IT spending trends during 2009 – 13 were marked by volatility, but 2014 – 17 looks to be a period of more secular growth. Predictable growth makes way for predictable hiring, which results in delivery optimisation and execution. According to ISG, Annualized Contract value (ACV) for IT contracts was up by 100% YoY in Q1FY15. And unlike previous years – the growth has been secular and holistic across verticals.
In the near future, scalable services (around Infrastructure, testing, BPM) will be provided at a lower cost, freeing capacity to build competence around new technologies – Social, Mobile, Analytics and Cloud. After a five-year hiatus, drivers for secular growth include-
a) Recovery of the US economy
b) Europe’s growing interest in outsourcing
c) Increased focus on new technology (digital / SMAC)
d) Improved demand for large, long term, integrated services deals
Enterprise clients are now more inclined to take forward discussions on new technology, which makes deployment more feasible. SMAC services drive digitisation of business processes and discretionary spends. This has created a whole new stack of opportunities around:
a) Modernising legacy applications
b) Migration to cloud
c) Usage of Big Data tools
d) Creating mobile (enterprise and consumer) interfaces and solutions
Popularly believed to be the fifth wave of Indian IT – after Mainframes, Minicomputers, Distributed PC & Internet – SMAC is fast gaining ground and captivating the interest of decision-makers within large organisations, because of its ability to make an impact on client business outcomes. A recent NASSCOM survey showed that SMAC currently accounts for less than 5% of current revenues of Indian IT companies, but respondents expected it to account for over 20% of revenues by 2020. Hence the projected growth trajectory for next 3 – 5 years is very high, estimated to be at a CAGR of 50 %. SMAC / digital will emerge as a key differentiator for the industry. In-depth analysis shows that proportion of digital/SMAC deals are rising exponentially, accounting for almost 46% of all deals signed in July. While these deals are currently small in size, it is only a matter of time before they begin making significant impact on overall volumes.
The market for SMAC is estimated to be 200 Bn USD representative of 3-stack architecture (Application Modernization at the bottom, followed by Data Fabric in mid-tier and finally Digital Transformation on top) out of which significant portion of opportunities rests with the first and third. Unlike the last spending cycle (1999 – 2013) marked by ERP / web-technologies, Indian companies now are better placed to compete globally. iOS, Android, Open Stack, Hadoop are some of the technologies where we have the wherewithal to train significant proportions of manpower. Additionally, India has emerged as the hotbed of innovative start-ups focused on SMAC, thus providing ample opportunity for increased collaboration between large system integrators and smaller companies to derive more effective and ingenious solutions.
There has been a focus among many companies to improve utilisation and employee productivity, and headcount addition has been relatively low. Incremental revenue addition for IT Services is now largely dominated by Indian companies, paving the way further for stronger brand visibility and recall. At the same time a strong US dollar will continue to provide a margin boost, which in turn will drive up investments in SMAC services.
We have just about entered another fresh cycle in tech spend and sector growth recovery. The ability to scale offshore operations for commoditised services like infrastructure management, application maintenance, BPM will be the key success factor. It is likely to be a two-prong strategy, where in the first part it will be driven by the ability to gain critical mass in each vertical, geographies, service lines, thereby optimising cost. Coupled with this will be the new strategy of seeking new partnerships and creating innovative solutions in the digital business.