IT firms mustn’t miss warning signals from Accenture

In the IT services industry, Accenture doesn’t just make waves—it can create storms that either lift the boats of competitors or send them into a whirlpool. This past week, JPMorgan and other equity analysts have been mulling the fact that Accenture has issued a weaker than expected forecast. There has been a meaningful cut by the firm of its constant currency revenue growth guidance from 2–5% to an anaemic 1–3%. This, say equity analysts, has been caused by a tight leash held by clients on discretionary spending. This throttles quickly converted small deals that drive a part of the business that contributes heavily to overall revenue.

In the meanwhile, equity analysts claim that a large “transformational” deal pipeline is healthy for Accenture, but that there are delays in deal signing or a revenue ramp-up on already-signed deals. There is also hope among analysts that the industry is cautiously optimistic, and they expect growth in the latter part of the year. In my opinion, the ripple effects of Accenture’s slowdown on Indian information technology (IT) service providers will be multi-faceted. First, let’s address investor sentiment. The stock market is as much about perception as it is about performance. Given Accenture’s broad client base across industries and geographies, its forecast is often seen as a barometer for global IT spending. If it hints at a slowdown, it sets a narrative of caution across the sector, which can lead investors to recalibrate their expectations beyond Accenture too.

For Indian IT firms, this recalibration might result in stock-price volatility. Companies like Cognizant, TCS, Infosys, TechMahindra, Wipro and HCL Technologies, which have an overlap with Accenture in terms of services and client industries, could see valuations affected as investors adopt a wait-and-see approach. If so, however, this would likely be more knee-jerk than judicious, and influenced by a herd mentality. Over the medium term, their stock prices would auto-correct vis-à-vis Accenture.

Beyond the immediate financial market implications, a more substantive concern for Indian IT firms would be understanding the underpinnings of Accenture’s weak forecast. Is it due to reduced IT spending by clients? Is it because of geopolitical tensions, or perhaps a sign of broader economic headwinds? The diagnosis matters. While analysts have hazarded some guesses, Indian IT providers should engage in some navel-gazing of their own forecasts to compare with the category leader’s weak commentary.

Accenture has been the most successful at reinventing itself in the digital age, while Indian firms have been laggards, no matter what their advertising may say. In an earlier column in this space, I discussed how Accenture had recast itself to enter a “reinvention phase,” as had Varun Sood of Mint. In my view, the firm is well ahead of its Indian (and non-Indian) competition when it comes to facing the new flood of Generative Artificial Intelligence (GenAI) and other cutting-edge technologies in the digital realm.

Since the downturn is supposedly due to a decrease in discretionary spending on new technology initiatives, Indian companies could double down on showcasing the return-on-investment for digital-pivot projects or pushing into recession-proof sectors like healthcare or utilities. Alternatively, if the forecast points to a shift in technology investment—say, from enterprise IT to emerging technologies like Generative AI or blockchain—Indian firms would need to realign their service offerings and talent acquisition strategies accordingly, which seems like a Herculean task for their current management suites.

The IT services industry is notorious for its tactics to attract skilled professionals and very poor at managing its revolving door of departures and new recruits. While attrition has now reduced, the pandemic saw the gross incapability of Indian IT providers to retain talent, unless they were willing to poach from each other at twice the recruit’s salary. This, they did short-sightedly and are still trying to lose that payroll bloat. According to analyst firm ISG, GenAI talent is “1% of 1%” (to quote its chief strategy officer). It is not clear to me that this talent can easily be wooed and retained by management teams using old tactics.

There is a silver lining for Indian IT providers, however. On one hand, scaling back on consulting and discretionary IT projects affects the pipeline and revenues of Indian IT companies. On the other hand, a focus on cost optimization could play to the strengths of Indian providers, known for their cost-effective solutions and operational excellence. This scenario could lead to an increase in offshoring and greater demand for managed services, as clients seek to do more with less.

But offshoring is a mezzanine step. It occurs before the automation and elimination of jobs. We have already seen this in the business process outsourcing (BPO) sector. I happened to run into the wife of the majority owner of one of India’s largest IT services businesses some weeks ago at a social soiree. When I recounted to her that her husband had wanted to hire me as the chief executive of his BPO business some 10 years ago, she remarked, “Does anybody even have a BPO company anymore?” God forbid that someone gets a chance to make that same remark about today’s IT services in the future.

That said, the IT industry has a history of turning challenges into catalysts for transformation. A weak forecast from a global market leader could well spark the next wave of evolution. Let's see.

SIDDHARTH PAI

a tech consultant, is also co-founder of Siana Capital, a venture fund manager.

This article first appeared in print in Mint and online on Livemint:

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