Can Indian IT industry reinvent itself?

For decades it seemed Indian IT could only grow.

The Y2K bug turbocharged their initial expansion in the late 1990s, and though later waves of changing technologies brought down other companies (remember Nokia), the Indian IT sector surfed to success.With every new technology, they pivoted.

From SMAC (social, mobile, analytics and cloud) to SaaS (software as a service), they trained and retrained hundreds of thousands of employees to deliver what clients wanted.

When the risk of commoditisation grew, threatening their margins, they doubled down on engineering freshers and even moved science graduates to some roles such as basic testing.The last round of automation, which threatened to take a chunk out of their business, failed because the licences for robotic process automation were more expensive than freshers’ annual salary.

And the industry fought off claims that they were on their deathbed.So when Sam Altman unveiled ChatGPT to the world in November 2022, it was initially just another new technology they thought they would need to adopt.

But this time things were different.

Enterprise technology typically moves slowly but companies wanted GenAI and the benefits (read cost savings) it could bring about as soon as possible and IT companies have rushed to comply.Every single IT company has the same AI strategy cut jobs, partner with OpenAI, Anthropic, or Palantir, change how they bid for projects, run and charge for them.But three years on, a deeper problem remains.

Indian IT’s structure and culture was built around throwing people at a problem and managing the challenges that came with it.

The rise of AI is making that irrelevant.“Most IT services firms understand the strategy.

They know AI will change delivery, pricing, talent models and client expectations.

The harder part is changing the culture that made them successful in the first place,” says PhilFersht, CEO of the consultancy HFS Research.PYRAMID MODELWhen the Indian IT industry was just an upstart in the 1980s and ’90s, its founders and early employees came out of some of the best engineering colleges NR Narayana Murthy had an M Tech from IIT-Kanpur, Nandan Nilekani went to IIT-Bombay.

FC Kohli, who cofounded Tata Consultancy Services, earned his degree in electrical engineering from Queen’s University in Canada.Their success came not just from starting the sector, but scaling it.

Just as Henry Ford revolutionised the automobile industry with his moving assembly line, Indian IT’s breakthrough was in industrialising the IT business.

Growth and scale meant putting in place structures and processes to deliver a high level of technology services but, this time, with freshers from tier-2 colleges from small towns no fancy skills or degrees were required.132489276This was the birth of the pyramid model.

Thousands of freshers at the base and then older, more experienced employees at the top.

When they needed the skills that degrees from the best colleges could bring, they hired them as a separate group.

Infosys, for example, has power programmers; Tata Consultancy Services hires Prime fresher talent that gets paid about three times a regular fresher does.

This talent is not fed into the general pyramid but is brought in when a project needs it.This model has worked for decades.

Even when technologies changed, IT companies simply tweaked what they offered.

Their underlying model still worked.“We are the children of prosperity.

We have only seen growth and innovation that help us and create opportunities.

The culture we have has been created in good times and has not been tested in bad times,” says Abidali Neemuchwala, who was earlier CEO of Wipro and senior executive at TCS.NEW EQUATIONThe rise of AI is blowing up the industry’s long-held assumptions.“Indian IT was built on breaking work into repeatable tasks and training large teams to execute those at scale.

That worked brilliantly when the constraint was access to affordable skilled labour.

AI changes that equation,” says Fersht.He adds that the best talent was isolated in chief technology officers or innovation labs and now it has to become part of the overall operating model.

This will be a problem.“We have these employees in separate units because they do not want to work in the traditional services model.

In five years, we will need more employees like them throughout the business and making that change is something everyone is trying to figure out,” says an HR head at a top Indian IT company.To hire this talent and apply them throughout a company, IT companies will need to make significant changes.“The cultural challenge is that top-tier AI talent does not want to be managed like traditional services talent.

They do not want layers of approval, utilisation policing and pyramid-style career structures.

Firms will need to create more product-style teams, give these people greater autonomy and reward them for building reusable IP and outcomes rather than billable hours,” says Fersht.Neemuchwala calls this the industrial-vsartisan model.

“The model will have to be re-architected to the artisan mode… all the non-artisan work is going to disappear in 5-10 years and if you can’t hire artisans, you are not going to have a company,” he says.SCALE VS AGENTSIndian IT’s biggest success was scale.

When you are among the largest companies in the world, you get a shot at the biggest IT deals; being larger means you win larger deals and get even bigger.As a result, IT companies doubled down on the pyramid and the kind of projects that would help them deploy this talent.

They focused on large enterprise resource planning (ERP) platforms, managing their clients’ infrastructure, running their customer service operations all the things that AI is threatening to take over.132489299“In the last four-five decades, industrialised IT/tech services firms like Accenture or TCS sold custom development, maintenance and testing services on top (of ERP platforms) for customers.

However, AI and Gen AI allow enterprise clients to re think technology across processes with an agentic layer either on top of ERPs or to create custom solutions that are faster to build and easier to maintain,” says Gaurav Vasu, CEO of the consultancy UnearthInsight.“This now challenges the business model of IT/tech services driven by application delivery services, testing and partnerships,” he adds.

According to him, the next winners will be those who can build horizontal and vertical agentic AI solutions that solve business problems without requiring “the large army.”That large army is also increasingly facing pressure from far smaller, more nimble competitors, some of whom know Indian IT business inside out.

ET has reported how a slew of senior executives have left Indian IT firms to set up their own AI services startups backed by venture capital firms.A few weeks ago, former Infosys CEO Vishal Sikka who was one of the first to talk about how Indian IT’s culture had kept it from being innovative raised $32 million to launch an AI services company, Hang Ten Systems, that directly competes with Indian IT.

About 10 years ago, at Infosys, Sikka talked about bringing in a product culture, which analysts pointed out would be crucial if a company had to successfully transition into AI services.“Cultural transformation remains significantly harder than technology adoption.

Product-oriented organisations require greater experimentation, tolerance for failure, investment ahead of revenue realisation and a stronger focus on out comes rather than effort,” says Gaurav Parab, principal IT analyst at the consultancy NelsonHall.“The true test will be whether leadership teams are willing to adapt management systems, career structures and incentive models to support fundamentally different ways of working,” he adds.SINK, FLOAT, OR SURF?One of the favourite phrases of an Indian IT leader is that a rising tide lifts all boats.

Technology waves, which have boosted growth, have boosted it for everyone.

And though IT companies love to talk about the large amount of work that AI will bring their way, this time it is going to be different.“This is a massive rising tide opportunity, but it will not lift all boats.

Companies that do well will be the ones that help their clients accelerate business value.

AI for business is a significantly larger opportunity than AI for IT.

As an industry we need to start thinking of [our] identity as less about IT and more about business impact and outcomes,” says Jimit Arora, CEO, Everest Group.But making this change will come at a cost.

Indian IT companies will have to take risks from clients they target to the companies they buy.

That would require them to put more capital into investments even when the returns aren’t immediately apparent.For listed Indian IT players, this is hard.

A couple of weeks ago, mid-tier player Persistent System’s shares dropped by 11% after it acquired German digital engineering firm Nagarro in a deal valued at 1.4 billion euros.

Though analysts agreed with the deal’s rationale boosting its European business and giving it scale in key verticals they found it too expensive.Persistent’s experience highlights how complicated is a transformation for a listed player.

Shareholders are used to large margins that fund dividends and buybacks; investing for growth cuts into those returns.“Making this change as a public company will be like trying to change the wheels of a car when you are speeding down the high way.

At least, when you are a private company, you have the option of pulling over and doing this in a garage,” says Neemuchwala.He points out that companies which have significant promoter ownership like Wipro and TCS could weather the turmoil, if the promoters bite the bullet.

“(They) might be able to do this, if the promoters are willing to make the investments and say they will not look at the share price for three years.

If the promoters are still looking for dividends and returns, then there won’t be any benefit.”IT companies have started making the changes they need.

But essentially discarding your strengths and having to rebuild a culture is hard.

But if a company wants to survive the next decade, they don’t really have another option.As Ray Wang, CEO of Constellation Research, underlines, “Burning platforms change culture very quickly.” ...