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More up Indian IT’s sleeve?

Increased hiring by Indian IT services didn’t come with a correspondent reduction in revenue productivity per employee

More up Indian IT’s sleeve?
Overconfidence is the wont of the young, and no amount of advice from an elder can stand in the face of a job offer that promises a youngster double their salary.

By Siddharth Pai

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In the last installment of this column, I wrote about how Indian IT Services seems to have shot itself in the foot by getting carried away with mid-junior level hiring during the pandemic. I mused that senior management at these firms may have overplayed their hand by hiring each others’ resources at twice their current salary levels to meet escalating demand as their customers rushed to digitalise during the Covid-19 pandemic.

I had said that the ‘work from home’ environment lowered the barriers to switching jobs. Also, no 26 year old is mature enough to understand that a two-times increase in salary is a fishy proposition; it’s simply too good to last. Overconfidence is the wont of the young, and no amount of advice from an elder can stand in the face of a job offer that promises a youngster double their salary.

However, I also wrote that IT Services companies are now beginning to address some of those excesses by cutting down on variable pay and by insisting that their workers start making the trek back to the office. I mentioned that it looks as if these firms will put in place the tried and tested method of pyramid rationalisation—industry-speak for hiring many young fresh graduates to replace the bloat among mid-level staff.

The industry has kept the salary for fresh IT engineering graduates about the same level for 20 years, without even keeping up with inflation. This luxury has been afforded to them because of a) the demographic of our country which has a very young workforce, and b) the rise of colleges geared towards churning out computer programmer graduates to meet the demands of the IT Services industry as well as the Indian set-ups of Western firms that look to capitalise on cheap, young Indian computer programming talent.

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I received an astonishing number of calls after the last “Techproof Express”, largely from industry executives as well as analysts who follow the industry. Their contention was that I had been too harsh on the Indian IT Services industry and that the head-honchos had in fact been clear about their priorities all along.

One such call was from Manik Taneja, a well-known industry analyst now with JM Financial. I have known Taneja for a while now and respect his opinion since he is thorough enough to back his views with a good amount of data. We don’t always agree, even when presented with the same data, but then that is what makes interacting with him interesting.

Taneja had some very intriguing points to make based on JM Financial’s data. First off, he points out that the blip in demand during the pandemic was a once-in-a-lifetime chance which left IT Services companies with little option but to step up to the plate. He took the example of the “TWITCH” companies. (TCS, Wipro, Infosys, TechMahindra and HCL) to make his first point. And what was true of the TWITCH group was also true of the Tier 2 firms such as Mindtree, Persistent, LTI, and a couple of others. The main point is this—the TWITCH group added more people during FY22 than the cumulative headcount increase seen across all four years prior, i.e., FY17-21. This is also true of the second tier.

Specifically, for TWITCH, the net new headcount added was just over 20% for the period, which is an astonishingly large figure, given that cumulative headcount addition in the four years prior was only in the single digits each year, with some quarters even showing negative growth in headcount during April 2017- March 2021. This 20% was a net positive hiring for TWITCH, of over 317,000 employees during the financial year. The corresponding number for Tier 2 firms (according to JM Financial’s definition) was 26%, or almost 47,000 employees.

There is no arguing that this represents a quantum jump for the industry and explains at least some of the reason behind the supply crunch for the talent. While I am constrained to accept that it is only natural that mid-level wages go up in such a scenario, I am still sceptical that the raises needed to be as high as they were.

Sure enough, we are seeing leveling off in demand, and the slowing down of certain compensation components such as variable pay, which I discussed last week.

The second vector from JM Financial’s data shows that this increased hiring did not come with a corresponding reduction in rates, as measured by revenue productivity for each employee. This revenue is a mix of both onsite and offshore (i.e., India based) headcount, and so with the huge shift to offshore/work from home caused by the pandemic, one would have expected some degradation in these numbers.

Taneja’s analysis indicates that for the TWITCH group, these numbers ranged between approximately $44,000 per annum for Tech Mahindra to $61,000 for HCL Tech. This range is less important and doesn’t indicate that one firm is better than another—since all sorts of factors play into these averages. What is important is that these numbers have stayed relatively steady, indicating a robust demand environment—at least until March 2022.

We will see what pans out during FY22-23. In my opinion, demand is softening, and the mid-level bloat that these companies have put on will take some time to work out of the system. India churns out hundreds of thousands of fresh computer programming graduates every year, and I have no doubt that they will be nipping at the heels of their overpaid seniors who graduated 3-5 years ago.

The author is technology consultant and venture capitalist

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