Tag: Indian service providers

Why is Leadership Changing in India’s Service Provider Firms? | Blog

Leading service providers in India are going through substantial change due to executive leadership churn. The question is: is this bad? To answer, let’s look at what’s driving the churn and how long it’s likely to continue, and why.

Take Cognizant, for example. The firm has gone through leadership change for some time. First, it changed the chairman of the board and a few board members. Then it changed the CEO. With the recent resignations of Debashis Chaterjee, EVP and President, Global Delivery, and Prasad Chintamaneni, EVP and President, Global Industries and Consulting, we’re now seeing turnover in the next level down in executive leadership. And I believe we can expect more turnover.

Similar churn has been happening at other services companies given the fact that each of the top five India heritage companies announced a new CEO in the past three years.

What’s Driving the Executive Churn?

Underpinning the leadership turnover is the providers’ move to a new business model. They shifted away from struggling with the issues of the labor arbitrage model and moved to the digital platform model. As companies move down this path, I think it’s natural for their leadership to evolve.

Evolving the executive leadership is natural because the old guard must give way to the new guard – firms must bring in fresh thinking. The prejudices, paradigm and old rules of thumb don’t work in the new digital model (or, at least, only a few of them work). To succeed in this transition, the firms must change their thinking. One way to do that is changing the leadership.

The offshore services majors have extraordinarily deep talent benches. To keep their deep talent pools, they need to provide opportunities for them to progress and move on to more senior roles. When the senior teams move on, it opens opportunities for this talent. And it’s an opportunity to being in some new blood from the outside. That talent combination can be quite healthy, particularly at a time where companies are no longer scaling the known, existing model. Instead, they are moving into uncharted waters with a new business model that is evolving and being defined.

Another manifestation of the executive leadership churn is taking place at TCS, which is handling the digital shift differently. The firm reorganized to give its deep talent pool opportunities and new responsibilities. Instead of executives leaving TCS, we see a substantial reorganization that opens opportunities for the young blood, new talent, to take on more executive responsibilities. TCS handled this in a different mechanism to achieve the same goals as Cognizant – bringing new blood through. TCS retained its old blood by giving them different responsibilities and by shaking things up and moving people around.

This is what’s happening, and it affects pretty much all the service industry’s firms.

How Long Will the Leadership Churn Continue?

The executive leadership churn is predicated upon the fundamental industry shift into a new business model, which naturally causes this turnover. The turnover is healthy and inevitable, given the degree of organizational change going on.

I think it’s prudent to watch for too much of a good thing. However, the turnover is inevitable. I believe we’ll see more change as companies navigate and embrace the new digital future and move deliberately into that future.

Cognizant President Prasad Chintamaneni Resigns | In the News

Bengaluru: Cognizant president for global industries & consulting Prasad Chintamaneni is said to have resigned, making him the fourth top executive to resign in the past one month.

Peter Bendor-Samuel, CEO of IT consulting firm Everest Group, said Chintamaneni’s resignation does not come as a surprise. “With a new chairman of the board and CEO, Cognizant is changing out its senior management team as it puts distance from the ill-advised Elliott (activist fund Elliott Managemement) influenced commitments of the last two years. Furthermore, , the senior Cognizant team has had a great run and accumulate significant wealth in stock which can best be sold while they are no longer insiders,” he said.

Read more in TOI

Dark Clouds Gathering for Indian Service Providers | Sherpas in Blue Shirts

The effort around reforming H1B work visas in the global services industry has been dangling for years, entrenched in a political battle in Congress. But there’s movement again, and dark clouds are gathering on the horizon, signaling a coming storm. Five days ago, the US House Judiciary Committee passed HR 170 (Protect and Grow American Jobs Act) with solid, bipartisan support, and it carries onerous policies aimed at India’s outsourcing service providers – as well as problems for their clients. It hasn’t passed into law yet; but it could happen in 2018. Here’s my assessment of the situation.

Proposed Requirements

As I’ve blogged several times since May 2013, reform focuses on service providers whose business model depends heavily on a large percentage of H1B workers placed at US clients. HR 170 raises the classification of H1-dependent firms to 20 percent, rather than 15 percent of workers. Providers would be required to pay higher wages to their H1B workers – with the minimum salary tied to the average occupational wage in the US. That’s a raise from the current $60k up to, and potentially surpassing, $135k.

The bill adds authorization for the US Department of Labor to conduct investigations of H1B-dependent firms – without first having to establish reasonable cause – and provides for a $495 fine to be levied on the firms for the investigations.

HR 170 also would require US clients to provide attestations and “recruitment reports” attesting that no US workers were displaced by H1B workers. This would add the burden of new management and compliance processes.

Impact

Obviously, the onerous requirements are targeted at Indian service providers that heavily use H1B workers (especially Cognizant, Infosys, TCS, Wipro). The provisions would raise their costs. They would not be able to pass those costs through to clients, so it would reduce their margins. Making it more onerous to use H1B workers would also negatively impact the Indian providers’ business models, which rely on the high-margin “factory” structure for talent provision.

Is it a Long Shot?

Although HR 170 was passed with bipartisan support by the House Judiciary Committee and has yet to pass the full House. If that were to happen, the bill would still face bipartisan battle in the Senate. We’ve seen that play out this year in efforts to repeal healthcare laws and now in tax reform efforts.

However, it may not be a long shot. The bill’s main sponsor, Darrell Issa, the Republican representative from California, will face re-election battles next year and is likely to push harder for a win in visa reform. And don’t overlook the fact that California’s Silicon Valley firms would benefit from onerous visa regulations targeting India’s firms.

My Takeaway Warning

India’s service providers are already struggling in an uphill battle aside from visa reform. They struggle to gain competence and market share in evolving to the digital world. Investments in rotating to digital raise providers’ costs, take time and often lead to battles with investors and other stakeholders who want to maintain the current margin levels. In addition, margins in the digital models are low, for at least the short term.

H1B visa reform’s dark clouds gathering on the horizon for the Indian service providers will only heap new burdens on providers already struggling with margins and new business models in trying to become leaders on the digital space. I believe the bill, if passed into law, would inhibit their growth.

US clients, which want more valuable digital services from third-party firms – but want to pay the low cost they have enjoyed with offshore providers for many years – must recognize that strategy is no longer in the playbook. They also need to be mindful of providers changing their business model and delivery practices to accommodate the requirements of H1B worker provisions when the reform passes into law and how the provider’s decisions will impact the client’s work.

Indian Service Providers Coming to Grips with Talent Challenges in the Digital World | Sherpas in Blue Shirts

India’s service providers are slowly coming to grips with the decline of the arbitrage model and the shift to digital models. The digital era brings the providers three challenges regarding talent. Over the next three to five years they will need 30-40 percent fewer people than they needed for arbitrage-based work. Second, digital talent often needs to be located in the US and Europe, but providers face work visa restrictions in the US. Third, they have over-hired freshers and have too many other employees who need training for the digital world. The result: continual churn of the providers’ employee base.

In fact, before too long, we’ll probably see an absolute reduction in the number of people employed in India. It hasn’t happened yet because the growth in digital business has more than offset the shrinking growth in arbitrage-based business. However, in coming months and years, the providers will face cannibalization of their existing arbitrage business as customers’ preference for digital models grows.

Currently, the industry is feeling the early tremors of the huge change that is coming to the talent model. Initially, the providers must deal with the over-hiring already in place. But as they take bigger steps to reshape their talent model for the digital world, their steps will become more draconian. As margins come under more pressure, service providers will need to manage their talent bench more closely. Obviously, anyone not assigned to revenue-generating work is vulnerable to be let go, regardless of tenure.

What Happens to the Laid-Off Employees?

The good news for laid-off employees is they have employment opportunities in the domestic Indian market. But there’s also bad news: wages are lower, and it may be difficult for the economy to absorb large number of workers in any given month. Laid-off employees may need to move to other cities where there are opportunities for work. They also may face a period of unemployment.

Ironically, the issues the laid-off employees face are similar to US and European workers whose jobs moved to India over the past two decades. As happened in the US and Europe, India’s workers may initially receive limited help from the providers and government programs; but they will likely end up in jobs with lower compensation.

There is a small glimmer of hope. Service providers will capture a larger share of digital work over time. And despite the short-term oversupply of IT engineers, it’s hard to imagine that India will not need engineers for a growing economy in the long run. But this will take time.

I could be wrong about providers’ need for ongoing headcount reduction. But as I speak with senior leaders in the industry, they acknowledge that they face a huge shift in their talent model and will likely need far fewer workers in the future.

Indian Service Providers Making Difficult Choices and Laying Off Workers | Sherpas in Blue Shirts

Service providers in India have issued several announcements around their intentions to let a fairly sizeable number of employees go. Six thousand at Cognizant, 1,000 at Infosys, more than 200 in the Mumbai office of Capgemini (a French company), and several hundred last month at Wipro with expectations of another 10 percent of the workforce this year if revenues don’t improve. This is unusual in this market and, understandably, it is creating angst among employees in the companies as well as interest outside the companies. However, it’s not just a case of “downsizing” and thousands of layoffs, as many media have reported. Let’s look closer at what’s really happening.

Digital is the New Reality

We at Everest Group have been tracing the trends in the traditional arbitrage-first based model, which constituted 78 percent of the services marketplace. The arbitrage-first business shrank in the last 12 months. The rotation into new digital models is another factor. Where it’s applied, the digital business cannibalizes the arbitrage business and compresses that revenue by 30-40 percent. Also, digital revenues at this point are small. Digital models are primarily in the implementation phase; therefore, most projects are small in nature and most are located onshore at customers’ locations.

Because of the arbitrage decline and the change to digital models, service providers now have an excess number of employees for the first time since the global economic crisis and recession in 2008. As market realities have changed, India’s service providers are taking steps to adjust their business models. As digital models often require 30-40 percent fewer people to do the work, I think it would be surprising if they didn’t thin their labor pools as a necessary part of adjusting to the new realities and new business models!

Talent Models are Out of Whack

But as I mentioned earlier, the providers are not just laying off workers. They’re also hiring. Their talent models are out of whack to be able to address digital work, which requires different skills and often needs to be done onshore where clients are located rather than offshore. Several are creating new jobs in onshore locations near their customers; Infosys, for instance, announced it is creating 10,000 jobs for US workers. Even in a digital world, the Indian providers need to maintain their pyramids (which rely on steady new hires of junior people) so they can keep their costs low.

Bottom Line for Indian Service Providers

India’s service providers are making difficult choices, including thinning their arbitrage-based talent pools. Thus, the layoffs are understandable and, indeed, necessary. It indicates organizations and an industry in transition and undergoing unaccustomed pain.

The service providers’ clients should view these developments as encouraging because the providers are taking the necessary steps to put digital talent in place. But the providers’ employees understandably experience trepidation as they face the new market realities with an increasingly uncertain future.

HCL vs. Wipro Soccer Matchup & the Digital Services Hullabaloo | Sherpas in Blue Shirts

In the last 10 days, analysts tracking digital services across the world woke up to highly savvy India-heritage service providers lapping up marquee digital deals in the world of sports. These new partnerships include HCL and Manchester United (soccer), Wipro and Chelsea (also soccer), and Infosys and the ATP World Tour (this one in tennis.)

These deals are prized because of the impact they create.

  • Strong digital services pedigree for these service providers: Because of their brand association with offshoring, labor arbitrage, and pure-play services focus, the India-heritage providers have traditionally been frowned upon when they entered the discourse on digital and technology products and platforms. Such deals will go a long way in changing this pedigree and association
  • Brand recall and stakeholder connect: Digital services are a different ball game. As you are not necessarily selling to the CIO, you need to reach stakeholders unreachable through the traditional sales route. These deals are excellent in that regard. For instance, Manchester United has 659 million followers across the world, second only to Facebook. Imagine the kind of global reach and exposure the deal creates for the HCL brand!

Sponsorship deals under the garb of services?

As an industry analyst, I am used to analyzing deals for their profitability and total contract value, i.e., the impact they create on the books in upcoming quarters. Looking at the above deals through this lens, I immediately saw that these are not traditional services deals. In fact, something tells me they will not figure similarly on the accounts as other services deals do. Indeed, Infosys candidly called out that it will be a “Global Technology Services Partner and Platinum Sponsor” of the ATP World Tour. Hence, it does not take a Sherlock Holmes to deduce that these three deals are essentially sponsorship arrangements (with an inbuilt services component) that the service providers have entered into under the garb of a services construct. A very easy way to decipher this is to compare the positioning of HCL’s and Wipro’s logos on the Manchester United and Chelsea websites, respectively. It makes it very clear which provider “spent” more on their “sponsorship.”

Take a look at the Manchester United website and you’ll see HCL’s logo is at the top of the page, right on top of ManU’s.

Manchester United

But when you check Chelsea’s website, you have to scroll all the way down to discover Wipro’s logo sitting in a corner sulking with Singha Beer for company.

Chelsea FC

So what?

Am I contemptuous of this sponsorship-deals-under-the-garb-of-services construct? Not at all! In fact, I am pleasantly surprised by the gumption shown by HCL, Infosys, and Wipro in taking this leap of faith to build a strong brand connect and pedigree. It shows they are willing to challenge the traditional constructs and meet the digital market head on. In a highly consumer-oriented world, new business will not come by just being efficient nerds. India-heritage companies are up against the likes of VC-funded start-ups, reforming technology majors (Google, IBM, Microsoft) and niche enterprise software firms (NetSuite, Workday, etc.,) all of which have stronger credentials in digital constructs. Given the buzz these deals have created, there is enough market validation for the tactical approach taken by these service providers. What is even better is that these are not typical paid sponsorship deals – these service providers will actually be providing services that will be touch and feel for millions of fans of these sporting giants. If they successfully manage it, this will create an exponentially stronger brand recall compared to what they have achieved in decades – being efficient service providers to enterprises, working in black boxes.

Hence, do not be surprised if TCS, which sponsors the New York Marathon (and many other races), turns around tomorrow and says that it is sponsoring managing all IoT (health sensors, speed sensors), platforms, and analytics of the race.

Keep watching this space for more on these developments!


Photo credit: Flickr

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