Agile delivery models to accelerated digitisation, automation is redefining the IT industry.

In the middle of the pandemic in April, Tata Consultancy Services (TCS), India's largest IT services company, announced a deal with US-based Amway to transform the latter's information technology infrastructure and operations and its global service desk. Just a few weeks ago, Wipro had bagged a strategic, multi-year deal from European firm E.ON for infrastructure modernisation and digital transformation services.

The Indian IT industry passed the stress test when the world was grappling with the pandemic. For companies, this meant not only equipping the huge workforce to continue servicing clients from home, but also realigning businesses. As cost takes centrestage both on the demand as well as on the supply side, organisations are embracing changes like never before. From agile, flexible operating and delivery models to reimagining the workforce mix and accelerated digitisation, automation is redefining ways of doing business in the medium-to-long term.

Reduced Onsite, Increased Offshore Within just a few days of the virus outbreak, IT firms moved computers and laptops to homes of their employees, provided them data cards and wi-fi routers, and in some cases even invertors, to ensure business continuity and minimum disruption for clients. Around 90 per cent of IT employees are still working from home (WFH).

Pre-Covid, no company had tested the possibility of remote working at such a large scale. Even clients were not too convinced about security, productivity and the possibility of a distributed workforce. The pandemic changed all that. With clients endorsing the resilience, IT firms are now proactively pitching for resource-mix models - from having a certain percentage of employees work from home for a particular project to increasing offshore work to help clients reduce costs and raising the proportion of gig/ temporary staff.

Two years ago, TCS had started the experiment, 'Open Agile Workspaces', where clients on specific innovation projects could collaborate with location-agnostic teams. As lockdown intensified across the country, the company quickly scaled up learning from 'Open Agile' to implement the 'Secure Borderless Workspaces' (SBWS) model - work done without the confines of geographical locations. In a recent letter to shareholders, CEO Rajesh Gopinathan said the outcomes of the new ways of learning have been impressive, and the company aims to continue SBWS as an integral part of its functioning going ahead. "There are even pockets where we have witnessed improved velocity, throughput and productivity," Gopinathan had said. TCS is looking to have only 25 per cent of its staff in office by 2025.

Apart from normalising remote working, companies are also looking at tweaking the onshore-offsite model to optimise costs and improve profitability. For Indian IT firms, onsite, or employees working overseas, is normally 22-29 per cent of their workforce. However, in the past two-three years, Tier-1 companies have increased localisation efforts, especially in the US, the biggest market of IT firms, as a goodwill gesture, though the cost of hiring locally is higher. But with added concerns over immigration issues in America and visa restrictions in other geographies, most companies are now stressing on offshore resources due to the cost advantage.

The signs of this changing composition of workforce are visible in the adoption rate of cloud computing in the form of how service concepts such as As-a, are evolving, says Feroz Khan, Partner and Leader, Digital and Emerging Technologies, KPMG India. "On a medium-to-long-term range, we can expect onshore to offshore ratio moving towards a 20:80 figure, which means that going forward, most of the resourcing in IT will happen offshore," he adds.

As part of the new cycle, companies are also looking at increasing the digital workforce (use of bots, automation of repetitive task). This could free-up nearly 10-15 per cent of the human workforce when deployed at scale (handling large volumes), and the resources can then be used for other projects, resulting in an increase in the overall revenue-per-employee metric.

Then there is the increase in gig or temporary staff. "Our research shows that what used to be anywhere between a 2 to 10 per cent mix, could now increase to 20 to 25 per cent" says Nitin Bhatt, EY Global Advisory Risk Transformation Leader, and India Technology Sector Leader.

Changing Deal Structures

The distributed workforce has also paved the way for IT companies to explore innovative ways of offering products and services. With a fundamental shift towards reducing delivery costs, companies are not just integrating analytics, artificial intelligence (AI) and deep automation, but also crowdsourcing solutions for superior and faster outcomes. For instance, TCS's Machine First Delivery Model (MFDM) uses intelligent automation and AI to solve complex business problems and also enables cognitive decision-making, which enables systems to self-manage themselves and defend against risks. NG Subramaniam, Chief Operating Officer, TCS, said in several large deals signed in FY20, the company had undertaken core transformation work by using this method of delivery to bring changes to customers' IT operations.

Wipro calls its new way of IT services delivery, 'Proteus Stack'. Shifting away from the traditional delivery style, this new robust working model combines the best of work-from-office, remote working and crowdsourcing along with innovative methods that deconstruct work.

As companies find newer ways of delivering services to suit the changing needs of clients, traditional time and material (T&M) deals are slowly making way for a mix of fixed and variable and risk-sharing deal structures. For instance, in a deal related to data analytics, the client may want the vendor to create an entire technology platform, and then run a few use cases and measure the outcome of those cases. A variable fee is then structured based on the outcome. "For large deals, companies are preferring a mix of fixed fees and variable model," says KPMG India's Khan. For IT firms venturing into e-commerce, the specific task is not just technology implementation, but the outcome and success of the platform as well, measured in terms of revenue and EBITDA increase, he adds.

Also, with clients renegotiating terms and obligations in contracts, and companies seeing lots of discounting and payment deferrals, deals could see newer risk-sharing templates, according to experts. However, this kind of deal structuring would also largely depend on the vendor-client rapport. "If a company has had a long-standing partnership, there would be a more honest handshake on newer risk-sharing models that will become a win-win situation for both," says EY's Bhatt.

Digital Adoption Drivers

In its recent report on the IT sector, Edelweiss Securities has said that pre-Covid high growth rate in digital services (25-30 percent) could further increase due to two reasons. One, consumers are moving to online channels, and two, marketshare gains made by digital business models over traditional ones.

For Indian IT services companies, 'digital' has been a fairly new journey. It's only in the past two or three years that most of them have been calling out for revenue split between traditional and digital businesses. While legacy business is still a significant revenue earner, the growing push for digital adoption has resulted in over a third of the total revenues of Tier-1 IT companies coming from such offerings.

According to a Nasscom report, in 2019, the market witnessed a shift from traditional services to digital technologies, DevOps, and As-a cloud computing service models. "If you ask me what is happening in the last three months, we have been busier than we have been in the last three years" says Anand Birje, Senior Vice President and Head, Digital and Analytics, HCL.

With clients rethinking every component of their businesses - from customer engagement to operation - the budgeting cycle has turned more flexible, where clients are looking at a spending window of two-three months to scale up the digital side of the business. During a recent investor meet, Cognizant CEO Brian Humphries said though the company was on a course correction in its workforce pyramid, digital is being protected at all costs. "We have a separate bench policy for digital resources because we do not want to lose those even if there is a demand-supply imbalance at the moment," he had said.

According to Pradeep Nair, Vice President and Managing Director, VMware India, Cloud adoption in the IT services industry has always been high. While the main reason for enterprises to move their customers, web and employee applications to the Cloud is because it is easy to scale up and down according to one's requirement, the pandemic added a whole new dimension. During the lockdown, companies faced difficulties in accessing data centres, simply because people movement was restricted. "Until now it wasn't such a big burning issue," says Nair. But now, companies preponed the two-to-three-year timeline to enhance their Cloud adoption to ensure seamless business continuity, he adds.

So, the focus has shifted from doing digital for clients to actually being digital. IT services companies are adopting new models such as digital sales pitches through interactive technologies, application of internal functions, and training and learning. Infosys recently came up with iEngage for improving engagement between employees and unit leaderships. A manager or leader can use the app to schedule meetings/events, invite employees and follow up. Data generated is used to measure employee sentiment and identify key concern areas that can ultimately lead to changes in policy and process.

Consolidating Vendors

Even as service providers push to cross-sell and upsell digital offerings to existing clients along with new deals, there is also an emerging trend of enterprises looking to consolidate vendors. The reasons are multiple - from cost optics to better security and superior integration by removing multiple touchpoints. Through most part of last year and even now, HCL has been seeing some bit of consolidation among clients. "Enterprises working with small boutique firms to solve one part of the problem are realising that they can't provide end-to-end solutions," says Birje.

As clients look at end-to-end global vendors of scale to solve their tech problems, large players such as TCS, Cognizant, Infosys and HCL stand a good chance of cashing in on the opportunity at the cost of smaller firms.

@rukminirao