IT services sector: Challenge is to deliver under constraints placed by COVID-19

IT services sector
IT services sector: Challenge is to deliver under constraints placed by COVID-19

IT services sector firms appear to have adapted well

Information technology (IT) was the first Indian sector, beyond the field of medicine, whose business prospects visibly brightened under the impact of last year’s COVID-19 outbreak. Under lockdown conditions, not only did corporate reliance on IT services sector turn tropospheric, where most clouds reside, but also many companies spotted gaps in their digital systems, even as a scramble to contain fixed expenses and raise operational efficiency pushed them to digitize the last of their analogue processes.

Demand for IT services sector from cost-competitive suppliers in India was expected to boom as new needs arose globally. Order books swelled and our IT services sector embarked on a hiring spree of sorts.

The three big IT services sector companies – Tata Consultancy Services (TCS), Infosys and Wipro took on 72,000 new recruits in 2020 to 2021, 44 per cent more than the previous year.

If businesses were abuzz last year with talk of either pivoting to a digital paradigm or perishing, a revival of economic growth this year in markets like the US has enlarged outlays of IT services sector and kept the post-COVID-19 momentum of bagging contracts going.

According to Pravin Rao, chief operating officer at Infosys, India has been a big beneficiary. “There is tremendous demand for talent,” he said last week. Clearly, there is plenty that our software professionals are being called upon to do. However, market demand could be less of a constraint on revenue expansion than the internal ability to deliver.

For the final quarter of 2020 to 2021, the financial results of our IT services sector make a case for optimism. The consolidated net profit of TCS in the three months to March grew 14.9 per cent from a year earlier, even as revenue rose 9.4 per cent. For Infosys, profit was up 17.5 per cent and revenue 13.1 per cent, while Wipro’s profit leapt 27.7 per cent on a modest revenue gain of 3.4 per cent. Their numbers for the whole year would probably have been just as robust, too, had the first two quarters’ performance not been weighed down by COVID crisis, which forced client engagement and service delivery to be done with minimal travel and site visits.

Still, IT services sector firms appear to have adapted well. All three firms’ fourth-quarter operating margins outdid the expectations of analysts, some of whom had earlier flagged margin compression as a potential concern after they gave out enviable pay hikes and bonuses.

IT services sector looks poised for much better to come by judging by trends in worldwide demand for cloud-based services, data analytics and cyber-security.

Yet, one thing to bear in mind is that COVID has altered the business environment even for companies that have customers beating a cyber-trail to their door. Making money in the global market for IT services sector is manpower-intensive, unlike packaged software.

Salary costs tend to ascend alongside revenues, as top line gains must be made by putting more techies to work. Also, supply capacity being people-centric spells a special vulnerability to the pandemic.

The restrictions imposed by COVID on overseas travel are likely to ease only in fits and starts over 2021 to 2022. Regardless of sector, with infection count soaring, uncertainty looms over the health of all employees across the country.

Currency volatility isn’t the only risk to be hedged. Attrition may be a threat, too. Costly or not, backup teams may need to be assigned even to IT services sector projects that are not mission-critical. All in all, the sector’s key challenge would be to optimize its workforce deployment so that revenue-per-head goes up. And, with corona-virus around, this doesn’t promise to be easy.

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