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IT services companies could lose business in the US following the election of Donald Trump as the 45th US president, if his protectionist rhetoric is followed through with policies and new laws.
IT and business process outsourcing (BPO) suppliers that deliver from offshore locations are already facing challenges brought by new technologies, such as automation, as well as a shift to insourcing business services among large businesses.
Gartner analyst Arup Roy said India-based suppliers, such as Infosys, HCL, TCS and Wipro, would be hit the hardest. “The Indian IT sector must now brace for further troubled times ahead,” he said.
Roy said Indian companies, for example, should not expect double-digit sales revenue growth in 2017, adding that “a sub 10% growth for 2017 is certain”.
“Trump’s protectionist views would have further dampening effect on growth prospects, if the views were to crystallise into some serious policy implementations,” said Roy.
“However, what happens during campaigns and what transpires in office can vary greatly, and we got early signs of that in Trump’s victory speech. But, at minimum, it is headline risk and adds to the uncertain times.”
Trump is expected to increase trade barriers for companies selling into the US, as well as have a tougher stance on overseas workers entering the US.
The US is by far the biggest business for the Indian suppliers and, although business with the UK is significant and Europe is growing, a reduction in US revenues will hit suppliers hard.
Legislation would have worldwide effect
The impact of Trump could go way beyond the Indian IT suppliers and affect any company using offshore resources to deliver services to US companies, according to Peter Schumacher, CEO at management consultancy The Value Leadership Group, who added that all the big IT services firms use resources in India.
“There is really no such thing as the Indian IT services sector. All companies would be affected. For example, Capgemini employs more people in India that in any other country. Legislation does not differentiate between Infosys, Capgemini or Accenture,” said Schumacher.
Regarding India in particular, Schumacher added that the IT services industry has been “wrought with fear that the US government may impose stricter regulations or other barriers” and thereby erode, even destroy, the advantages of the global delivery model.
Schumacher said while “some restrictions have been imposed”, the industry’s performance proves that “they have not impeded growth materially”, with the value of IT-related exports now surpassing US$100bn annually.
“The IT industry has become the largest private sector employer in India and represents almost 10% of the country’s GDP. Driven by the success of this industry, India has become the world’s fastest growing large economy. Given the fragile state of the world economy, enacting legislation that would hurt this growth is in no one’s interest,” he said.
“Any legislation aimed at reversing this would be irrational and is more than unlikely to happen as it would significantly weaken the US trade negotiating position with India.”
He said the US has a huge trade deficit with India and is pushing India to procure US military equipment. India is a large buyer of military equipment and wants to buy equipment from Europe and Russia, as well as the US. “Putting restrictions on offshoring will hurt these negotiations,” he added.
Schumacher said if tougher restrictions were to be imposed, although this is unlikely, it could prove to be risky and even backfire as multinationals could shift important strategic business advantages to offshore-based technology firms.
Mark Lewis, outsourcing lawyer at Berwin Leighton Paisner, said it is too early to say whether the US “will get the protectionist Trump or not, or where he will focus his protectionist attention”.
For example, putting bigger barriers up against manufactured goods from China might have a big enough impact to keep the public happy. Manufactured products from China in the US dwarf IT services from India in value and potential job terms.
He added there is also uncertainty about whether Trump will impose restrictions on overseas companies sending staff to the US.
However, Lewis said there is a potential happy ending to Trump’s leadership for offshore services. If Trump grows the US economy through corporate tax cuts and other strategies, it might increase the opportunities for IT suppliers in countries such as India.
“If US employment grows quickly, there will be demand for IT and back-office services,” added Lewis.
Challenges for Indian suppliers
Protectionism is not the only headwind for Indian heritage suppliers, according to Roy at Gartner, with the developments around automation and insourcing also challenges being weathered.
Indian IT companies grew fast through providing lower cost IT and business process staff to carry out work for western organisations, but today much of the work can be automated. For example, software mobile operator O2 automated business processes and reduced its need for staff in India.
Artificial intelligence is also beginning to make ground in BPO and IT. Robots are even providing customer services for banks, which is a direct replacement for offshore BPO, of which Indian firms are big players.
Meanwhile, large western multinationals – the source of most of the revenues of Indian IT service providers – are also moving to global delivery networks and setting up multiple regional hubs worldwide.
Many are building these as in-house hubs to take advantage of the low costs and resources in places such as India. These hubs are part of the company and staff are employees, rather than supplied by an IT services firm.
Although India is seen as the best place to set up these hubs, there is often no role for Indian IT service providers, and these regional hubs are now competition. For example, after deciding to insource in 2013, Astrazeneca began a three-year project in January 2014 that has seen it replace seven major IT suppliers with in-house resources. It also created global delivery hubs in India, Mexico and China.
In 2013, German car manufacturer Daimler said it planned to achieve savings of €150m a year by bringing IT services in-house and expanding IT operations in India and Turkey. In 2012, General Motors said it would insource around 90% of its heavily outsourced IT operations.
While Indian companies have adapted to changes in technology, the new challenge of protectionist policies in the US will lead Indian-based suppliers into a period of uncertainty.
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