There are dark clouds on the horizon of India’s information technology and outsourcing industry.
Profit growth at even India’s most successful and sophisticated software companies could be doused as companies, governments and consumers around the world do an increasing amount of their computing on the cloud, says outsourcing services advisory firm ISG Inc.FCD.UN.V +2.26%
Companies that have traditionally used in-house servers running on custom-made applications are putting more of their business on external servers and using off-the-shelf software. Using the cloud often means using fewer people so Indian software companies—once dubbed “body shops” because they could supply as many computer engineers as a project needed—are going to suffer as they lose much of their competitive advantage.
As it is only going to get cheaper and easier for companies to switch to the cloud, smart people-powered service providers need to get ready for the storm, said Sidharth Pai, partner and president for Asia Pacific region at ISG.
“This means, developing software that allows businesses to (interact) faster and more efficiently with their external stakeholders–customers, suppliers, etc.–rather than focus on changes to the internal workings of a client,” he said.
Around one in four of the deals ISG helped advise involved cloud computing last year. That’s more than three times more than the percentage of cloud deals it saw three years earlier.
India’s software and outsourcing companies are still too reliant on the business model that uses lots of relatively inexpensive Indian engineers and sends them to client sites to build software and fix problems, ISG and other analysts say.
Cloud providers use external servers, sophisticated technology and automation to manage clients data using fewer employees. Where a traditional service provider deploys one employee to monitor up to 200 servers, cloud players can use one employee to monitor up to 10,000 servers, ISG estimates.
The cloud infrastructure players are drastically cutting down prices and starting to create pricing pressure on service providers in India and elsewhere who continue to set contracts based on the number of engineers deployed in a project.
Cloud infrastructure providers such as Amazon Web Services, Red Hat, Rackspace Hosting and others are emerging as a formidable threat to Indian outsourcers and other traditional service providers and consultants including International Business Machines and Accenture, that earn revenues from managing the technology infrastructure of clients.
Traditional service providers now have to strive to get more cloud contracts–where they help clients shift data to cloud infrastructure providers–rather than focusing on creating their own clouds, ISG said.