Markets have many flaws but they are good at spotting where the money is likely to move.
On Thursday this week, US Department of Labor suspended 8 major technology companies from the permanent labor certification (PERM) program.
Next day, on Friday, the stocks of all of these companies barring one went up - contrary to what a casual observer would have guessed.
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6 of these 8 companies are in the IT services industry.
Early days still but I think the winds are turning for the industry. Three things worth watching:
1. AI impact: is turning out to be net positive for the industry. While AI does automate some lower level coding, it is also creating new streams of work as clients seek help transforming themselves for the AI era. Recent results from Accenture and TCS are early indicators supporting this view.
2. Visa restrictions: while devastating for those impacted, the industry remains unfazed. As people movement gets restricted, work is quietly moving to where the qualified people are - not only more work but also higher value work. If Covid was the trailer for remote distributed work, the GCC boom that it triggered in India was the movie. Now, with more mobility restrictions, the trend is likely to turn into a phenomenon.
3. Exchange rates: Indian rupee has been on a slow and gradual decline against major currencies for quite some time now. With large portions of their workforce in India and revenues in dollars/euros, weaker rupee is turning out to be a cost advantage for the industry. We don’t know how long this trend will continue but it’s contributing is non-trivial.
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All is not rosy though. The industry is entering a new era that will dictate new rules for success.
Doing higher value work remotely requires different organisational muscles than the cost arbitrage model that powered the industry in the past. Those muscles span multiple areas - capabilities, talent pyramid, delivery model, commercial construct, culture, leadership refresh, and more. And they will need to be built fast.
As AIs contribution to P&L still remains elusive for most large enterprises, they are increasingly asking their IT service providers for more skin in the game through outcome based pricing. This is a completely new terrain with huge implications for the industry’s revenue, margin, and risk management. This will need to be navigated carefully.
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The industry has been written off before. Each time, it has found ways to adapt and come out stronger.
Is history about to repeat itself?
Time will tell.
#IT #ITServices #AI #PERM