The disclosure made by Reserve Bank of India that the share of on-site mode of delivery for Indian IT services has come down from 25.5 per cent in 2007-08 to 15.5 percent—a little lower than a sixth of total software and ITeS exports in 2018-19 should be a cause of concern.

As technology evolves, the cost of labour is no more the only factor when it comes to deliver software products. Agile methodology has today become a de facto standard for all modern software development and while it is costly, clients prefer paying for it for, well, agility.

The traditional approach called the ‘waterfall’ model is often clunky and slow, while ‘agile’ is seen as a modern and lightweight way to deliver projects. But for agile to work best, the iterations of software need to done by having everyone in the same room, walking through the solution at the same time, step by step. This means you need to be closer to client location more than ever.

This shift from remote development to active client involvement has major repercussions for Indian IT. While it can afford to be closer to the client, it is unable to do so. Nationalist fervour in the biggest markets for Indian IT services—US, UK and Australia is making on-site operations more challenging than ever.

Data from US Citizen and Immigration Services indicate that top four IT services firms — TCS, Infosys, HCL Technologies and Wipro  — have seen about half of their work visa applications getting rejected in calendar year 2018.

For TCS, the denial rate has shot up from 6 per cent in FY15 to 37 per cent in October-December quarter last year.

Indian IT industry has still been on a growth path overall. But in the midst of all this, the industry is faced with its biggest dilemma: Hire locally in these markets or acquire local companies. Efforts are on in both directions.

To hire locally, IT services firms need to first find talent available in US and UK. But several job postings have been lying open for months as there aren’t enough well-trained IT professionals in these countries. TCS, Infosys and Wipro are now working closely with US schools to ensure kids are interested in STEM education and they have enough availability of talent in the market. TCS in fact became one of the top employers in the US in 2017, hiring 12,500 people in a matter of five years. That number is on the rise for all its peers. This has led to a sharp rise in wage costs for Indian IT companies. To cope with related higher costs, the IT companies are now beginning to move up the value chain in search of higher margins. The earlier business model had led to a  situation where Indian IT firms had become the global experts in executing low-value projects.

Now they are switching over to new transformational platforms like robotics, artificial intelligence and automation. Acquisition is the other route that IT services firms are taking to beef up their talent pool in these markets.

In the long run, Indian IT companies will have to find better ways to deliver services remotely by using new-age collaboration technologies, which allow people to collaborate from across the world in a way they are sitting together in a single room. Globally, these new technologies are enabling tectonic shifts in systems and processes that require very different capabilities compared to implementing an enterprise  resource planning software. But unless the Indian IT companies hasten the digital transformation, declining on-site revenues will be a reason for concern.

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Published on November 25, 2019