IT companies will have to prove their digital narrative in 2017

Winter has set in, and yet, the biting icy winds do not stop New Yorkers from getting to work. At Liberty Street, inside the Times Inc. office, there are a couple of financial service providers and media companies talking about digital transformation.

In that small gathering of powerful business folks are leaders like Joe Ripp, the executive chairman of Time Inc., and CEO of LPL Financial Mark Casady. They are looking for answers on ways to make their organisations go digital, and they turn to Ganesh Ayyar, the CEO of the $900 million Mphasis Ltd, for enlightenment. The first question he poses to the CEOs is, "How comfortable are you with using digital technologies before you make the organisation prepare itself for transforming its business digitally?"

It was at this point in the conversation that everyone paused and pondered on this question. Eventually, a consensus was reached - to enable digital transformation, the leadership team must acknowledge the change, and be digitally savvy before embarking on it. "Four years ago, I realised that I needed to change the way I interacted with new age digital communications before I lectured on implementing digital change to my clients and others," says Ganesh Ayyar. He says that this lesson was learned after observing his young daughter, who went digital for every bit of information and learning. "Now, getting an entire organisation to be ready for this kind of customer, who wants fast information and queries answered without any lag, is the key to revenues in the future," says Ayyar.

Mphasis is investing it's time and effort in working with clients on the future of IT, which is to build automated platforms that reduce dependency on people. In the next wave of IT investments, organisations are betting heavily on analytics aided by machine learning algorithms. The cloud is just a foundation for distributing and executing these services.

Ayyar echoes the voices of several IT company CEOs, who are looking at revenues from new businesses because traditional IT business such as application development and maintenance and testing are collapsing. Data available with YourStory shows how the profit margins for IT companies have dropped over the past decade. In the high twenties a decade ago, margins have now come down to 19 percent on an average (see chart).

"Automation is real. We are constantly looking at working with startups that have built great technology in analytics and machine learning," says Rishad Premji, Chief Strategy Officer at Wipro, who was talking at a panel discussion at the BengaluruITE.biz, an event held by the Karnataka Government recently. This transformation to find businesses that can increase value for clients and create value for shareholders is well underway in every IT company.

Learning to fly

This year will be a defining moment for the likes of Infosys and TCS, who are favourites of the stock market thanks to the rich rewards they have presented to investors over more than a decade. Infosys’ 2020 plan, which is to achieve $20 billion in revenues, by achieving $2 billion through platforms, $1.5 billion through acquired companies and $16.5 billion through its traditional business, is going to be tracked with a lot of expectation by the media and shareholders. Since 90 percent of the revenues come from developed markets, the company must convince CEOs and CTOs of large organisations in those markets to deploy transformation projects. The €8.5 billion Dutch bank ABN Amro has chosen Infosys, along with a set of other partners, to create an architecture for digital transformation that can improve operational efficiency and customer service.

The industries that are going to go through a big transformation are:

• BFSI (Banking, Financial Services and Insurance)
• Automotive
• Retail
• Pharma

"IT companies have to sign multi-year deals for digital transformation business. But these businesses are still a small portion of their revenues, and traditional IT is going to be the largest revenue earner," says Sanchit Vir Gogia, CEO of Greyhound Research.

The business for these companies comes from implementing the platforms created by the likes of IBM, SAP, Microsoft and several other global product companies. It will be interesting to see how home-grown platforms compete with these global MNCs. Large product companies relied on system integrators like Infosys and TCS to implement their product. It's a matter of time before these companies create their own platforms. Infosys’ goal of reaching $2 billion through its own platforms, therefore, takes on a good deal of importance, and its success or failure is something to watch out for.

According to Gartner Inc., driven by growth in software and IT services revenue, worldwide IT spending is forecast to reach $3.5 trillion in 2017, up 2.9 percent from 2016’s estimated spending of $3.4 trillion.

The report adds that the bright spot for the IT industry has been the software and IT services segments. Software spending is projected to grow six percent in 2016, and it will grow another 7.2 percent in 2017, to total $357 billion.

So, it is good news for the Indian IT industry after all. But what about automation doing away with jobs? Unfortunately, everyone should prepare for that future. "It is more of a realignment of jobs," says Shashank N D of Practo. He adds that software jobs will be commoditised, but jobs in analytics and higher technical skills, to build intelligent platforms, will be far more valuable.

The reality is that IT is changing, and it is not going to be the hottest place for employment in the years to come. The era of throwing people at a problem in an effort to solve it is going away. The days of handing out mass joining letters are over. The age of automation has begun, and IT services will transform themselves into platforms companies to drive more value for their clients.