Recession is good for Indian IT companies

Triggered by an article in BusinessWeek about Tata Consultancy Services' (TCS) pay-cut.

Reduced pay. Pink slips in the air. US recession killing Indian IT industry. Time to write the obituary of Indian IT outsourcing industry. Well. Not quite.

Well, recession is here and so are the fears that Indian IT companies' golden run is over. While there will be short-term pressures on these companies, this slowdown can be the much-needed catalyst for these firms to move out of their comfort zones and into the next level.

Is the TCS' pay cut harbinger of tougher times?
I hope so. Indian IT firms have been riding the wave of outsourcing for the last few years. It has already been established that while the predictions of the demise of Indian IT are premature, Indian IT firms are entering a more competitive landscape. They may not be able to maintain their spectacular growth rates 20%-40% of yesteryears due to variety of factors - strengthening rupee/falling dollar, wage inflation, increased competition in the form of alternative outsourcing destinations and presence of MNCs like IBM, Accenture etc in their backyard.


Still, it is not a crisis.
No doubt the Indian IT companies that are heavily dependent on US market are going to feel the squeeze in the immediate future. Nonetheless, these are not fly-by-night companies. They have honed their outsourcing skills over the years and have developed global delivery capabilities rivaling or arguably in some cases surpassing well-established multi-nationals. Over the years, they have shown excellent execution skills moving beyond cost arbitrage alone. More importantly, though the stocks had been hovering in the stratosphere, these companies did have their feet firmly on the ground. All in all, the fundamentals are still strong for Indian IT companies.

Recession a good thing.
The current recession may be a good thing to happen to Indian IT companies. Not just because of the conventional wisdom that in these times companies have to cut more costs and hence will turn to more outsourcing. That may be true but one thing the recession does is to offer a chance for the Indian IT companies to think hard about themselves. An opportunity to look inwards and realize their strengths, weaknesses, go after new markets etc. After all the other side of challenge is an opportunity. For far too long, the companies have been on rise. As alternative outsourcing destinations, models and trends emerge, the Indian companies will have to improve their value-proposition.

I hope the recession will have these companies focus on the following:

1. Lessen dependence on one market and fine-tune their de-risking strategies.
Though all top-tier Indian IT companies have been trying to consciously reduce their dependence on US market, the recession will only hasten this process. The current slowdown is a blessing in disguise for these companies. They will be better off planning now for the future when US is not going to be a dominant market any more. Europe is of course getting lot of attention thanks to the strong euro.

2. Focus on the potential emerging markets.

So far, the mantra has been harvesting and now is the time to sow the seeds. Beyond the developed markets, there are huge opportunities in emerging economies. So far, Indian companies have been reaping the benefits of their expertise in developed markets. Now is the time to sow the seeds in emerging markets where the next level of revenue stream will come in.

Invest in BRIC markets to gain early mover advantage. It is only a matter of time before outsourcing in these countries become matured. Turn these into strengths before they become competitors. This is where the next billion dollar revenue going to come from.

3. Efficiency and Productivity
This is an area where Indian IT companies already hold an edge over other multi-national companies. Nonetheless, the companies will be forced to squeeze out more efficiencies to meet increased expectations from their customers.

4. Focus on other revenue streams beyond their bread-and-butter services
Almost all of Indian IT companies are already doing this. Strengthen consulting, IP, Automation Tools, New Products & Services etc. Diversification is - not in terms of portfolios - but in revenue streams. Moving up the value chain is a cliche. Creating new value chains is what is required.

5. Buying of US companies
What better time to buy out US companies than this environment of weakening dollar and recession? This can be either to acquire new industry vertical/skil lor deepen expertise.

6. Buying of other Indian IT companies
There are a lot of small and medium-sized companies in India supporting outsocuring. Not everyone of them is financially strong to endure a sustained recession and wage inflation. This is an opportunity for the bigger firms to gobble the smaller ones operating in niche areas such as Outsourced Product Development, Gaming, Open Source Technologies etc.

7. Correction in wages and weeding out weaker performers
For years, the Indian IT engineer has been put on a pedestal just like their western counterparts before outsourcing picked up pace. They had it easy over the years demanding and getting outrageous compensation and selling loyalty for a pay hike. It is probably a good thing to bring the much-pampered Indian Software Engineer down to earth because in some cases the compensation is ludicrously high compared to the individual's value proposition. If this slowdown forces companies to tighten their recruitment processes, all the good reason to continue to do so.


In summary, though the fall-out of this slowdown has short-term consequences, Indian companies will have a huge opportunity to come out better and stronger because of this.