In June this year, global financial brokerage firm JP Morgan reiterated its negative stance on India’s information technology (IT) services sector and downgraded Indian several IT giants including Tata Consultancy Services, HCL Technologies, Wipro and Infosys from a neutral to an underweight rating. It cited further weakening demand for IT services and delayed project starts for the bleak outlook.
Global brokerage Jefferies Financial Group Inc. also lowered its growth estimates for Indian IT companies in financial year 2023-24, pointing to worsening demand. Among the challenges the Indian IT services sector faces in the near future, analysts and experts have also flagged slow revenue growth and moderating global IT spending.
“What global customers are saying is that they are moving away from physical services to more digital services and they are competing on that landscape,” said Vineet Nayar, former CEO of HCL Technologies and founder of Sampark Foundation, a non-governmental organisation working in the primary education space. “So on one side we hear that kind of vocabulary, on the other side we hear a vocabulary that Indian IT is facing a significant slowdown… the question that comes to mind is, are we wrong-footed in the solutions and services we are offering?”
Nayar said that every time there was a crisis in the market, the Indian IT sector gained market share, but now people are taking money away from legacy companies and investing in digital services. The Indian IT sector is also fundamentally based on its people, he added, saying that its ability to attract the best is staggered.
“The talent war is the biggest war,” Nayar emphasised. “We should not allow our talent to go anywhere else. Whatever we need to do to support, to bring them in, we should do it,” he said. “I think we are in a cycle where investment in new products, new platforms, new services, new digital, new capabilities, is very critical. Therefore we should have the ability to attract the best,” he added.
While he admitted being concerned on where Indian IT is heading with regards to digitalisation of services and the talent pool seeping away, he added that he believes Indian IT will find a solution. “I am an insider and therefore concerned. But if you are an outsider, don't be concerned because Indian IT always finds a way around,” he said.
For The Core Report Weekend Edition, The Core’s Govindraj Ethiraj spoke to Nayar about where the Indian IT sector is heading, digitalisation as a target, legacy IT companies and more.
Here are edited excerpts from the interview:
You have been talking about whether or not IT companies or the IT sector is prepared for the big shifts that are happening, including through AI (artificial intelligence) and where they have perhaps gone wrong. Why don't I let you start off with where you think we are in Indian IT and what has gone wrong before we come to what can be set right?
If you look at the genesis of Indian IT, actually the takeoff happened in Y2K in 2000 where Indian IT was the answer to the large pool of people which were needed to be able to fix the potential Y2K problem. And that is how Indian IT had, what I call, a hockey stick growth.
Then came the 2008 recession. The 2008 recession put a significant cost drag on a lot of customers and Indian IT, given the fact that they had matured in the last eight years with offshore services and CMM-level five factories, became an answer to that problem. Because of which the global IT companies saw a downstick whereas Indian IT companies gained market share during that phase. If you take the Covid time, exactly the same thing happened predominantly because work from home and offshoring took a big sweep up and everybody was cutting costs. Indian IT was the answer to that problem.
When we come now, we see a dichotomy in number one – what the global banks are saying for example, or global customers are saying. You take Citibank, you take JP Morgan, you take Bank of America. I am talking about the customers, not the brokerage houses and all of a sudden they're saying they are doubling down on investments in digital and their IT spends are only going to increase because that is exactly what is happening in their business. They are moving away from what we call physical services to more digital services and they are competing on that landscape. So on one side we hear that kind of vocabulary, on the other side we hear a vocabulary that Indian IT is facing a significant slowdown. So the first question which comes to my mind is are we wrong footed in the solutions and services we are offering? Predominantly because every time there was a crisis in the market, Indian IT gained market share. Now there is a crisis in the market and people are taking money off the legacy and investing in digital and we are facing the pain. Does that mean that we are wrong footed? Does that mean we let the margins, we release the margins rather than invest the margins during Covid times? Are we as ready as digital like other companies are?
The second thing is that Indian IT fundamentally is based on its people, its processes, and its products. The people are part of it — I have seen a lot of announcements which are like the new startup announcements. Unfortunately, we have a lot of these celebrated startups which are sacking people like bananas. Indian IT seems to be forgetting that for such large companies, reputations are very important. Their ability to attract talent is very important. I was in IIT Bombay, I was a convocation speaker there, and I was asking how many of you guys are joining Indian IT? And the answer was very different to the answer it used to be. And why you are not attracting the best is predominantly because of these knee jerk reaction policies of getting red and utilisation dominating, quarter and quarter margins being important. But I think we are in a cycle where investment in new products, new platforms, new services, new digital, new capabilities, is very critical. Therefore we should have the ability to attract the best. So on those two counts, I believe that I am a little concerned about where Indian IT is going.
Having said that, Indian IT has always emerged from these scenarios. So all the listeners, especially people who wish to join Indian IT, I am an insider and therefore concerned. But if you are an outsider, don't be concerned because Indian IT always finds a way around.
In an article that you wrote, you talked about how the top ten US banks increased their investment in technology by 12-16%. So if we can build on that a little bit and then connect it to the point that you made about people not being there. So either we have hired too much, but we have not hired the right people, and those we want to hire, we are just not finding.
You have to go back a little and think when the industrialisation happened, what really happened is that processes and back office automation became very important. So we automated everything so that banks and all our customers are more efficient and more effective, more responsive. Banking automation software came and Indian IT came up with the fact that they became extremely good in what we call the back office development. Now with digitalisation coming in, the back office has become less relevant. The front office has become very relevant — the customer experience. So if you go into Axis Bank or ICICI Bank, you get a different kind of experience. And people are choosing banks based on the mobile app experience they have with the bank, rather than the balance sheet of the bank. So therefore, the banks are digitalising themselves to move away from what we call standardisation, commoditisation to personalisation.
Now, that whole move of standardisation to personalisation is what we call the digital move. All that development is not happening offshore. All that development starts with what we call a fast development on a digital innovation lab, which is largely on customer premise or in a near shore centre. So therefore, if you want to get into that market, you need a couple of things. Number one, you need feet on the street where the customer is right. Number two, you need consulting capabilities where the customer is so that you can navigate the customers to both left and right. And number three, you need talent who has been able to only in the last five years, understand these technologies, absorb this technology, apply this technology, so that he or she can consult to the customers.
And that needs a fast track growth of capability which did not exist five years ago. Now, all that you have to do near shore and then only the product, the services will start moving offshore. And to be able to do that, because if you do not have enough people, you need a product, you need a platform and you should have invested in a product and platform to be able to do it without people or with lower skilled people.
Now, when you look at the way Indian IT has been hiring, obviously they have been hiring onshore at a good rate, but we need to hire exactly like we hire from IITs. We need to hire from the best institutes of the world to be able to build those products and platforms.
And I am very happy to see CEOs move onshore. I think the chief delivery officers and chief technology officers should also move offshore because that is where the market is right now and the tail will come to India automatically. So this whole emphasis on hiring from campus and large numbers and things like that is reflecting the massive cash business, which is the legacy business.
And it is a very attractive business and very difficult for us to move away from it. And it will go through ups and down. And therefore you will hire and you will not hire. I hope you do not fire, but you will delay hiring and I hope you do not change the salary which you offer to the freshers. These are all not ethical practices, but that is not where the real story is. The real story is what you are asking: who are we hiring, where are we hiring, how are we accelerating their capability building and are they relevant for tomorrow? That answer I do not have. And that answer if I correlated with revenues, I would say that is still a work in progress.
So what is wrong with having legacy skills, at least at this point?
You have to remember there used to be a company called EDS, and HP, and IBM and Dell and they were the big dads of the services economy. And in came Indian IT with a new offering called offshoring, CMM level five, automation and therefore the entire legacy business moved lock stock and barrel and the customer said that because cost is important, you are no more relevant.
These Indian IT companies like TCS and all those are a lot more relevant and so the business moved. So the question is legacy is a very attractive business and the reason those companies did not move is because the total IT outsourcing at that time was a very attractive business with 20-30% net margin and therefore they said why should we attempt to go to India, why should we attempt to do offshoring, we are already making 20-30%. This included IBM. Now, when an Indian IT company came in and they started taking all these outsourcing contracts away, including HCL. When we started taking all these contracts away, they woke up, but they woke up too late. What happened? Indian IT became more relevant for the customer and they became less relevant for the customer.
The question is, legacy is a very attractive business. We are making the same statement. It is a 20% net margin. It is growing at 10%, 12%, 13%. We can deploy tons and tons of people, nothing wrong with it. But see where the market is going, see what happened to EDS should not happen to you. See the fact that you are continuing to be relevant and continue to talk to the CEO, continue to be in the boardroom. Yes, digital will continue to be only 5-10% of the customers revenue, but you will be relevant for the customers. That is what relationships are all about. You do not want to be a back office vendor.
When somebody else becomes a front office vendor, you lose relevance and they build an offshore capability and then exactly what we did to Global IT companies, they do to us. So that is the reason digital is very important not from a margin or revenue perspective. It is very important from a relevance point of view. And customer relationship, privileged access—all what Indian IT is damn good at, will come from you being relevant to their pain areas.
Now, digitalisation is a good target to have, it is an aspiration. But I am assuming that it is not that easy to achieve. Wipro said recently that they were launching a massive programme to equip everyone with AI. There have been similar programmes run by people like Accenture and I am sure all IT companies to equip them with the world of digital. So are you saying that all of that is not happening or there's not enough of it happening?
I will be very unpopular for saying this. There is a verbose and there is a reality. A lot of revenues got rechristened as digital revenues, right? And because of which we potentially see everybody being extremely good in digital. But when you see what are the actions people have taken, how many of these companies have created specific digital divisions?
So how did Indian IT grow? Every time we grew, Indian IT was based on creating completely new divisions and new service lines. So how many companies have a completely different division for digital? Number two, what are the kind of intellectual property applications which Indian IT has put in compared to let us compare Accenture versus some of the others and saying what are the kind of applications which have been put in? What kind of products have we announced? What kind of product platforms have we announced? Because tomorrow everything is going to be around platforms and not about people in capability. This is what AI and ML is. So I think we have to think differently. Yes, the legacy business has to be thought exactly the way we thought before. But the digital business has to be thought of differently. The legacy business will also see a digital.
Some of my colleagues in the industry are absolutely right that they are going to use AI, ML to be more productive. The service costs will go down. If we needed ten people, we will need two people. All that stuff is going to happen, definitely going to happen. But my argument is legacy is not going to be relevant. The relevance is shifting. Most of these banks are struggling to be relevant to their customers. And so there is where you need to move and to be able to move the matrix for you is completely different.
And once again I say, I am dead sure that Indian IT will get it right.
To come back to people, since that will be the core of all of this. You wrote perhaps at a time when you were not feeling very charitable. You said: IT companies now hire school pass out children and train them on the skills in just three months, giving them the advantage of lower cost and lower attrition. What they now seek from universities and colleges are advanced digital skills which are difficult to teach in six months. So, obviously it is difficult to teach in six months but these are people you have in your organisation. So, how…I am sure many transitions are happening but the larger problem seems to be unaddressed.
I wrote that article from waking up the education system. At one particular time engineering used to be a large supply pool for the Indian IT and Indian IT is going down the tube and their legacy recruitment is school passout. And therefore if you're not careful your engineering colleges will close down, which is exactly what is happening. So the article I wrote was for the Indian education system, for the engineering colleges to wake up and be more relevant. But from an Indian IT point of view, I would challenge you to ask how many people, how many of the top five IITS , what percentage of the students go into Indian IT. So the talent is there, we have to have the guts to play competitive and get them. So either it is the price we pay or the job opportunity we offer or the platform to create products that we offer, the talent is in India. Why do we allow the talent to go somewhere else.
I would say that Indian IT with the market caps they have and the margins they have are capable of attracting investors who are long term oriented. They must understand investors have an opportunity of going in and out in a quarter. Indian IT does not have that opportunity of going in and out. So the boards of Indian IT and the CEOs of Indian IT have to think long term and we have lost a few battles and we have won many battles. Indian IT owes a lot to India. If this mission of being the third largest or second largest economy is to come true, we need products, we need platforms, we need intellectual property. We cannot be the service headquarters of the world. We have to be different. Who's going to take that lead? Government cannot take that lead. Indian IT CEOs, Indian IT entrepreneurs have to take that lead. We have to think long term.
There are a lot of younger entrepreneurs, right? They were very young when they started. They started with no cash. Today there is a lot of cash going in, running around. So it is not just the large company, it is also the smaller company. Where is your ambition? Where are your guts? Indian IT got created from scratch. Now what are we going to create more? This country needs them. We have that capability. Do not fall for that sugar baby called legacy software with 20% margin and massive cash flow… that is going to take this country down.
We need to have guts to go against the grain of the quarter by quarter stock market for some time. What are we talking about? If your profit is 4,5 billion, $6 billion a year, how much is 100 million dollar dip in that profit? Not much. And especially if you can tell a story. HCL told its transformation story. The stock market supported it. You supported it because you bought into that argument. So I think there is an opportunity here. There is a massive opportunity for our country. There is a massive opportunity for Indian IT. We should stop this infatuation with legacy and believe that that marriage is going to go away.
We have to create something more. It will take five, seven years to create it. We have to put our best and brightest there. We have to hire the best and brightest. The talent war is the biggest war. We should not allow our talent to go anywhere else. Whatever we need to do to support, to bring them in, we should do it. To retain them, we should do it. And we should have open policies. Motivation of the employee is critical if he wants to moonlight outside office hours. And it is not competing with you and it is not breaking any rule. Why are you preventing it? We are not in manufacturing, we are not in an Industrial Age. We are in a digital age. Everybody is free, nobody is bound. Our people policy has to be so emancipated that it's become a competitive edge.
But wouldn't you want the talented people now that you have made a case for going or gunning for the best in class talent in this country, engineering talent and so on? But wouldn't you want them to be focused as well, as opposed to doing multiple things and grappling with one project in the morning and one project at night? Not that there are too many of them, but just as a more hypothetical question
Very clearly, creating platforms, not products, creating platforms which are industry specific, which are using machine learning in a way the world has not seen before. So they are embedded as a separate division or separate team, which taps into the information we have on every vertical and we have a lot. Starts working on creating platforms which will bypass all this custom build of digital solutions and will take us exactly how India went—bypassed the mainframe age and went into Unix multiprocessor Unix and we completely bypassed the mainframe age and became world beater on capability of developing operating system is the way we need to do that.
So they need to move and create something which is going to be very relevant five years from now. So they need to be in that.
Indian IT has faced many challenges and that too is very well documented and people talk about it. In the scale of complexity of challenge, where would you rank the current one versus what you've seen in your career?
It is a nuanced argument in terms of the challenge is 5 out of 10 when we have faced 8 out of 10 kind of challenges. Our preparedness and response to the challenge is 50% of what our preparedness response to previous challenges. So although the challenges in recession and in other times were far bigger, our preparedness and our response to them was much better. The challenge now is not that great, but our response is a little lethargic.
What should I look out for or what should I expect that CEO to do which would give me confidence that that company is marching into this new digital age in a significant way?
Here is what I would want you to think about. The new competition is coming from the Googles and Amazons and Microsofts of the world, when everything is moving digital and into their house. They are creating new smaller vendors in local communities which are offering those digital services to their customers. And therefore do not be focused on China, Vietnam, Philippines or Eastern Europe, but watch out for what these biggies are doing. These biggies are not only bringing in all the applications, all the infrastructure into their houses and therefore they have what we call privileged access and exclusivity with their customers. But they are doing it not with the biggies, but with creating a lot of smaller ecosystems who they can have a sharper control on. If you remember, what Microsoft did with operating system is what potentially can happen with the services sector if you are not very careful. So I don't have any advice for them. But I would say that you need to redefine competition.
The competition is going to be like when Indian IT emerged, nobody believed Indian IT could compete with IBM and HP, but it did and it took the market share away. Your competition is not going to come from a country, it is going to come from these biggies and it is going to come in a way which you have not imagined. And it is going to come from many small ecosystems which will become very difficult to compete because they will be sharper, they will be focused, they will be local, their cost structures will be lower and that will become very difficult to compete. So my emphasis would be to redefine your competition and see what your competition is going to be and then your responses should be based on that.
You started the Sampark Foundation which addresses education gaps and it has been a while and you have rolled it out to 76,000 schools now. Tell us about where you are in that process and what's next.
In 2013, my wife and I decided that we wanted to quit everything we were doing. And I quit HCL and said that, let us take an opportunity to try and see if we can demonstrate large scale social change in education and bring design thinking and innovation to it. A lot of my partners from Harvard Business School and some people from West Coast collaborated to create design thinking and create products which will ignite the classroom transaction and make the job of the teacher easier. So we created maths kits using an audio box. We created English kits, of creating an immersive experience of stories and Bollywood and songs and things like that. And now we have created what we call a smart program, where we are converting a dumb school into what we call a smart school. All this for less than $1 per child per annum. So today we are touching the lives of one crore children in 1 lakh 9 thousand schools across eight states. And it is a very fulfilling opportunity for me because I am getting a lot more. My wife and I are funding this completely. We do not take any funds from the government.
The message I have for professionals who are looking at this and thinking about this – there is a life outside IT, and that life is called India. India needs intellect. It doesn't need your money. There is enough money flowing around. It needs intellect. It needs design thinking. It needs solutions. So all you guys who have been so successful in IT, especially in IT, think about hanging your boots and doing something for the country. Go to Jharkhand, go to Chhattisgarh, go to these tribal areas which these days I travel. It's a very poor country. It needs your help. And it's not going to be only the government who's responsible. We are all responsible. And you can make a change. So go back to your village, go back to your town, apply innovation, apply design thinking, apply process, apply technology, and make a change. And I think it will make you very happy compared to that million dollar bonus which you normally get.