Indian IT services firms turn on cost-efficiency mode

Leading tech services firms have stepped up on the cost efficiency mode via plugging anniversary hikes, reducing variable payouts, going slow on replacement hiring, pushing for reskilling instead of lateral hires as manpower utilzation over the next couple of quarters in the sector is expected to ebb. Increased travel and subcontract costs, margin pressures, recession in the US and a return to work for many teams is bringing down the balance sheets of these firms.

“IT Services companies are facing multiple headwinds. Return to office, increased travel costs, highest ever subcon cost, the recession threat from the US, lower margins in recent quarters, to top it all there is a sense of reality check that they may have over-hired in the preceding 12 plus months,” said Kamal Karanth, co-founder of Xpheno, a staffing solutions company whose clients are largely IT firms.

Recently Tata Consultancy Services (TCS) stopped its first year anniversary hikes, underscoring efforts by India’s booming technology sector to arrest high staff costs. While rivals such as Infosys are rolling out 70% of variable pay, Wipro had delayed payouts for certain employee categories.

These brakes on manpower costs, come at a time when the tech sector’s top IT firms is expected to hire more than 1,50,000 fresh graduates. According to Karanth, the onboarding has started and the firms are using this opportunity to reduce costs of lateral hires.

“This gives them the flexibility to lower their costs by optimising their workforce. Hence we see the tough stances around return to the office, variable pay withholding or pushing increments to the future,” said the Xpheno’s co-founder.

In IT services firm, manpower makes up 70% of the costs. TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra—have seen their employee expenses shoot up as high attrition continued to plague them in the June-ended quarter. On average, wage costs as a share of revenue rose from 54.3% in the March-ended quarter to 55.2% in the June quarter. The hiring frenzy of the last four quarters, multiple counter offers, higher thann usual increments, out of turn promotions were acceptable until now .

Aditya Narayan Mishra, director and CEO at Ciel HR Services says the tech firms are now replacing junior manangement lateral hires with the new batch of graduates. “Those who were getting paid ₹8-10 lakh, now will see many of their work being done by juniors. Firms have said they rather train to upskill their employees than hire from the market,” Mishra told Mint.

Brokerage firm Kotak Institutional Equities in a July report on IT Services India, noted that clients are reprioritizing tech spends but not compromising on digital initiatives. “Focus on cost efficiencies has increased which presents a set of opportunities that can offset pullbacks in discretionary spending,” it stated.

With fresher hiring and drop in projects, the bench strength of tech firms will increase. Both analysts and recruiters say that this will be the chance for the companies to upskill and reduce costs. Employees between projects are said to be on ‘bench’.

“As new recruits are placed on projects and become billable, utilization will increase hand-in-hand with better pyramid. Higher supply and declining attrition will lower both lateral hiring costs and subcontractor usage,” Kotak added.

Attrition for the June-ended quarter for the tech firms were: 19.7% for TCS, 28.4% for Infosys, 23.8% for HCL, 23.3% for Wipro, and 22% for Tech Mahindra. Wipro and Tech Mahindra were the only ones to see a slight dip in attrition numbers when compared to the previous quarter.

“There are corrections being made now and business performance is a big rider. The signal is sent out that companies will focus on building sustainable cost structures,” said Rituparna Chakraborty, co-founder and executive director of TeamLease Services, a recruitment company.