How IT firms can glide changing times

IT companies have dominated the market for the past two decades. Now in recent times, they have got some reality check. Their shares have been beaten down, churn rate is high and facing various headwinds in the external environment.

Although Indian IT companies like Infosys and TCS are based in India, their business comes from abroad. More than 80% of revenue for these companies comes from EU and US. In business segment terms, the financial sector accounts for 30% of both TCS and Infosys.

On all these fronts there are risks. There is banking turmoil in the US as well as Europe. While the economies in both these regions are trying to find footing. On the brighter side, these challenges are expected to fade within a few quarters. 

What lies ahead?

If you are a long-term investor in IT companies, then you have to track progress toward industry 4.0. We can say that right now an organisation works like an analog machine but in Industry 4.0 company as a whole will appear like an automated machine.

For this, you have to track digitisation in different sectors. A lot of companies in India as well as abroad are digitising themselves by getting ERP systems. Banks across the world are gradually becoming fintech firms. Then there is generative AI which turns everything heads on.

Even the government is looking to digitise the country, creating various kinds of dashboards using tech to reduce logistics costs.

For all this, IT firms will play a pivotal role. These firms are enablers of Industry 4.0

Risk factors

There is a caveat. Various traditional companies and banks are creating in-house teams for IT. So that competes IT firms on both fronts. One on hand, it eats away at the business, while on the other hand, they poach employees. At the same time consultancy firms like Mckinsey, Delloite are expanding themselves in IT services, becoming direct competitors to IT firms.

Strategy ahead

IT firms like Infosys, TCS need to enhance barriers to entry. They need to exhibit that they have economies of learning advantage (lower costs and better services due to past experience), economies of scope advantage (using the same resources for diversified services), unique insight into a broader changing ecosystem and focus on innovation. A combination of these gives them a unique edge.

Hence, they can provide these services more efficiently than in-house teams of traditional companies or new entrants. Even if traditional companies poach the best talent they can’t give the same efficiency due to the unique combination of knowledge that presides in IT firms like Infosys and TCS. Digitisation is done majorly to increase efficiency. So the IT firms that can execute and exhibit cost leadership will stand to gain.