Cover Story

A dream in decline

Print edition : June 23, 2017

Employees at Infosys’ campus at Electronic City in Bengaluru. A file picture. Photo: G.R.N. Somashekar

The spectre of large-scale job losses haunts the Indian IT services industry, which teeters on the brink of an existential crisis.

THE information technology (IT) industry, the poster child for India’s liberalisation adventure, appears to be heading inexorably towards an existential crisis. Reports in the last few months from the major Indian cities that are the hubs of software service exports indicate an unprecedented and alarming level of unrest among a workforce that has for the past two decades been considered, perhaps with some hype, to be among India’s elite. Although the industry has gone through upheavals in the past, most notably in 2001 and 2008-09, this time it appears to be very different in terms of both the scale of the sackings and who is getting the sack.

The reaction from the workforce has also been unprecedented. In every major hub, software “professionals” have been in touch with unions, old and new, in an effort to challenge their “sacking”. Whether that will be sustained is a different matter, but there are unmistakable signs that they realise the need to shed the “elite” tag to make common cause in this hour of distress.

As the crisis unfolded, doyens of the industry such as N.R. Narayana Murthy reacted, initially with the cryptic remark that he was “sad” about the happenings. Later, he suggested that those at the top levels of the company ought to make “sacrifices” in order to protect jobs at lower levels, just as he claimed he and his co-founders did at Infosys in 2001. Clearly, Murthy’s reading of the scale of the crisis and its underlying driving force appear to be misplaced. The comparison with 2001’s bursting of the dot-com bubble, industry veterans recall, is itself erroneous because then the industry stood at the cusp of the great offshoring boom that took it to heights on which an entire mythology has been constructed. Moreover, the industry was much smaller, not the employer of four million people it is today.

Anecdotal evidence from Chennai, Hyderabad, the National Capital Region (NCR), Bengaluru, Pune and several of the second-tier cities that the industry had spread to indicates that the large Indian IT services companies are in the process of shedding thousands of jobs. Strikingly, the focus of the big companies appears to be on sacking those at the middle level, employees with 10 to 15 years experience. The extent and scope of the job losses remain anecdotal because neither the companies nor its prime lobby, the National Association of Software and Services Companies (NASSCOM), has thought it fit to provide information about happenings in an industry that perhaps has the greatest visibility. Industry doyens, its chieftains and head-hunters have made sympathetic noises but have generally blamed the workforce for its lack of “appropriate” skill sets relevant to that old industry cliche—“fast-changing technology”.

Fear in the air

Queering the pitch have been analysts like Gartner, which predicted in 2014 that one in three jobs would be lost to new technologies that would replace not only the grunt work done by humans but also their cognitive functions. As Samir Sinha, founder of Robonomics AI, a Sydney-based start-up that specialises in Artificial Intelligence (AI)-based solutions, says, it appears that the mere “fear” of an impending invasion by robotics-based software automation, which would do the work at the lower end, is driving the current wave of panic in the industry. That this may well be fuelled by market analysts and the financial markets themselves is indicated by the fact that barring Infosys every major Indian software services firm—TCS, Wipro, HCL Technologies and Cognizant—has either initiated a share buyback or is in the process of initiating one. Market chatter indicates that Infosys, too, may not be too far away from initiating one. Industry analysts fed on the buzz about rapid technology change have started to measure companies on how far they have incorporated AI, automation and other new technologies into their business models. Given that the five majors in India, which account for almost 30 per cent of all employment in the Indian IT sector, are driving the fear, is it surprising that the stories of large-scale lay-offs are coming from these companies? What is happening to employees in the smaller companies is not even on the media’s radar.

In truth, insiders confide that neither the industry nor its captains have thought it fit to speak with a measure of truthfulness to its workforce about what they expect from them. One senior-level technical executive at Cognizant Technologies, the United States-based offshoring services company with an overwhelming proportion of its workforce in India, said: “All this talk about the pace of change of technology at a general level is fine, but the workforce has never been told what is expected from it.” “The companies,” he observed, “are so obsessed with numbers (revenues, profits, margins, and so on) that they have been blind-sided by technological changes, especially those that can be aligned to their client’s business. In this scenario, for honchos to blame their own workforce for their so-called lack of skills only amounts to heaping insult on the injuries of the hapless.”

But even more damaging for the IT majors is the dilemma they are in. All of them have made forays into new technology areas in a limited way, each with its own strategy. But none of them has been able to stitch automation into its DNA for the simple reason that this would cannibalise existing revenues from offshoring. “My delivery manager could probably automate at least some functions, such as support roles, resulting in cost savings to the client, but why would he do that if it were to result in lower overall revenues?” the Cognizant executive cited earlier asked. Sinha says the role of automation, especially robotic process automation, will increase as they become ‘smarter’ and more capable of taking on what humans are doing now in the industry. That has to do with the way the industry has been structured.

But there is no guarantee that automation that may replace a significant portion of the work that is now offshored will give the incumbents any special advantages or privileges. The old advantages of having a large English-educated workforce, the time difference between India and the West, and above all a workforce that could code at a relatively cheap price point, would disappear from that calculus. Indeed, the peculiarities of geography that make India a prime beneficiary will be off the table. If automation proceeds and matures on a trajectory that can be reasonably expected, a significant portion of what is offshored need not be done at all. More realistically, as automation is married to machine learning and analytics, client companies that offshore work may be motivated to reduce it in order to retain control over their operations. All in all, it is not yet clear how and at what pace automation will be adopted, let alone gauging its impact. Instead, fear and hype are all one sees in the landscape.

It is also possible that the Trump factor, shorn off all the concern for U.S. jobs, probably works in favour of automation, just as offshoring itself was driven by U.S. companies’ compulsion to push down costs. Indeed, Sinha says, Trump is perhaps the “best salesman” for robotic automation in the software services industry.

The jobs pyramid

When the Indian IT industry’s offshoring model took off about 15 years ago, it scaled up the delivery model through which it delivered services to its clients overseas. Essentially, what the industry did was to quickly scale up its workforce, stacked in a pyramid-like structure. The largest proportion of the workforce was at the base, also paid the lowest wage, and at the narrower end of the pyramid were the more well-paid jobs for the relatively few. It is those at the base and middle of the pyramid that are now under attack as companies seek to shed their workforce, even though it is not clear whether they have a tangible strategy to replace the existing offshoring model that is coming under severe stress.

Rakesh (name changed on request), an employee at Wipro with more than 20 years’ professional experience, points out that 40,000-45,000 of the company’s workforce of about 170,000 employees is being “targeted”, a significant proportion of whom have 10 to 12 years’ experience in the company. He challenges NASSCOM’s claim that those with “redundant” skills are the ones who are no longer required by the companies. “If the industry is trying to reposition itself, is it going to achieve this by sacking the more experienced ones, those who have a wider array of skills, those with greater domain expertise and those who have served the company instead of hopping from one company to another when the going was great?” asks Rakesh. He also takes umbrage at the manner in which employees are shown the door without “any due process”.

Industry chieftains’ claim that a large section of the IT workforce does not have the appropriate skills is also questioned. One executive who works for one of the top five told Frontline: “Companies are talking about new technologies and new skill sets, but what they want is never articulated cogently.” Skill sets, he argues, are not built in a day; nor are they available on tap for any industry. He cites the media industry and asks: “Do senior editors seriously expect a fresher to start breaking stories from day one simply because they have been to a journalism school? Why should the expectation be any different here?” He also notes that the new technologies such as AI and other tools are still evolving—in fact, they have been evolving for over four or five decades—and will not be found on educational campuses, which is what the industry, spoilt by the manner in which the state has pandered to its demands, has come to expect as a matter of right. This industry veteran—one tends to become a veteran in this industry relatively young—also notes that though his company has hired “highly paid data scientists, that is more because it has become an industry fad”. He points out that they have been deployed in sales functions rather than in roles that would result in company-wide benefits. And, those performing “client-facing roles”, who could possibly bring in deep-domain expertise that would help the company broaden its engagement with the client, “are too caught up with the numbers of their projects instead of focussing on more valuable ways in which they can yield benefits to the company.” It is true that automation would hit what are routine tasks now, but what is relatively sophisticated could become routine tomorrow.

Yet, despite all the talk about automation, domain-level knowledge still remains critical because automation cannot yet make the judgements, prudent assessments and acumen that human beings are capable of making even if the industry becomes more automated, he says. That has a lot to do with the way education, especially engineering curricula have been structured. Essentially, they were geared to churn out a cheap supply of labour for the industry, which deployed them at the lower end of the pyramid to reduce costs.

The offshoring model, which generated high profit margins for the industry, especially between 2000 and 2008, was struck by the global financial crisis. This correspondent, a regular at several of the companies’ quarterly results presentations, recalls that when companies were asked about the impact, they always answered thus: “Our clients simply have to outsource more in order to cut costs in the wake of the recession.” But soon after, they realised that the clients’ larger offshoring projects were now being broken into smaller bits, resulting in greater competition among these companies. Nothing highlights this better than Infosys, traditionally known to be picky and choosy about client projects, going after even small-ticket projects.

As offshoring matured, it became clear that the marginal benefit to clients was reducing. Consider this: when a business transformation project is expected to yield a saving of about $500 million for the client, the IT service provider implementing the new system could perhaps expect a project worth $10 million. But the next round of transformation is likely to be much smaller; not only would the size of the project be lower, but margins would be hit by the greater competition that the incumbent would encounter.

Most sober analyses of the role of automation and new technologies suggest that while technology itself may be important, deep domain expertise would remain critical. This would imply that IT services companies’ excessive focus on recruiting students from second-rung (or even the third-rung) engineering colleges, which was suited to establishing the base of the pyramid, is in need of urgent change. It is evident that at least one and a half generations of youth have been sacrificed in order to meet the needs of a single industry, while other, more general skills that could have been of great value in a diverse range of domains have been ignored or neglected. There is much cruel irony in the manner in which IT honchos now blame the “educational system” for much that it may have been responsible for.

The IT mythology

Much of this industry is shrouded in a mythology that has been fuelled by success in a global playing field. Like all mythology, this one too conceals several aspects of the story, while amplifying other aspects beyond belief. One of the key aspects of this mythology has been the insistence of the industry, especially the later entrants, that this was built and engineered on a pure play of private enterprise, against heavy odds imposed by the government. Nothing could be more wrong. It is often forgotten that the first software export scheme, allowing software exporters and entities specialising in computer education and training to import hardware at concessional rates, was launched in 1972, well before these companies were even born. But even more critically, the tax holidays and tax breaks that this “sunrise” sector got from the government meant that even as late as 2008 these companies had an effective tax rate of about 7 per cent. The provision of land at concessional rates from State governments and a host of other subsidies and incentives—even the deployment of buses of the public transport system for industry workers—are forgotten aspects of the mythology. Even missing from the gleeful tales of the growth and enterprise of the industry is the real story of how the IT services industry’s initial roots and expertise were built on its relationship with Indian companies, among them several major public sector companies and undertakings.

In reality, there is much this industry owes, not just to its employees who now face the sack after serving them through its period of great profitability, but to society on a much wider scale. Writing a recent blog post (Horses for Sources), Phil Fersht, CEO, HFS Research, an analyst on business operations and IT services, remarked: “I sincerely hope Prime Minister [Narendra] Modi is in talks with India’s flagship IT services firms to fashion new tax incentives to have them invest in their staff, not simply resign themselves to satiating the whims of greedy investors.”

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