I spent the weekend glued to my laptop screen, repeatedly checking for updates on Lehman’s situation, as well as Merrill and AIG. Like a rubbernecker watching a highway accident, I couldn’t stay away, emotions surging through me as disaster unfolded in front of my eyes.
While most of the news is about the FSI companies themselves, my thoughts veer towards the collateral damage in the IT consulting and outsourcing business, where I’ve worked for the past dozen years. I left Capgemini’s Financial Services BU (which had been Kanbay) almost a year ago. At the time, the bulge bracket firms were among the crown jewels of the legacy Kanbay accounts (after HSBC, of course). We touted our projects in four of the five leaders, because of what they said about our ability to execute complex projects and to develop domain expertise, and as a measure of general credibility. If we worked for these big players, it was clear evidence that we were doing something right. What do those accounts look like today? What do those accounts look like at Infosys, TCS, Wipro, Accenture? What is the larger impact on the way these businesses operate, and on the economic ecosystem around them?
The Indian IT outsourcing business was just starting out the last time we saw a meltdown like this – in the internet and tech industry in 2000-2001. Many of the Indian employees in this industry have never seen business slow down, never mind shrink. I think back to my time in iXL, an internet consulting firm, that went from wild optimism to repeated layoffs and restructuring during the dot.com bust – the gloom and doom, the desperate scrambling for lifeboat jobs, and wonder how this will play out in the IT industry in India, and all the domestic Indian businesses that depend on it. Wall Street has been looking grim for many months, but the fallout from this weekend will accelerate and intensify many changes. A few guesses:
- Some of the business “rules” are going to be rewritten. Big players have concentrated on big engagements, clients with over $5M in annual contracts, which has mostly meant financial services companies. Now they will look more carefully at smaller accounts in other industries, particularly those with the potential to grow even as financial services contract.
- There will be a new emphasis of diversification, both in industries and geographies. The big players have already increased their focus on Europe, and now we can expect to see more interest in India-based business and other emerging markets that were considered too low margin in the past.
- There will be more interest in service lines that will grow as the bread-and-butter AMO work from the financial services players is consolidated and tightened. We’ll see more attention on growing consulting, BPO (especially non-FSI lines), ERP, embedded systems, etc.
- There will be widespread layoffs in the Indian outsourcing businesses, for the first time ever. Some of the prestige associated with IT careers will wane, and they will no longer be seen as a sure ticket to a good marriage and wealth. Some employees will leave the industry and pursue careers that are more aligned with their personal interests, some aspiring recruits will look to other areas. Hiring standards will go up, compensation will go down; overall employee quality in the IT industry may actually go up, although morale will surely go down. India’s young managers (usually under 40 years old) will be faced with leadership and management challenges they have rarely encountered, and some will leave; those who stay will grow and mature. While the shake-out will be painful for both the IT industry employees, the long term effects may be beneficial to an overheated industry.
- All of the related players, big and small, are going to hurt. The IT industry in India has propelled an economic miracle, with opportunities in real estate, employee services providers (insurance, banking, food service providers), hotels, car services, and all the small businesses (think tea stalls) that support its employees. The meltdown is centered in a few big businesses in New York city; it will be felt by individuals throughout the world.