Higher attrition to impact IT cos margins

Written by Rachana Khanzode | Mumbai | Updated: Nov 9 2010, 17:55pm hrs
With technology firms in the country seeing a surge in contracts, employee attrition could be a big challenge for top IT companies and may impact their margins. Less diversified mid-sized IT firms, with a smaller bench strength, may even lose out on contracts.

During the downturn, most technology firms had cut down on hiring but with the demand picking up in the second quarter, top firms including Tata Consultancy Services, Infosys Technologies and Wipro Technologies implemented wage hikes to check attrition. Despite this, attrition rates remained high for TCS (13%), Infosys (17.1%) and Wipro (19.4%). Higher attrition rates are expected to remain a concern for the industry since replacing people, with fresh graduates would cost 8-10% more.

Analysts at CLSA point out that every 5 % points of attrition potentially knock off 150bps from gross margins. Put another way, every 5 % points of attrition raise can neutralise 3-4% in currency depreciation, or 2% average pricing hikes, said Bhavtosh Vajpayee and Nimish Joshi, analysts at CLSA India. The report added that, While the impact of attrition on a companys gross margin is intuitive, its other effects include higher recruitment and training costs, loss of business momentum via delays in staffing, potentially poor delivery against peers in multi-vendor contracts, and larger cuts to margins in fixed-price engagements. Attrition has ramifications on company profits and could impact deal-winning capability.

Even though tech firms including TCS, Infosys, Tech Mahindra and others have indicated that they are not looking at another round of increments, to retain existing employees, analysts say top IT firms could look at 8-10% hike for freshers. The increased entry level hires coupled with greater competition from MNC vendors will likely result in a jump in fresher salaries. Our information from select campuses suggests that Tier-I Indian vendors have sent indications of an 8-10% hike in wages, depending on the tiering of the institute on quality. This will further put pressure on margins, especially at Tier-II vendors, CLSA adds.

However, T V Mohandas Pai, board member and head HRD and education & research, Infosys, said he wasnt concerned about attrition as it is a part of the model and companies have survived it in the past. We are not looking at hiring freshers at increased costs. Salaries would be at the same levels as they were last year, Pai said. Ajoy Mukherjee, vice-president and head, global human resources of TCS had recently observed that the company would take steps in line with industry trends. We are looking at hiring more laterals in the coming quarters and wage hikes for them too would be driven by demand, Mukherjee had said after the results announcement.