The outlook for the Indian information technology (IT) sector is 'cautiously positive' in 2018 with global and U.S. economies improving, according to Indian IT body, NASSCOM.
However, India’s $154-billion information technology sector so far has been battered by a broader slowdown in technology spending, while uncertainty looms over work visa rules in the U.S., the biggest market for Indian software services firms,and growing protectionism across multiple countries across the globe.
For the longest time, the U.S. was the largest as well as the most dominant market for the $154-billion software services industry. However, the increasing changes in the visa norms, especially H-1B, have been making it more difficult for companies to employ skilled foreign nationals to fill critical skills gaps in the U.S. In fact, according to National Foundation for American Policy, the top seven Indian IT companies experienced a whopping 43 percent drop in their H-1B visa approvals between 2015 and 2017.
The stress is visible in the case of revenue contribution of the U.S. to the company’s revenues too. For instance, U.S. opportunities contributed to 56% of TCS’ revenues at the end of September 2016, which has fallen to 54.1% at the end of September 2017. In the case of Infosys, the number is down from 61.5% to 60.6% during the same period, while for Wipro, it has fallen from 54.8% to 53.6%.
What is interesting is that, according to the report by National Foundation for American Policy, the share of H-1B visas to Indian companies in FY 2017 equalled a miniscule 0.006 percent of the 160 million-strong U.S. labour force. One may question the impact and need of such protectionist measures and the timing,especially with a parallel reality also staring at the industry: the growing importance of cloud computing and artificial intelligence, which require fewer workers to be onsite, according to the same study. Indian IT companies have been working on two-pronged strategy to tackle this situation for some time.
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Large Indian players Infosys, Wipro and TCS have been aggressively ramping up their presence in the country and stepping up local hiring, either setting up local innovation centres or tying up with local universities to work in newer technology areas. Infosys plans to hire 10,000 people in the U.S. in next two years and has plans to setup four innovation centres across the country. Wipro already has 55% of the U.S.workforce that is local. TCS recently partnered with Cornell Tech to set up Tata Innovation Centre on its campus last year, following a $50 million investment from TCS.
The flip side to this strategy is that Indian IT companies, at the same time, do expect an increase in their billing rates for their clients, as salaries for H-1B visa holders are rising. The cost arbitrage edge is weakening and, ultimately, companies will have to be pass the increased costs on to the clients or they will need to be prepared to take a direct hit to their margins.
While the U.S. still contributes to two-thirds of the sector’s revenues, over the past few quarters it has been countries in Europe – especially in Continental Europe – that are bringing the maximum growth.
Under a lot of pressure, U.S. growth rates have reduced to single-digits for top IT companies. Meanwhile, Europe is growing at a much faster pace.
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In the last year alone, at least 20 development centres have sprung up in countries like Poland, Romania, Bulgaria, Hungary, Austria and Ireland. For example, Infosys added its newest facility in Karlovac in Croatia and Wipro setup a specialized automotive centre of excellence (CoE) in Timisoara, Romania last April. In addition, HCL has 4,500 employees in Europe today. For the past several quarters, IT firms’ European business has been growing substantially faster than the U.S. business overall.
What this translates into a growing need to find the right talent, which is mobile, adaptive and highly skilled, in many more countries. It requires the mobility team to be agile and be ready with a talent ‘pipeline’ which is ready to dream beyond the ‘American Dream’, which is available to be deployed in multiple more countries.
Talent is going to define the rules of the battle and the competitive advantage. One such cornerstone of this strategy deployment will be managing costs. The Indian IT success story is based on labour cost arbitrage. It will be imperative for the mobility teams to monitor cost projections as well as track actual costs on a regular basis and closely work with not just the business teams, but also the reward steams as well and in multiple countries. The need of the hour will be to continue to closely monitor the ratio of local vs. on-site assignee and on-site team pyramids,with a larger base of local freshers, to drive home cost optimisation and productivity.
At the end of the day, no IT company would like to risk taking a hit to their margins.
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