-10 years experience guys, the attrition was significantly higher – at 35%. And if you considered all the good guys that Infosys wanted to retain, the attrition rate was almost 65%!

    Just that one statistic tells one simple story – that Infosys is doomed. No company can afford to lose two-thirds of its desirable employees and recover from that blow. The people who are left behind are not the guys Infosys wants or needs. They are able to survive today in the company, because Infosys simply cannot afford to create a fear environment and risk losing even more of the good guys.

    Vishal Sikka probably has inherited an impossible situation. Irrespective of what he does, Infosys is going to be in trouble. And in many ways, Infosys is just the bellwether for this sector – all companies are going to face the same fate.

    We must realize a few basic truths – keeping Rupee weak, and allowing tax free status on export revenues does not help industries. It only encourages inefficient behaviour – it helps hide the inefficiency for long, till it becomes too late. All these sops made the domestic sector unattractive for Infosys – the easy money from Y2K made it unnecessary to look at Products. This is not very different from the sub-prime crisis of 2008 – when cheap and indiscriminate loans encouraged a bubble – that hurt everyone for years.

    When everyone started carrying a mobile phone, the PCO operators went out of business. In many cases, these were handicapped people – without large savings, etc. They didn’t have any politicians or unions or anyone else fighting for their livelihood. Why should pampered fat cats of IT get any support? Supporting this sector today is probably the worst thing the government can do. Let these companies die, or let them reinvent themselves. They don’t deserve a single penny in terms of support.

    This is an industry that flatly refused to even plan for the bad times when the going was good. They didn’t invest in products, they didn’t invest in IP. If the government wants to help, it should help the smaller companies, the startups – and the help should be done in such a way that it is totally meaningless for larger companies.

  44. Thought provoking article Deepak, but the a bit overblown. Reminds me of the Mayan prediction that the world will end in 2012. We all know how that turned out, don’t we?

    While I agree on the points you mention about retraining, reskilling and the need to be relevant in this VUCA world, the doomsday prediction is good for TRPs but not entirely accurate.

    I offer only three counter points:

    1. The world is going through a digital explosion. Every process, procedure, activity is getting internet / data / mobile enabled. Guess who will be the ones who will be entrusted with creating these systems? Demand will be stronger than ever for IT solutions. Agreed some of these will be captured by product companies / apps / entrepreneurs, but a lion’s share will be taken by the IT companies.

    2. Guess what? The companies are not sitting idle. They are the ones investing in platforms, private clouds, productised solutions, etc. Take the revenue growth for the industry or any one company over the past 10 years and compare it with headcount growth. You will see that the difference is healthy and companies have been adding non linear growth.

    3. Eastern Europe / Russia / Sri Lanka – surely you jest? What the world’s best imitator and replicator and the second largest economy in the world has not been able to do in-spite of committing national level resources and funds to build an IT industry you expect war striven countries to do? Not being complacent or arrogant, but the scale and proficiency with which the Indian industry has developed, will be extremely difficult if not impossible for smaller countries to replicate. Believe me – all the MNCs have tried and set up centres in Latin America, Central Europe and elsewhere and have finally consolidated in 5-6 cities in India. Forget Warsaw, they are reluctant to even consider Coimbatore.

    • Thanks, good feedback.

      on 1) Time will have to tell. I see it moving much more towards smaller IT shops that can turn around things really fast, or towards customizable product cos.
      on 2) I don;t think this is right. Take revenue per employee – a metric that should be growing hugely if they had non linear growth. This for Infy was Rs. 1.45 lakh in Sep 2009. In Sep 2014 it is 1.81 lakh. That’s 24% more in 5 years; and you would get more than 20% from the rupee depreciation alone!
      3) Philippines took away our BPO business quite easily and it is a tiny state. Enuff said :)

      • Not to belabor the points, but 2 quick observations
        1.1 Thanks. Other than new tech, budgets are also driven by macroeconomic and regulatory changes, which start-ups may not be able to capture as the incumbent gets priority.
        2.1, NASSCOM data shows – IT industry revenues 2004 to 2014, revenues grew at CAGR of 21% in $$ terms, while headcount grew at 14 odd%
        3.1 My error in not clarifying the distinction between companies and countries taking away business. We should compare apples to apples. A large percentage of the work done out of Philippines is done by Indian companies. We would be hard pressed to name one Filipino company in the BPO space. Infy, TCS, Genpact et all have large centres in Manila. So if we are talking about the impending doom of the IT industry because of competition from other geographies then we have to compare “home-bred” companies there. Else what stops Indian companies from using the competitive advantage that SL offers? (Not that it will happen)

        • AJ – to answer this

          1. Macro and regulatory changes might help niche companies rather than the biggies (I know IT cos that now focus on compliance that are winning contracts away from the big guys, and have been able to use tech to standardize for everyone else as well and go into the cloud too). Infra management wise some reg changes might apply (like you must have the server in your premises) but short of that, the concept of private managed clouds are eating up a lot. And will do too.

          2. NASSCOM consolidates all IT cos including product ones. Here I speak of the big IT suppliers who have fat benches and the like. Also, it’s quite skewed with things like cost centers for some of the larger companies that wanted to put more revenues here in the 2004 to 2010 times (when income here was tax free). If you look at the productivity of the employees in teh big listed IT cos, it doesn’t provide the pic of increasing efficiencies.
          (Btw, can you link to NASSCOM data?)

          3. Two points here: It doesn’t matter if the Indian cos go to Philippines, the jobs here are lost (which is my point about people needing to get themselves retrained). For the IT cos themselves, this is a big challenge; it’s like questioning why would an IBM or HP outsource to an Indian company when they could set up their own bases here?
          In any case check this: http://www.abs-cbnnews.com/business/01/01/14/36-biggest-bpo-firms-philippines.
          Of the top 36 cos hardly any are Indian – maybe 24/7 (is that the same one?), Hinduja and Genpact. The rest are mostly non Indian (and some are Filipino, like SPi) and we simply haven’t gotten in on the act. It wouldn’t surprise me to see HP/EDS/IBM take the lead in setting up bases in other countries (not the Indian giants)

          When I say other countries will take away business, I mean necessarily that the IT industry within India is at an inflexion point. This means the middle management will lose work. The big cos will have to move faster to cheaper countries and even then, the cloud angle will beat them up in the medium term. This is where they will need to rapidly change strategy. It may already be happening, but they have to cannibalize themselves and get there faster.

  45. very nice article. But it is great opportunity for Government of India…..to open up opportunities in Project Management for the middle tier employees….I am sure there are many who would like to serve the country…..

  46. Every individual has to be aware about his contributions to the company. If some complacency sets in there, he will bite the dust sooner or later. If it is Govt job, he will not progress further and if it is PVT company, he will be shown door some day. In India we are overstaffed everywhere, we don’t want to do any lesser work once we progress and we get dependent on lower people/support. Especially this was an eye opener for me when i visited a company in Europe, where irrespective of their level, they do every other work. So what is happening is good in a way.

  47. Very well written Deepak!

    Hope all those ‘global practice heads’ (glorified titles Indian IT companies give to every 2nd middle manager :-), delivery managers and project managers realize they are suffering from Boiling frog syndrome and change soon.

    I believe people below these ‘heads’ have a better chance to acquire new skills and be relevant in the market.

  48. Nicely summed up Deepak, however isn’t it the trend in nearly every service industry. Take for instance the job of a typical IIM Graduate in the Financial Services , If you are among the best from IIM A/B/C you might l;and up in a front end role. If you are an average in IIM A/B/C or even the brightest in any other IIM ( With IIM, I include top league colleges like XLRI , FMS etc ) , the best you can hope to get is back end equity research and investment banking. The skill level for this job once assisted with a Bloomberg terminal is comparable to that of a code coolie. The perks are same , the difference however lies in penalties. Contrary to the job philanthropy of IT companies the BFSI sector fires at will and runs on a out of country or out of company model.
    The obscene bonuses pocketed by investment banks before the 2008 crisis have now taken a nosedive which means a graduate from IIM gets paid in the range of 10L to 15 L by companies like JP Morgan, Nomura and HSBC which is what companies liek Cognizant , HCL and Wipro pays to a Business Analyst.
    Won’t the financial service industry go down the same lane like IT industry ? And I have cited the salaries of the IIMs , if you look into the next tier of B-Schools it’s even more pathetic

    • on the spot sir.Services Industry always moves always towards the lowest cost.go to any hotel.Why r the staffs there always young?unlike IT travel tourism,F&B are old businesses .How come employees r always young.This is the thing i hv observed in services industry.The problem in India is about a perception of higher social status for office work.Better to learn some skills like welding,mobile repairing than wasting time and money on higher education.

  49. Creative destruction from a poet’s perspective:

    https://www.youtube.com/watch?v=bI10wgbeXgc

    Main pal do pal ka shayar hun, pal do pal meri kahani hain
    pal do pal meri hasti hai, pal do pal meri jawaani hain

    Mujhse pehle kitne shayar, aaye aur aa kar chale gaye
    kuch aahe bhar kar laut gaye, kuch naghme gaa kar chale gaye
    woh bhi ek pal ka kissa they, main bhi ek pal ka kissa hun
    kal tumse juda ho jaoonga, jo aaj tumhara hissa hun

    Kal aur aayenge naghmo ki, khilti kaliyan chunne wale
    Mujhse behtar kehne waale, tumse behtar sunne wale

    kal koi mujhko yaad kare, kyon koi mujhko yaad kare
    masroof zamaana mere liye, kyon waqt apna barbaad kare?

  50. Kind of Confused article. Seibel owned by Larry Ellison offered ‘Cloud’ services ? Its SFDC which did that.
    IT services companies are not here to offer the ‘Glamorous’ product company roles. If IT services companies become product companies and IT industry will have to lay of people in ‘Lakhs’.’Services’ industry can offer jobs in crores, while a Facebook, Google etc employe in a few thousand. IT services firms do offer ‘Outsourcing’ services to Facebook, Amazon, Linked & most of the Hot Tech firms.
    First they said Indian IT firms can only do ‘Y2k, but then they moved onto Applicatioan Maintianence, then they said they cant do Package Implementation and IT firms did that, then they said they can do Infra Mgmt & firms did that, then they said U can do IT Strategy & our fims did that.
    Yes There is a problem with the ‘Pyramid’ for which Natural course is to ensure people take longer to grow to the next level.
    And Automation will make many of the mundane jobs redundant. But there will be newer roles opening up.

  51. Hey Deepak,
    You have written absolutely right article at the right time. The time has come for everyone to reinvent them self. I tried my best to list some of the possible learnings after reading your article

    1) From Fresher’s/College students’ point of view:
    – It is the time for them to realize the current situation of IT and better to think of alternative careers.
    – Save money by not joining in so called engineering colleges which promises campus placements.
    2) IT Employees with 1-5 Experience
    – Start think out alternative careers/skill set which will get the jobs with Product companies.
    – May be a better option to pursue higher education like M.Tech/MBA & Ph.D. which will get them the jobs which values their education/degree
    3) IT Employees with 5-8 Experience
    – People with this experience are reaching the danger zone which is 10-15 years.
    – They have to serious think about acquiring the skill set to perform tasks rather than leading/mange team/projects.
    – They can choose any technology apart from their current skill set, so that they will have choice of employment.
    4) IIM MBA Graduates
    – Stop getting in to IT Companies and try to get in to proper business consulting companies.

    5) People with real estate interests:
    – Save the money and wait for some more time as the bubble is about to burst. This will allow purchasing the property at a lower price compare to current prices

  52. If all you code coolies are done with MBA/Management Skills bashing, can we now go back to work please?

  53. A good insider history of Indian IT industry for last 10 years or so.
    I cannot but help see that the root of this problem lying in the fact that we want to get bucks easily. India the strive and fight all along was to become a ‘manager’ than excel in your chosen profession by acquiring serious IT Skills. It was the way to have more power, money and work life balance without doing/possessing any serious knowledge
    Even in management it was ‘for having some one under your order to execute commands rather than any high principles of management, product or program management’.

    For long time there was no incentive to learn the bread and butter core skill. The IT leadership in India or ‘for India’ encouraged disproportionately ‘managers’ than a talented programmer, designer or architect. The very design of the job Hierarchy in Indian IT industry demands bitting many a bullets if one choose to be an individual contributor or a coder or do anything useful than commanding. And many a reluctant Indian techie has shifted to management.

    But now there is a definite shift and I hope we will learn to value the worth of knowledge and hard work than easy buck

  54. Another point to be noted is all these companies are still building PC based solutions and services when the businesses are turning to mobiles and tablets to run their show. We don’t have any big company in INdia which has invented an mobile app which is successful

  55. Industry analysis:
    Sofware services like Infra management, manual testing services , stable process’ app generation are in big trouble.Cloud and automation are going to hit them hard if not already.
    Software services like non-stable process’ app generation, highly customized app generation , cloud based app generation so on… are in growth areas for 3-5 years. Cloud only helps these delivery accelerated.
    Software services like data analysis , mobile app developments and cloud migrations are going to see huge growths in 3-5 years.

    Company type analysis:

    Large IT companies : Average growth for 5-10 years . Some areas will contribute more than others. Will re-hire from colleges to fill trenches. Indians are going to fall for stable job illusionists for some more time.

    Medium to small scale : Have cash and resources to steer fast , will do. No cash/resource, will die. Either will grow faster or die faster.

    People analysis : Why do people needing stability ever get to this industry ? If people cannot change/learn faster every year till they decide to retire, they should consider themselves in the danger zone in this industry, forever. This is one of the largest , least regulated industry and innovations will kill need for every skill within few days . No pointing in searching for stable jobs/skills/companies/tech in this field. Lots of us fell for the safety illusion.

  56. Deepak,
    Agree with you on most aspects. It reminds me of one of our ‘strategy’ sessions in the 2005-2006 era, where in a bunch of us went to the leadership of a tier-1 company (I used to work for them back then), that cloud is coming, we better be ready, and we had a 3 year plan to get to SaaS. The response was “We’ve a bigger problem of huge demand and low supply, figure out a smart way of hiring and training and billing…cloud is a future problem”.
    I recently learnt Infosys who attempted to foster the ‘Product Culture’ in the eco-system of services hard, finally hived off the product and platforms group outside as a subsidiary entity with only ‘3’ BANDS, (i.e., no more 5+ years guy becoming a manager sort). They as one would imagine, couldn’t produce ‘products and platforms’ successfully within the large 150,000 ‘resource’ strong organisation.
    That said, I still believe there is market for T&M kind of models, may not be growing as crazily it did. That wouldn’t die. Its just that the skills are different. The boom created a handful of fat-belly, underskilled managers (including yours truly), but these guys can still skill themselves up and get leaner and bounce back. Isn’t that the rule of nature ?
    A final point : How did everyone fail to notice that the ‘fresher’ salary for a Wipro / Infy is still in the 3.2 Lakhs salary bracket ? (Which got established years ago…). Weren’t these signs enough to pick up the cues ?

  57. Reeks of jealousy towards the IT folks. Seems like you missed the IT bus and now are making useless stories.

  58. Many of these Big IT companies have already started collaborating with innovative startups in domain to analytics, cloud, IOT. And are also encouraging startup culture within the organization. All these companies have hard cash with them. They will use that cash to buy these startups and scale their business.

    Coming to middle managers, that’s a good change I guess. All 10+ experienced guys playing with excels day-in and out need to reinvent themselves.

    • Vikram,

      I’ve engaged in this activity on behalf of a mid sized firm- The sales people are so used to selling services, it is impossible to change them to sell products. Assume a firm hires a new set of product sales people, the current sales people won’t let them anywhere near their accounts/customers. Besides, service companies have no clue how to do a biz plan for products, where you may have to go several quarters (years) without a profit. They are used to quarterly profits and monthly cash flows early in their sales cycles.

      • that is a very important point the dynamics of product based businesses and risk assessment profile is completely different.

  59. Amazingly written article…

    You may want to read this article -which is pointing the similar problem from Bigger canvas …
    That article talks on “real jobs” – the jobs that really converts or add values to the product/service. Not the jobs those are merely clerical in nature… Very thought provoking article. Let me dig out that from my links and post it here.

  60. Very neatly put. We will pay the price of being a country of body shop companies or “IT labourers”. Had we invested our talent, time and effort in product development , Indians may have founded startups like Amazon, Facebook and Google too. All the good talent went to support and service. Not just that, better salaries in IT for sometime hurt Manufacturing and other areas as well.
    Short time Boon became a long term Bane!!

  61. After been through “Engg Degree-Big IT Co-Offshore Dev-Onsite-Offshore Project Lead” route, this is the best post I’ve read on current state of Indian IT industry.

    And “What Really Needs To Change” section gives clear pointers to anyone who’s in or soon going to be mid-management level role in Big IT Cos. This is what I headed out to do about 2 years back after spending 8.5 yrs (crazy, I know!!) at Infy. It was late but still better than never to realize that this career path has reached its plateau. Jumped from lead/manager role to an Individual Contributor role at a niche enterprise product co.

    The Enterprise Products, as mentioned in post too, are at inflection points as well. Moving from customer infrastructure to cloud. I’m glad to witness this transformation as opposed to be at receiving end of transformation at one or the other Big IT Co.

    Once again this is a great post and a serious food for thought for anyone working in Indian IT space.

  62. Hello Deepak,

    The article is nicely written, I enjoyed reading it. But I disagree on a few messages the article passed…

    It was evident as early as in year 2005 that future of IT service companies at large, such as TCS would not be as great as it commonly perceived then. These companies were solely dependent on body shopping and USD to INR ratio. The day USD to INR ratio would drop to level of 30s (from 45+) these companies would stop making profits – that was a huge risk these companies carried, the upper management (VP and above) generally did not have any vision beyond 2 years for their company… their future was potentially dark indeed.

    Further, it was more evident as early as in year 2007-08, when TCS CEO started the idea of making TCS a fresher-heavy company. To ensure profit of the company grows while competing with their fellow Indian competitors and while salaries were getting blindly hiked for employees (due to tremendous demand caused by rapid expansion) – TCS devised a strategy to make company fresher-heavy, so that overall cost of employees remains low while average salary in market still grew. [average gross salary below 5-6 Lakh/annum and average experience of 80% TCS employees below 5 year… what a great idea !!]

    Thus, the company created a time bomb, by shifting a problem in future that should have been tacked at that time. Did anyone question the TCS management, what would happen to those fresher when they grow older and become experienced eventually ? The practice not only continued in subsequent years but the other Indian companies, specially body shoppers started following this practice. Thereby making the problem pandemic. It was sure that the experienced employees were going to be in trouble at some point of time.
    What a transition … from mass employer to mass un-employer !! Just to ensure the profit growth of the company remains better than expected during the tenure of a CEO.
    So, the root cause of the problem is not new technologies, but the greed of the management of big Indian IT companies that has led to mass firing of its employees. The media is silent, but the insiders say that the criteria or firing in TCS is not performance, it is rather number of years of experience (and indirectly the salary) that is the factor, or else why employees continuously receiving grade ‘A’ should be given pink slips ?
    The blame squarely goes to the greedy management, who no longer feels the pain and misery of the common man unlike their forefathers (the TATAs) till a generation back who resisted themselves from any such firing during period of recession. TCS surely could have opened program for its employees to get them adequately skilled and used in new business domain or somewhere else.
    And lastly, the government is to be blamed as well. I wonder why software companies & subsidiaries in India were exempted to pay taxes if they were already in very nice cost effective position to pull business from west. The government could have better utilized such tax collected in long term welfare of these software employees whose economic future was relatively uncertain due to the nature of fast changing IT world, I am sure such a move would truly have helped those employees who need to cope up with financial challenges. Further, the government might have encouraged IT companies to move part of their earnings towards building software products – which helps build wealth in the society much better than IT service business. It is noteworthy that ‘restructuring organization’ (synonym of ‘firing’) is happening largely for the service based IT companies. The product based companies surely would want to copy the model of ‘keep more fresher’, but they really need experienced employees, which means long term job security to employee while the company generates more revenue per employee in long term.

    Dinesh Kumar Bohre
    [KREC, 1998 batch]

  63. Excellent article. I am Senior lead developer in usa. I was like one of the employee as mentioned in your article in one of big service companies. I quit that company, because i was rated poor since i was a better coder and was told that i lack managerial skills. Now i have come out, i find the top level people code better than me in major companies in usa. this includes senior managers, directors. they read code . I guess indians have to change their mindset. Also i noticed that consulting attitude is not there in india, people think that a company will let them work forever till they retire . I have been fired many times due to project ending and i find new projects.

  64. Great piece of writing..insightful and full of common sense and clarity…a rarity these days. Am glad I stumbled on this site. Have subscribed. Keep ’em coming and all the best!!

  65. Great article Deepak!! The Chicken will come to roost now or later. However, as a further extenstion of this. Is Analytics the new IT? E-commerce, Analytics companies are taking the role of previous IT companies. Could you please through light on these industries as well in some other post?

    Best

  66. Stories like these have been in the news since 2000. Earlier it was said that after Y2K is done IT will be done. Then same thing in 2008. But Indian IT grew stronger and peoples salaries grew as well. TCS already clarified that they will only fire 3000 pros which is not significant number. Most of the guys commenting here are coders who remained coders due to no managerial or communication skills and are wallowing in self pity.

    • Rahul,

      Your comment lacks knowledge and understanding of the topic.

      Most of the comments here show lot of maturity and deep understanding, they can not be just coders who failed to be promoted (e. g. my designation is consulting principal)

      Second, tcs is not firing just 3000 employees, that would not even come to news, they are firing much more, more than 30,000 employees, all with many years of experience as per my source of reliable info)

      Take care

  67. I am not highly optimistic about the the transition from services to products. We are building a in-house Android app for the Indian market and it was hell lot of difficult to envision the concept and functions of our potential customers. Being traditionally given project spec which we have to develop, creating on our own took us a long time, but eventually I knew we needed to shift and after bleeding lot of money we did manage to complete the development and are marketing it.

    We still do have our services business which is what makes us run, and our product will take atleast another year or 2 to start getting revenues. All said and done, I am pretty pessimistic about indian IT services companies which has tasted easy sweet success to jump into a product development which is a ball all together and needs different mindset for development.

    • There is unnecessary optimism about products.I agree.If that was so why did yahoo had to fire 2000 people same with IBM and recently the makers of angry bird game too.The crux of the matter is hire and fire.Make hay while the sun shines. my advice keep on changing companies even if u get few thousands hike,give intv every 6 months and keep offer letter in hand.

  68. Deepak, being a manager in the semiconductor industry, I see a huge potential for Indian semiconductor industry be it in products or services. The manpower is very expensive in the US and product costs purely developed out of India are mindbogglingly fractional. Companies like Infy, Wipro are already in to semiconductor services and with technology getting complex to keep up with Moore’s law, engineer requirement is shooting up. Unfortunately our universities are not upgrading to these requirements and we are requiring people with US/European education to move back. I still do think though that once we have upgraded universities to handle areas like Device Physics, Nanotechnologies, serious hardcore NP complete problem solving, we will be the natural destination. Taiwanese/Chinese are rapidly upgrading to make their countries the hubs of future technological innovation, if we miss this boat, we will end up with programmers galore ready to cater to the low end of the software eco system like Web Development, Microsoft products based utilities for retail/banking but not have competitive products to challenge an Android or Windows or such. My way forward would be:
    1) Strong semiconductor eco-system
    2) Strong hardcore software like OS, Compilers, Electronic Design Automation eco-system

  69. Hi Deepak..Nice article..
    1.What do you think will be the impact on IT Product companies in India.As salaries rise will IT Product companies also tread the path of IT services in terms of layoffs and other cost cutting measures..?
    2.I have around 8 years of experience and I work in an IT product comapany(Juniper) in India.What should people like me do to survive such changes in future.I love coding and I am very much into it..But I am not sure will growing technically alone help survive the challenging future(I mean will a transition from a strong developer to good technical architect alone help face the changing tides for the next 20 – 30 years).?
    3.Will keeping myself technically updated help..?How to prepare myself..
    4.How will be future of product companies like Oracle,Samsung,Ariba,Inmobi in India?
    5.What about e-com companies like flipkart and snapdeal.They are paying huge salaries for developers(30 + lakhs)..I myself is contemplating a switch to one such company..But frankly speaking flipkart and snapdeal are not making any profit and are running on VC funding.When the tap dries will there be bloodbath there as well..?

    Pls do tell us what you think

    • 1. IT product cos that are funded will likely keep giving high salaries. There are just not enough good people to go around.

      2. Loving coding is good, learn more stuff I would say. An architect is a deep down tech guy so learning about different stacks, different technologies including data mining/analytics should help.

      3. LOok at courses on Coursera and so on?

      4. Like I said product cos that are well funded will not be hurt right now.

      5. Of course there will be a bloodbath when VC dies, but VC will die only after some time (and could likely be around for five-six years!)

  70. Deepak,
    A very well written piece. A lot of these points were what I have been preaching for a while. Having half of my extended family in IT this is something we have been talking about for a while. All good things have a limited life.

    I don’t have the eloquence, so guess couldn’t have told the story this well.

    Well done on this piece and hope a lot many people read this from IT industry to understand what is happening and what might happen to them in near future.

    Databases are not going to fail like in 90s anymore. Thanks to Oracle for Exadata. The app servers are not going to fail like in 90s, thanks to Oracle for Exalogic. Mainframes will need very reduced support thanks to IBM for zOS and like. All these support jobs are on the verge of extinction. Like you don’t need an electrician at your house everyday for maintaining your appliances and circuit, these jobs will only be available with large data center companies or cloud providers. So that is another 2 lakh jobs gone from India in the next 5 years.

    Interesting times indeed. The chinese proverb that says, “May you live in interesting times”. That actually is a curse. :-)

    Thank you again.

  71. The article trigerrs my old memories of the ups and downs that i underwent last 20 years. I smelt the rat wayback in 2002 and did not venture with real estate which everybody were crazy to grabe a piece of land or flats with the high salaries . I graduated and explored new areas in testing like localisation / i18 n testing( mulitiple languages certifications) which was a nish area and moved out of the managerial role to a individual contributor role which is giving enough mileage . I think the technical contributors are always having edge and can sleep peacefully.

  72. Author hits bulls’ eye on existing situation of IT companies. IT companies provided many jobs, created wealth for themselves and employees, created professionals, provided opportunity to work in other cultures on large complex projects. If not IT how could have been possible all this economic growth for such a large number of people. Thanks to IT companies/professionals for catching such the opportunity.If I am not wrong INFY is the first indian comany to list on Nasdaq, which inspired many other to join. Nasdaq listing opened many opportunities for indian IT companies. Reader agree with me that many IT professionals from these IT companies moved out and started many companies in IT or other sector (may be services/products) and made money for them and society in large. I believe this is an indication that we are in the right direction. Until now we are serving others ( thru fixing Code), I am sure the process slowly turn in words and start questioning how can I improve myself and later how can I compete with others on international market. In the process large IT companies may struggle more to stay float compared with other smaller and leaner companies. Once somebody asked me can you name a company which survived more than a century ? I have to really think to answer the question. You can count these companies on fingers. Similar all these large companies will try to reinvent them and make relevant to the market. In the process some may perish, some rise up and we find new players. The right policy decisions from the government time to time will help industry. Growth from IT inspired other sectors as well particularly Hyd real estate boomed majorly because of IT employees. Many people in Hyd blame IT professional in HYD for the high rents ( I leave it readers imagination who really is responsible).
    As author described many middle managers living away from coding and struggling to make relevant to the market conditions, whoever not fit they will be shown pink slips. Did you ever pay more to a mason ? As middle layer go thru this struggle, will definitely find a way out from the current slack period with the experience what they gained all these years. As author suggested learning a new skill will be boon and make any candidate relevant. New skill may provide next opportunity may be in any sector like IT, Retail, Manufacturing or Farming etc. I am optimistic that all these middle managers who are struggling will surely work towards their growth implicitly for society. I am sure there is no other alternative. Right government policies help rather than unions. To site an example in 90’s my uncle waited 10 years to get a land line phone connection and today it is possible in no time. This is happened with right policies not with unions.
    Gandhiji pushed out of train, and he used that experience for freedom struggle. Surely when somebody pushed to the corner we definitely find a way out. I think that is natural instinct of any human being.

  73. That explains why companies like CMC Limited fraud people like me with their job enabled training courses while the senior management just enjoy the chaos.

    I don’t know how such companies exist in the first place.

  74. Deepak, you have enough material to write a book.

    The situation would aggravate when cloud based applications take center stage and reduce the maintenance activities on the client computer significantly. Also if Rupee gains back against dollar (if Indian economy does well in coming years), that would also reduce margins for IT industry in India.

    What TCS is doing now would become a norm for other services companies too. But the in the product companies, wages will go up and may match US salaries in a couple of years to a decade. For right and high quality talent, pay would be same irrespective of geography in those global MNC companies.

  75. It’s time that people realize this. I am not from IT industry , still can say that it hasn’t happened overnight . There must be under current of this phenomenon know to people in industry . Few people like Deepak saw it and did a course correction ( or joined some Tech focused role within IT sector ) .

    I remember people reacting vociferously when this article in Current Science was published in 2005 ! – it was on a broader problem of skill shortage though …… ” Where have all the young ones gone?: The coolieization of India” , by Gangan Prathap and was with Centre for Mathematical Modelling and Computer Simulations (C-MMACS) at that time, ( http://www.iisc.ernet.in/currsci/oct102005/1063.pdf ).

    People said these guys are jealous and what not , and criticized even for semantics of word “coolie” ….It is evident from your post (and comments ) that people now agree that very few were/are doing core tech jobs. I am not sure situations that bad , even if it is , they will see the light as the path unfolds…..It does always !

    • Yes, I remembered reading at that time. and i too opposed that tone of Coolie. The reason is if you compare work ethics,culture, work pressure across multiple sectors,life of IT people is nowhere near Coolie.In fact i found people working in Banking sectors(SBI/Canara Bank) etc work pretty much harder. People working in manufacturing sector do not get the kind of luxury average IT guy in medium-big IT company(nice cafeteria,relaxed work environment)
      I agree that past decade or two, vast majority of work done here in India is laborious(read fixing defects,infrastructure maintenance etc) and process oriented and did not show the kind of innovation in products, software.

  76. Hire and fire can be tolerated, but this kind of blatant age discrimination should be resisted in a progressive society. Sad to see so many people blaming the affected employees rather than the company which is still hugely profitable. It’s evident that people are fired because of age (experience) and not performance. The worst thing a company could do with it’s employees is to brand them as non-performer when they are not. Be honest and declare it as a layoff and don’t discriminate on the basis of age. If this happened in a western world, company would be facing a lawsuit.

  77. Even though an excellent piece, and most of the comments are true. What can Indian companies do move their business forward. Couple of dramatic shifts that are happening around business.

    – Business is saying IT is a nightmare. Any project that takes more than 6 months to deliver loses its efficacy to business.
    – They want IT to be Agile.
    – They are wrangling control back from IT in many cases. Software as a service (SAAS) is a big driver for this change. Since business can start doing things faster without the control of IT.

    All the current Indian companies – TCS, Wipro, Infy and the 2nd tier ones have little or no interaction with business. They go to the CIO and peddle the following

    – Labor Arbitrage ( I have a developer at $ x/3, why do you want to pay $x to an US employee)
    – I have done this solution in company X and can do it for you at ($X/2)

    * Both of these models are but Labor Arbitrage. Labor Arbitrage will accelerate to its death as a business model, as prices rise in India which means Indian IT companies will have to continue to pay more to their employees and making the Labor Arbitrage model under continuous pressure.
    * The legions of coders that we are proud of is becoming a commodity skill set, putting even more pressure on pricing from US. For a CIO / VP why should I pay an Indian coder $x when I can get $x/2 (Tier 2 company) or $x/3 (tier 3 company).
    * The real value add came from the process and control of the S/W development life cycle (Waterfall model), but today in a SAAS/Agile world has broken the requirement for process and control. You deliver with business and become closer to business with more skin in the game.
    * A core part of the business model is based on the ability for Indian companies to garner more H1-B visas. Any legislative action (a few of which are already planned) will make India companies pretty much non-functional . They are already under pressure because of visas situation and the process will only exacerbate as time moves forward.
    * Indian companies need to understand and learn from Japanese/German Auto manufacturers as to how to integrate into foreign countries. Today all Japanese/German car companies have extensively large operations in USA , design products and services for their resident countries and have manufacturing plants etc. A similar exercise by the Indian companies in integrating foreign workforce into their operations will make them a stronger operationally and not based on a pure H1-B workforce. Remember, when the Japanese car companies first came in USA, they were not the most liked companies, today they get the most awards.
    * Indian Companies will increasingly face pressure as SAAS providers are increasingly baking easier technology integration into their platforms and dramatically improving the productivity of an employee. Most implementation and support requires now require knowledge around business , which is limited in Indian companies. Tier 1 providers (Accenture/Delloitte) provide a more attractive option to business ( we have changed the business model for a similar company and here are the benefits they have got) than we can figure this one out (jugad ?).
    * The emphasis on profit projections for the stock market, means the perpetual hiring of freshers and forced attrition of senior resources , is cutting down the knowledge worker and creating an operational risk. It cannot be managed beyond a point leading to a spiraling cycle of more employee cuts.

    All in all, unless Indian companies work on these issues around some of their core business models, it seems the future holds very little . They have to break their self prophecies of world beaters and work on improving employee relations, talent retention, cultural diversity and thought leadership to become real change agents and provide more value to business.

  78. Some great points and aptly put. I want to add some from my side 1) When Indian IT companies were hiring by the thousands they never had a clear strategy or plan to engage them beyond 10 years. As you already talked they did not adapt to the changing Technological topography. 2) In the western economy companies might have hired contingent workers or contractors paid them well and let them go as the demand subsided. But the Indian companies never gave them benefit of the contractor by paying them well or compensating them in severance package when they let them go after 10+ years of service, totally unethical. 3) Culture in the technology company was, they absolutely despised the guys good ad technology and that include programming. No focus on the product development research and development. Just the body shopping, which went down the drain and was only good as long as it lasted.

  79. Excellent Post. I landed here through hfs. Wanted to share the comment I made there.

    This reminds me of an interesting analogy.

    Clients, employees and shareholders of an IT service company are 3 points on an equilateral triangle and life usually follows a straight line. So you can touch any 2 points with a straight line, but you’ll have to ignore the 3rd

    So best scenario – Keep both your clients and employees happy, i.e. Clients get value for their money and employees work on interesting projects, gain skills and get better salaries. But the shareholders will have to adjust their expectations on quarterly stock movement as this is a front heavy investment.

    Worst Scenario – Shareholders don’t want to reduce their earnings and remain happy. Employees continue to get paid more without any skill development – happy in short term. And the poor client is stuck in a sticky T&M deal that was signed years ago. You are sitting on time bomb.

    Most probable scenario – Client forces you to get into a fixed price deal and is satisfied now. Shareholders don’t want to let go the returns and push management for more. It’s anybody’s guess what will happen to employees.

  80. Well said.
    People who are fighting being job less are also right.
    Restructuring of salary and roles are more welcome than restructuring workforce by firing people.
    Everyone can not reach where you have reached today. 95% people depends on job so they can not accept the simple arithmetic that you have explained.
    When you compare with other developed countries then one thing I want to point out is that their govt gives protection to the jobless people. At least let our govt pitch in and fight with those job less TCSers.

  81. Deepak, you youself appear to be data scientist in your current capacity. Does this mean you religiously believe in this new industry of Data and Analytics ?
    Do you think it is here to stay for long ? Or it is just another buzzword along with cloud ?
    Naysayers claim that IT industry will forget these two in not much time once they realize doing things the tradional way is far more efficient and/or cheaper. It may be good for newcomers like Amazon but mature companies like IBM, HP, SAP etc pouring so much of dollars into it will not yield significant returns in long run. What are your thoughts on it ?

    • To be honest even data and analytics will be superceded and is already getting done primarily through computers.

      It’s actually not cheaper anymore to do it traditionally, when computing can bring you analytics on the fly faster and better than if done through humans.

    • I believe that data itself is useless, it’s the algorithms which sort data out that matter. This statement sounds like common sense but isn’t, recently Nassim Taleb also pointed out the same. During 2008 we had tonnes of data and yet most people failed to spot the crash. So in that sense the money is in algos, something which Indian IT firms don’t excel in. It’s mostly either a big boys club or startup territory.

  82. Excellent article! A couple of thoughts here –

    – There’s a persistent thought in the IT industry that as long as businesses need to differentiate themselves, they will need differentiated business processes and that will require highly customized IT to support that. This will keep integrators alive and kicking forever. There have been several technologies and processes that threatened to homogenize IT for everyone (think packages, corba, …) but ended up inflating the demand for integrators. The hope is that Saas and cloud will also do the same. While in the short term, it will cannibalize revenue because of standardization, in the long run as businesses demand higher customization, the integration demand will kick in. I am not convinced if this will be the case, and even if this happens Indian IT companies are not positioned to capture this demand best.

    – The models of Musigma and Dhruva provide an interesting perspective. While there will always be large and small players, I believe Indian IT stands to gain from a German Mittlestand like model. Mid tier players that specialize in 1 thing and do it better than anybody else. Firms without coolies and excessive managerial overhead, only specialists and experts.

    – Indian IT has to reinvent itself, no doubt about that. Dependence on T&M is a death spiral in itself. The stone age didnt end because we ran out of stones, it ended because it’s business model became irrelevant. Likewise the Indian IT industry won’t be threatened because we’ll run of people (as many thought 10 years back), it’ll be threatened because of irrelevance.

  83. Great article and comments! Another point to be noted is the kind of work these big companies are doing. In early days they had to maintain and reassemble the work already done by an IBM/Accenture. But today, they are just tweaking what is already available. Like commonizing websites across the world, adding a new module, adapting the displays for mobile viewing and stuff. To me it’s looking like the fag end of rising demand for IT services. I am not saying that the demand won’t exist, but it would not continue to grow. So down sizing at where it hurts more is inevitable especially when these companies are under huge shareholder pressure to book growth in profits. PEs are running at 22-23 and that bubble is also under threat.With crude prices going down, another crisis is surely looming above us in the short term as the exports from Europe/US to gulf countries would suffer and so the IT business from those countries would be impacted. As Indians we really need to think through what would lead the next growth wave as IT sector lead the growth from fore front in the last two decades – IT guys buying houses/cars/furniture and so on. I believe that we should use the power of IT for good governance and it’s time that GOI starts investing in to IT infra. But then that alone would not solve the problem for middle managers. As Steven Covey (and you) put it, “sharpen the saw” seems to be the only way out.

  84. World is flat ! ! !

    Ironically many believed that IT fraternity is more capable therefore paid highly than other professional fraternities. This was fallacy, just a demand and supply gap. Situation is just getting normalized. People in other field are far more capable therefore making inroads in other field is not easy for IT middle managers. They need to develop lot more managerial skills to be competitive in job market.

    Sunil

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