IBM Spin-Off to Make Indian IT Sector More Competitive

With global tech giant IBM splitting its business into two entities, the Indian IT sector is set to become more competitive.

IBM is planning to spin off its managed infrastructure services unit into a new public company by the end of 2021. The shift will help IBM focus on higher-margin businesses like cloud computing and artificial intelligence.

About a third of IBM’s global headcount of around 380,000 are estimated to come from India. IBM’s CEO Arvind Krishna said employees in India could be moved to the managed infrastructure services business unit.

“This is going to create a brand new player in the IT services domain that will have the ability to work with a lot of partners,” said  Sanchit Vir Gogia, CEO and chief analyst at Greyhound Research.

“While there will not be much change in Indian IT exports, the domestic market will become more competitive. There will be opportunities to grow with these global partnerships. There will be more localization and quicker decision-making.”

The Indian IT & BPM (business process management) industry revenue was estimated at around $191 billion in FY20, a 7.7 percent growth year-on-year.  It is estimated that it will grow to $350 billion by 2025, according to a report by the India Brand Equity Foundation.

“This spin-off may disrupt IBMers in India focused on traditional services for a while, but overall dependency on India will grow and it will play a more important role in IBM’s growth going further,” said D. D. Mishra, senior research director at Gartner.

The move by IBM is being closely watched by the Indian IT sector as it could establish precedents for other IT companies as a case study for future spin-offs.

“A lot of Indian IT service providers will closely observe what is happening,” said Mishra. “They may have to face a similar situation in the future. Indian IT companies have lesser issues at the moment as they are comparatively more flexible and agile, but as some grow bigger, they will face challenges. Managing growth is more challenging than managing downfall. This will be an important case study of change, and there are many lessons which will come out of this.”

The IBM spin-off could also open opportunities for Indian IT companies to acquire new clients if some IBM customers decide to switch to other providers.

“Creative destruction of enterprises is often needed to compete in the new world, and change is the only constant,” said Mishra. “The company is expected to improve its margins, and its strategic focus on transformation can be advantageous if the transition is handled well. There are a lot of questions on which IBM may need to provide immediate clarity which impacts its existing customers.

“A lot of IBM customers consuming its traditional services may find this change risky and may switch to other providers as we have seen during such transitions,” he said.

“IBM has always been a monolithic organization which prevents flexibility and agility, and this will need to change. So directionally, it is a good step, but a lot more depends on execution.”

Globally, IBM’s total revenue dropped 5 percent to $18 billion in Q2 2020 over the previous quarter. However, its cloud revenue was up 30 percent at $6.3 billion.

IBM India’s revenue dropped 2 percent to INR 27,279 crore ($3.8 billion) in 2018-19, compared with the previous year.

With the spin-off, IBM expects to be more focused on hybrid cloud and AI solutions.

According to Krishna, the hybrid cloud platform represents a $1 trillion market opportunity. India over the years has made remarkable progress in the segment.

Cloud spending in India was estimated at $2.5 billion in 2018, a 6 percent share of relevant IT spending compared to a global average of 7.9 percent and average of leading countries of 11.4 percent, according to a report by the National Association of Software and Service Companies (Nasscom).  It is estimated to grow at 30 percent a year to reach $7.1-7.2 billion in 2022, according to the report.

India’s public cloud market is among the largest in the Asia Pacific (APAC) region behind only Australia and Japan, according to Boston Consulting Group (BCG).

IBM’s announcement comes at a time with the Indian IT sector has been in a difficult phase due to the pandemic.

The Indian IT services industry, which grew by 6.8 percent in FY2020, is expected to show muted growth in FY2021 owing to the pandemic according to report rating agency ICRA.  The sector’s growth will drop to 0 percent to 3 percent in FY2021 versus ICRA’s earlier expectation of 6 percent to 8 percent, the report said.

“While IT investment may go up, its translation to acceleration for Indian IT is a blur amid re-prioritization of expenditure (legacy/digital),” said Mohit Jain, a research analyst at Anand Rathi. “We are cautious regarding runaway valuations despite the sector’s resilience.”

(Edited by Uttaran Das Gupta and Judy Isacoff.)