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The Indian IT services industry, which is now at $100 billion in export value, has evolved over the last 15 years from labor outsourcing to technological process outsourcing. Now, after the outsourcing boom, the IT industry faces tougher times ahead.
Growth rates across Indian companies have been muted. Industry body NASSCOM even decreased its full-year revenue guidance for the Indian IT and IT-enabled services (ITeS) industry for 2016 to 8 to 10 percent from the 10-12 percent it projected at the start of the fiscal year. A Gartner analyst has predicted that "a sub 10 percent growth for 2017 is certain."
Some analysts say it's the industry's death knell. They are wrong.
There's no question that times are changing. For a long time, the Indian IT services industry relied on volume, providing low-cost labor, massive hiring and large development centers. This model worked for two decades.
U.S. research firm HfS Research predicted that the Indian IT sector could lose 640,000 "low-skilled" jobs (requiring repetitive tasks, such as data entry, incident management, data compilation) by 2021. Business process outsourcing and infrastructure management, which employs 3.7 million people in India, will face the bulk of this impact.
Part of this is global uncertainty, but a good part of this is because of shifting demand. Every industry is being touched by (social, mobile, analytics and cloud-based innovations), automation and artificial intelligence, and customers are already expecting the integration of these technologies.
But the jobs are not disappearing. Low-skilled labor should give way to a leaner force of skilled workers who can solve problems creatively, and apply analytics and critical thinking. Demand will rise for people who can work on automation, artificial intelligence, machine languages and data sciences.
Current trends indicate this. The IT services industry is estimated to have required 16,055 engineers to generate every additional $1 billion of export revenue in 2015-16, compared with 31,846 engineers in 2009-10, according to NASSCOM. This is a near doubling of the efficiency of labor. Services companies are likely to see lower hiring, pointing to increasing automation and productivity.
I've seen a demand for vendors who can bring the benefits of digital and computing technologies to their businesses, instead of pushing people-heavy and asset-light business models.
This shift of focus away from human capital could prove devastating to Indian IT services companies if they do not respond to these changes. But it is also an opportunity if they embrace the challenge.
IT and outsourcing companies are already investing in machine-learning automation platforms, cognitive computing, virtual customer assistants, visual computing applications, robotics and drones.
However, we need broad change. There are no easy choices for the IT services industry. They must instead prepare the labor force for the widespread integration of automation.
And why shouldn't companies take this up? Implementing robot process automation, we've seen, results in 40-65 percent onshore cost reduction, as well as a 40-80 percent reduction in labor hours, as well as reduction in errors.
The challenge is this: any move towards automation and other new technology will likely gut your existing business. If the technology you embrace reduces the need for human capital, this means a significant fall in revenues in the short term.
This calls for tough decisions, such as layoffs, particularly in middle management, and dealing with the impact on jobs overall.
But we need this change now if Indian IT services wants to stay competitive globally. Smart alterations in legacy systems, deploying business units specialized in new technologies like RPA or AI, as well as appointing business leaders to identify goals, timelines, skill sets and opportunities to maximize return on investment. They also must adopt strategies and measurement of what they are offering customers - this means that they must also integrate AI, automation and predictive analytics in their own business models.
A company focused on automation is a leaner, flexible and more knowledgeable organization. It is also specialized and sharply focused on building brands and teams - something that Indian IT services companies may not have put as much of a priority focus on at its start. Now they must differentiate themselves from the competition, not just compete on cost reduction.
The manufacturing industry might be a good indicator on how successful transformation can play out. Automation in manufacturing was once seen as a job destroyer, but the integration of improved efficiency and productivity with machine-to-machine communication, cyber-physical systems and self-organizing production systems made it a reality. Businesses that thrive today are those that embraced these technologies.
Take manufacturing in the United States. The number of jobs in the country's manufacturing sector has declined from 17.3 million in 2000 to 12.3 million in 2015, driven by advancement in computers and robotics in production and accounts processes.
Yet, the size of the manufacturing industry in the United States remains robust. The gross output of U.S. manufacturing industries was $6.2 trillion in 2015. THIS is about 36 percent of U.S. gross domestic product, about double that of the other big sectors.
Economies in which businesses are lethargic in keeping pace with cost-competitive practices and technology adoption can face a downslide.
If the IT and ITeS industries can adopt these practices, they will see that the next era of their growth will depend on software with a deep focus on "verticals" such as BFSI, retail, manufacturing and healthcare.
Specialization allows companies to adjust more easily to industry changes, shorten the time to market for technology like artificial intelligence and automation, and offer industry-specific expertise integrated with technology - for example, Mphasis has a focus on the financial industry, with leaders who have worked extensively with fintech. This touches back on my earlier point on branding: the vendor will win customers more easily as it can offer customized products as well as a specialized brand presence in the market.
Every century has witnessed one major disruption that has set the growth trend for the next few decades. In this millennium, all industries are riding the wave of automation and robotics; enterprises that respond to this shift will be the ones whose names you know tomorrow.
Ganesh Ayyar was chief executive and executive director of Mphasis. Raised in Madhya Pradesh, he graduated from Guru Nanak College in Chennai. He worked for nearly two decades at Hewlett-Packard in various executive roles. He lives in Singapore with his family.
The views expressed in this article are not those of Reuters News.