The Inflexion Point for the IT Service Industry (Long)

This is a long post. Its meant as weekend reading, and I would love to hear your
thoughts: deepakshenoy at capitalmind.in or comment on this page. Ive written too
much, but Im sure Ive not written enough.
Indian traditional IT sector jobs are going through a massive inflexion point. Ive said this
many times, even on a TV interview with ET Now that IT service companies are in a soup:
they are darlings of inefficiencies rather than efficiencies.
Whoa. Explain.
The IT business has traditionally consisted of billing for headcount. That means you put X
people on the project and you get revenues that are a multiple of X. That multiple can be
$25 per hour, $100 per hour or even as low as $7 per hour, depending on the kind of
work needed. Typically, the idea is to get work done by freshers or people with low
levels of experience, with oversight by someone whos experienced (a project lead).
Most work is process oriented you have a checklist to set up and maintain servers, or
manage infrastructure requests. Or you take IT infrastructure of a large company which
has thousands of computers, servers, backup jobs etc. and do it remotely for way
cheaper. (read this TCS Case Study) Or, and maybe what might survive, build software
solutions for customers. And then, implement solutions like SAP or Siebel or Oracle or
such solutions for customers.
For a long time, US and European companies were happy to send this work to India,
because people locally were too expensive to do this kind of work. India was cheaper,
even if it put more people on the job than absolutely required. There was no need for
efficiency for the likes of TCS and Infy. Even at $20 an hour and Rs. 36 to a dollar (in
1996) the income potential was Rs. 115,200 a month for a 160 hour employee on a
project. This is when I started off in IT services, getting paid the grand sum of Rs. 6,500
per month. Even at Rs. 10,000 per month, the company was ludicrously profitable for
every person on a project it could have five on the bench and still make 50% gross
margins. (Also, remember, there was no income tax for software exports then).
This skewed the dynamics. The higher margins allowed IT Service exporters to offer
higher relative wages (to other sectors), way lower costs to customers (whose equivalent
costs were $50 per hour plus insurance plus holidays plus what not) but still maintain
great profitability. Guess what? Everyone and his uncle joined the IT service business. In

my batch in KREC/NIT Surathkal, in 1996, more than 200 out of a batch of 360 joined the
likes of IBM Services, TCS, Infy and the like. It didnt matter what branch you studied in.
(And I made some pocket money by teaching my fellow students COBOL for a test they
had to pass to land the job)

Over time, the rupee weakened to 45 in the wake of the dotcom bust, and these
companies continued their hiring; they might have lost some business, but as the global
economy recovered, what it was for the other countries was a jobless recovery in many
ways; the jobs then lost were outsourced to India because it was just cheaper. This was
the 2003 to 2008 period when the IT Business absolutely thrived.
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Within the IT companies, the path to glory was common:

Go through training program which was essentially what-else-to-do-when-onbench

Be assigned to a project. Youre sold to a client saying you know X and Y, when
you probably dont

Piggyback on project lead to learn stuff thats important for the project

Code, document, test, learn to write proper emails

Get promoted to project lead, when youll be helping others do the above steps

In three years, make project manager. Now you dont code. Yuck.

Your tools of choice are word, excel, powerpoint and outlook.

Scale up the management tree of the organization, with your power being how
many people report to you

This was a given. You work in a company for three years and still code? You must have no
skills whatsoever. The idea was that people would mature this way, and many did, and
scaled up all the way to even CEOs. As the business grew, the workers the freshers
hired at low salaries were extremely cheap, and hired in the thousands. The guys
moving up the ladder made for the middle tier, and so on. Natural attrition into other IT
companies kept the middle layer lean (you could double your salary moving to a different
job), and the bottom layer saw enough attrition and massive hiring to keep growing. A
pyramid.
The Paradigm Just Shifted
While this was happening, the carpet was getting yanked out from under the IT
companies legs, in slow motion. Infra management was changing rapidly, and moving to
the cloud. Companies with 3,000 servers could move them to an Amazon or Rackspace
or private cloud, which was remotely managed by a handful of very talented engineers
and massive layers of automation. Siebel and SAP offered customers cloud based
solutions where the whole thing was already setup all you needed to do was configure
your companys details in, which was complex, but needed 5 people rather than the 50
person teams that would have been needed.
A project manager, a client manager and what not who were usually assigned to
customers were no longer efficient; they would now need to manage more projects made
of smaller teams.
Alongside, the massive hiring and natural scaling up of the hires in the 2003-2008 period
meant in 2014 that you had a large number of people in the middle management as
project managers and senior consultants and so on.

The natural pyramid had gone out of shape. There were just too many in middle
management.
Salaries, with high inflation, had also gone up substantially. The mid-managers were
drawing upwards of Rs. 15 lakh per year, and many were quite happy to see the regular
increases year after year.
And then came the assault of the product companies and funded startups. Companies
like Google, Facebook and Amazon were hiring for their stuff and they werent doing
projects for others they were using the teams to build their own products. The likes of
Flipkart and Ola and Zomato also were hiring the best people from colleges and so on.
The middle managers couldnt work here; they had no serious programming skills left,
and product management was a different beast altogether. No employee handbooks, no
ISO 9000 and no real comfort zone of saying you wanted to be allocated to a different
project. So the IT folks, by and large, didnt join the startup revolution, and distanced
themselves from the newer technologies that involved doing great things with smaller
teams. And that has been a fatal mistake.
Other IT companies emerged that made themselves niche. A Mu Sigma, for instance,
could charge a huge premium, at hundreds of dollars per hour, because they have
massive analytics investments that helps their teams deliver solutions to customers
faster. Druva, a software company started in Pune, offers automated transparent backup
products for computers, mobile devices and servers, on the cloud, at the fraction of the
cost it would take to hire a large IT service company.
Worse, the rupee at 63 would also be no help. The Rupee has actually appreciated
against the Euro, the Yen and the British Pound. The Ruble just devalued from 30 to 60 in
a year, and they have great programmers. Against other Asian and Latin American
currencies, the Rupee has appreciated substantially.
The EndGame Begins: The Stalled Salary Hikes and IT Firing
As the inefficiencies became apparent, companies tried different ways to do things. Infy,
for instance, stopped all salary raises with many quarters of tepid growth. This gave
them natural attrition as the mid managers found jobs in other IT companies. Some
smartly shifted to the more efficient startups.
Companies in western markets have started to shift away to other countries who now
have a cost advantage. Faster and smaller projects are in vogue, with the cloud being a

huge factor in adoption of customizable products like Salesforce, and has even prompted
the SAPs and and Siebels to move to the cloud.
The IT companies had very few product investments. They became nobodies in the space
that grew the fastest search, online advertising, social media and anything to do with
cloud/open-source technologies. This would have cannibalized their existing customer
base imagine going to a customer and saying that instead of having a large team of 20,
lets just use this software thatll do the same work with 5. Eventually the customers saw
the cost advantages and reduced sizes anyway.
The fat middle layer, and customer moves to more efficient software solutions meant
things had to change and fast. While Infy lost much of its middle layer naturally, the
other IT giants were still saddled with them. Then Wipro announced that they wanted a
lean middle, moving from a pyramid to an hour-glass kind of structure, and would cut
workforce by about 33%. Recently TCS is in the limelight for actually firing
underperformers (the horror!) which will cut their workforce by over 25,000 people, if
numbers are to be believed.
This is just the natural endgame and TCS is likely to be leading the pack.
Where Do People Go?
Roubini talks about this: Where Will All The Workers Go? This was a question they asked
in the US when manufacturing jobs left for China, and then service jobs left for India
(BPO, IT Services and so on). This is insane. Technology will displace people from jobs,
and has done so forever. We IT people took away the jobs of some manual process
worker somewhere. Cars took away the jobs of horse drawn buggies. Mobiles destroyed
the whole Public Call Office (PCO) ecosystem. Online e-commerce will hurt retail. Uber
and Ola will hurt the autorickshaw.
The outrage of the IT worker is largely misplaced. The technology we build is designed to
cannibalize everything. Tomorrow people will get programs that write themselves without
the need for complex programming too.
But the question should be human. Where do these people go? 15 to 20 years of
experience and they will get that pink slip.

There is a point to saying people need to be let go better giving them a month (or six!)
of severance rather than having them resign, helping them find other jobs, and in
general, accept that youre not just hurting one person but their families and kids and so
on. And its incredulous to fire people without providing them money, when youre hugely
profitable, so its all the more reason to give people a few more months of money as
severance.
What Really Needs To Change
But theres more to this than a few months of severance. Middle managers and I know I
am in that exact age bracket need to reinvent themselves. This could be one or more
of:

learn a new skill either back to code and processes in newer technologies, or in
a completely different domain. This could take months or years, but its necessary.

invest and create alternate sources of income

keep debt manageable so a job loss will leave you with at least a years expenses
in the bank

stay humble: the people who reported to you could be your next boss.

To stick with this might be a better approach than going out on the streets and
demanding that TCS hire them back while not hiring freshers instead. Because that is
simply not going to happen; if you force it, the IT industry will shut down even faster.
Unions and government intervention are the wrong answers.

The broader impact is on real estate and discretionary spends (like cars) and local
economies (like Bangalore). But that will need a different post altogether.
I just wanted to highlight the inflexion point in the industry and how it came to be. It was
not something you can just blame on higher management. They didnt see this coming,
because to have acted proactively meant loss of revenue and that would have gotten you
fired then, not now.
At one level this is a bubble that is now going bust; the great Indian IT service bubble. It
was fuelled by the relatively low tax rates by the government such companies didnt
have to pay taxes till nearly 2010. This maintained that all the juiciest jobs were in IT
services. Not in products you couldnt get the tax benefits if you built software for India.
That created extremely skewed dynamics for everyone that graduated from an
engineering college between 1996 and 2008. We could blame the government, but that
wouldnt do us any good either.
Its time to reinvent ourselves.