Pandemic ushers in the next big wave of IT outsourcing

Originally published by Rajiv Rao for New Tech for Old India

Who knew when the pandemic first hit that it would perhaps be the greatest opportunity — and catalyst — for IT services companies.

At the time, in March 2020, it was code bright red. IT services employees were prohibited from going into the office in an industry that has long defined productivity through physical face time.

For these companies, existing deals faced dire consequences if they were not catered to. To make things worse, many clients such as banks, insurance outfits, utilities, and e-commerce sites among others had to run their operations through an unprecedented surge of client activity. They also had to do it through a workforce that was sitting at home without the hardware or bandwidth.

And yet, these companies have endured and triumphed. The amount of deal wins has been unprecedented. The numbers — revenue, net profit, revenue growth — have almost uniformly been, not just good, but record-breaking.

Every outsourcing wave in history has been accompanied by an acute crisis along with an outsized opportunity. In the first wave, it was the bogey of Y2K that terrified companies into thinking the world would stop dead in its tracks when computer clocks, engineered with only the twentieth century in mind, entered the 21st century.

The Y2K non-problem fired up the rockets for Indian IT by introducing the opportunity of using cheap labour to architect applications and taking care of a company’s tech infrastructure remotely.

Then came the global financial crisis in 2008 and glimmers of a new dawn began to appear on the horizon. This new dawn shined a light on the urgency of the incoming digital age and the need to rapidly buy into it by ditching the old labour arbitrage business for a world that necessitated more complex digital solutions using the cloud, AI, machine learning, and big data.

These technologies became the new gospel. And yet, despite that evangelism, most IT services companies failed to embrace the digital with an urgency that was crucially needed. The flow of easy money from the old business still continued, albeit at a dwindling rate. Both companies and IT providers were reluctant to jump ship, and the new world of digital solutions was still too unfamiliar to be embraced wholeheartedly.

The only company that truly blazed a trail here was Accenture with its ravenous appetite for acquisitions and hunger for digital deals.

Now, virtually overnight, with everyone conducting most of their primary affairs via online banking, shopping, and entertainment — at home — many businesses have had to completely overhaul the way they do business. Consumers needed to be appeased in ways not done before, and websites and business solutions as a whole had to be intensely more agile than they had ever been.

survey by HFS and Infosys consequently showed that, today, deep in the midst of the pandemic, over 60% of polled companies intend to speed up their digital transformation while 70% have plans to redo their products and services to drive greater customer value.

This means plunging money and architecting solutions in exactly those spaces that IT services companies and their clients have historically dragged their heels on — things like cloud, cybersecurity, automation, AI — and re-skilling their employees and putting more resources into a consulting approach.

Accenture, true to form, rocked the IT landscape when it blazed out of the gates with a 25% jump in pandemic-inspired new deals compared to last year between September and November. This included 16 clients with over $100 million in bookings.

The biggest comeback story belongs to Infosys, which racked up huge deal wins — $7.13 billion for the December quarter alone, its highest ever. Digital comprised a staggering 50% plus of the company’s revenues, which is growth at a 31.3% clip.

A prized contract worth $3.2 billion that it won was with Daimler, where Infosys now has a mandate to completely remake the auto company’s entire IT operations and infrastructure landscape across workplace services.

Even the recently beleaguered Wipro, which has been having trouble firing on all cylinders in the digital era, recently snagged a mega-deal with Metro AG that will bring in at least $700 million over five years. This comes alongside its new CEO Thierry Delaporte, who looks destined to power the once-stagnant company to greater heights.

In fact, as TechCircle notes, both Wipro and Infosys — TCS too — have successfully wooed European companies. TCS with Prudential Financial and Deutsche Bank, Infosys with German carmaker Daimler, and Wipro with German wholesaler Metro. In November, TCS acquired Postbank Systems AG from Deutsche Bank in a deal that involved the takeover of 1,500 employees based in Germany.

“Germany is where the recent ‘mega-deals’ have taken place (in Europe) because most large German firms have never outsourced at scale before, and the current market made it appealing for the likes of Infosys, TCS and Wipro to secure a foothold in the lucrative German market,” said Phil Fersht, CEO, HfS Research. A Euro-centric shift is one of the hallmarks of a new, evolving strategy.

Of course, none of the impressive performance metrics for the quarter ending December 2020 would have been possible without some unanticipated but hugely welcome cost savings in office rent, maintenance, electricity, land acquisitions, travel, and a whole host of things that were once de rigeur.

Most companies have stated that the working-from-anywhere model will be largely here to stay and may even inspire additional new ways of doing business.

Still, these will soon just be icing on the cake as the current pandemic environment becomes status quo.

In order to keep the engines going with the hopes of attaining greater heights, these outfits will have to truly and aggressively chase the new world. One where, as HFS’s Phil Fersht wrote in his blog, you offer genuinely “transformative services that run your borderless, work-from-anywhere business operations in the cloud, dependent on deep skills in data science, process design, automation, and most importantly, business logic and training people to become digitally-fluent.”