With the surge in protectionism and spread of digital technology, Indian IT firms will need to evolve their business models and up their innovation game.

India’s IT industry found its niche providing global companies, mainly in the US and Europe, with armies of low-cost engineers to handle back-office IT functions, as well as exporting more experienced engineers to fill positions at client sites. Over the past three decades, IT has grown into a $140 billion industry in India. Double-digit growth was not unusual for the biggest players, such as Infosys, Wipro and Tata Consultancy Services (TCS) – until recently.

While the $900 billion global IT services budget still holds vast opportunities, the protectionist stance of the new American president and some European leaders is causing jitters in an industry built on globalisation. It is likely that fewer new US visas will be issued, and there is talk of a potential “outsourcing tax” to discourage IT managers from looking overseas. Another cause for concern is slower growth in the US and European economies. In particular big customers like the banking, insurance and energy industries are cutting back on IT spending.

However, as The Economist reports, “Changes in how clients think about technology is a bigger worry for Indian IT firms.” In general IT budgets are growing, but “an increasing amount of the money is spent on trendy stuff like analytics or the internet of things. Such new ‘digital’ services will rise from a tenth of total IT spending in 2014 to over a third in 2020, according to McKinsey”. IT managers are increasingly looking to finance big data and mobile projects by cutting spending on their IT infrastructure, which is often maintained by Indian firms.

While European and American rivals have had a head start, Indian firms are moving in the same direction; for example building new digital platforms that they can sell to multiple clients. Selling higher-value products and services requires more expensive talent. And because these firms have long specialised in fixing problems cheaply, not in driving innovation, a fundamental shift is needed.

“We will not survive if we remain in the constricted space of doing as we are told, depending solely on cost arbitrage”, wrote Infosys CEO Vishal Sikka in a letter to staff. “If we don’t we will be made obsolete by the tidal wave of automation and technology-fuelled transformation that is almost upon us.”

The challenges facing India’s IT sector are compounded by changes in leadership at the top firms. The entrepreneurs who founded Infosys and Wipro have been replaced by a relatively new generation of professional managers. Effective February 21, Rajesh Gopinathan will take the helm at TCS, replacing Natarajan Chandrasekaran, who is credited with building up Tata’s IT business. Chandrasekaran now heads parent company Tata Sons.

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