Outsourcing is passé

In the 80s, the Information Technology sector was dominated by body shoppers. Then it was the Y2K compliance that supported the Indian companies. And then came the lucrative outsourcing contracts from the United States and European banking and financial sectors. That helped Indian IT companies grow through the last two decades. That chapter of growth appears concluded.  Instead, a new segment – Analytics, particularly Engineering Analytics (EA) is quietly emerging as the alternative driver of growth.

Presently, banking financial sector outsourcing contributes the bulk of the revenues for four of India’s largest Information Technology companies -TCS, Cognizant, Infosys and Wipro - ranging anywhere between 50 and 65 per cent.

Outsourcing deals for these sectors essentially implied automating the transaction, record keeping and information process in the banking sector. The choice for India as a source for implementing these processes was largely driven by the value and the wage arbitrage opportunities. It effectively meant that the Indian IT sector could deliver at far more competitive rates than their US counterparts virtually the same value or even greater value.

The financial sector’s contribution to the Indian IT sector, particularly to Bengaluru-based Infosys and Wipro was large, virtually the mainstay of their revenue base during the period. This was partly because the financial sector has automated both wholesale and retail transactions. This meant that transaction and record keeping of wholesale banking transactions that included large derivative contracts and foreign exchange trading desks were digitised.

But the Banking, Financial Services and Insurance (BFSI) phase is less lucrative now, unlike in the past. The reduced profitability stems partly from the fact that the US and European banks and financial institutions have remained in a consolidation phase since the financial crisis of 2008. Consolidation implied that demand for new IT for financial sector automation has shrunk. The result is that financial sector IT processing is now witnessing intense competition. Countries like Philippines and China have now caught up with India in both the value and wage arbitrage for the Western financial sectors that have suddenly turned cost conscious.

The result is that incomes of the domestic IT companies are under pressure. Each of the domestic IT companies is currently faced with sustained margin pressures, implying that they would need to operate on thinner net incomes. The thinner net incomes in turn have impacted employee wages. Consequently, the BFSI-driven IT sector is no longer a high wage island. Presently, there are more employees on the bench, meaning idle manpower resources in the sector, translating into pressure to work on lower wages.

However, this phase appears transitory. It has only meant that the IT sector is in a phase of transformation and shift from traditional areas of business. The new emerging business is Analytics. Analytics refers to the process of collecting, organizing and analysing large sets of data (called big data) to discover patterns and other useful information. Big data analytics can help organizations understand better the information contained within the data and will also help identify the data that is most important to the business and future business decisions (Webopedia definition).

An instance of large data entails creation of trillions of records of millions of people or processes across the globe, all from different sources, web, customer contact, social media, card usage and mobile data. This data is completely unstructured and completely inaccessible. This data when structured, formatted, manipulated and stored helps gain useful insights. It could be as simple as the movement of a piston in an internal combustion engine across all makes. The data and its subsequent analysis could effectively result in making better engines.

Karnataka’s edge

Analytics, therefore, has immense applications across the entire spectrum of industry. But the most important application of analytics is in engineering. It is here that states like Karnataka have an edge. The edge comes from the fact that Karnataka already has a history of engineering innovation, beginning with Sir M Visvesvaraya’s hydro electro project in the Sharavathy Valley. Karnataka produces close to two million engineers per annum from all the engineering colleges, by far the largest in the country. That skill pool alone gives the state a leading edge in Engineering Analytics.

Engineering analytics application includes, aerospace and defence, transportation, healthcare, industrial and energy sectors.  In aerospace specifically, analytics tools could be used to predict component life spans and potential failures. This predictive analysis is a tool that has potential application in the defence sector where equipment components are put to extreme stress conditions. A predictive analysis, therefore, could result in preventing loss of life of highly skilled personnel and destruction of high value equipment, particularly combat aircraft or naval vessels or even armoured/infantry equipment operating in differing environment conditions.

A report by Zinnov Consultants has estimated the potential benefits from Engineering Analytics at half a trillion $US by 2017. Of this, at least the addressable market by service providers is estimated at US $ 14.8 billion. Spending in EA is presently estimated at $13 billion, the largest spender being industrial and energy entities with attendant benefits to service providers.

Companies like Cognizant have already stepped up the focus on engineering analytics, identifying potential application in the farm sector, with potential impact on farm output and productivity. But the main deterrent factor that has prevented companies from enhanced exposure to analytics is the financial uncertainty.

In the BFSI sectors, income was assured. In engineering analytics, the income risks are unclear. A Cognizant report released recently said, “Given the nature of EA problems, tangible benefits and Return on Investment are not always quantifiable upfront. The costs are sig¬nificant and involve establishing infrastructure both at a lab scale and production scale.”

The IT sector’s present risk phobia has not prevented the forward momentum. A new generation of more fleet-footed entrepreneurs is emerging. These entities are just small entities. But then all big ventures start small. Sir Visvesvaraya showed the way when he set up Jog Falls power project in 1946. Others have simply taken up the baton to move forward!      

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of Karnatakatoday.com and Karnatakatoday.com does not assume any responsibility or liability for the same.