The fabled millennium bug fuelled the rise of India’s IT outsourcing industry. Talented engineers uprooted from Bangalore to London and New York to fix software western companies feared would crash computer systems en masse. A very different bug is now testing companies like Tata Consulting Services and Infosys, which work for many of the world’s leading multinationals.
Coronavirus has forced India into lockdown, challenging the ability of outsourcing company staff to function smoothly from home. As in the 2008 financial crisis, revenue will drop sharply following the hiatus in contract signings.
Indian IT service groups are exposed to sectors hit hard by the epidemic. Banks will likely respond to lower profitability by slashing IT budgets. Rupee depreciation and growing demand from telecoms clients are meager consolations. Goldman Sachs has cut 2021-23 revenue estimates for TCS 9 per cent, with a 2.4 per cent contraction forecast next year.
Indian IT outsourcing groups are a resilient bunch. Despite the financial crisis and US innovation in cloud computing, both TCS and Infosys tripled revenues in the last decade, while maintaining ebitda margins well above 20 per cent. Coronavirus presents an opportunity for them to grow market share. Healthy balance sheets position them to swoop for weaker rivals and penny pinching clients may opt for their affordable services.
But coronavirus will only accelerate trends that make revenue growth for India’s showcase industry increasingly difficult. Importing low-cost Indian staff to work on-site was already under pressure. US President Donald Trump’s crackdown on H1-B visas attacked the labour mobility that groups like TCS and Infosys rely on. The virus is likely to intensify that trend. Accenture and IBM are better positioned to capture complex jobs in a post-coronavirus world with internationally dispersed, localised workforces.
Tighter budgets could push corporations to outsource to much cheaper Uber-style IT service marketplaces such as Github, acquired by Microsoft, while automating basic IT services using artificial intelligence.
The millennium bug, in part a figment of the imagination, helped Indian outsourcers expand. Coronavirus is all too real and will have the opposite effect.
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