Software engineers have not been in such demand since the late 1990s. A Mint report dated May 17 about Infosys Ltd’s plans for bumper growth and retention bonuses underscores the challenges faced by the industry which is the country’s largest employment generator in the organized sector.
Salaries have been rising in the last two years, mainly due to the changing nature of work for technology services companies, and also because of wrong-timed moves by some.
India’s information technology services sector has nearly three dozen listed companies and thousands of privately owned firms, which Nasscom estimates had a turnover of $227 billion in the year ended March 2022. Five of the largest domestic technology services firms – Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd and Tech Mahindra Ltd – contributed nearly 40% of the country’s $178 billion in IT exports last year.
Four years ago, in the year ended March 2018, these companies together hired 5,182 employees.
Fast forward to 2022. These five companies alone hired 2,73,377 people. What has changed so much in four years?
As the world grapples with the COVID-19 pandemic, businesses across the world increased their spending on technology. The great corporate migration to the cloud was the second structural change. Fortune 500 companies are now spending less on buying servers, and are instead hiring the infrastructure offered by Amazon Web Services or Microsoft Azure, which rent computing power by the hour.
The IT outsourcing sector went through a pandemic storm on the strength of these two changes, and as a result, technology services companies now need more people in data analytics, cyber security and machine learning tools, rather than just proficiency in basic languages like JavaScript. On which computer codes are written.
Now there is a dearth of this talent pool. Therefore, IT services are competing to attract and recruit the required number of workers. In other words, salaries are rising rapidly because of the demand-supply mismatch in the market for skilled engineers. This is basic economics at work. The market will clear, stabilize salaries, and end stratospheric growth when the fallout rate drops to pre-Covid levels, according to HR managers’ projections, by the second half of the current fiscal.
While this may not sound very pleasant to potential employees in the job market, it will be music to analysts and investors who are concerned about rising costs in the IT industry. The fastest growth in nearly a decade, seen in the sector last year, came primarily at the expense of profitability due to increased competition.
Employee costs account for more than half of an IT services company’s total expenses. A decade ago, TCS used to cost employees 43% of salaries and consultants’ fees. Last year, the company’s salary bill was 53% of its total expenses.
Infosys’ operating margin declined from 28.8% at the end of March 2012 to 23% last year, a sharp decline of 580 basis points.
Among IT firms, Boffin is confident that customers can recover higher wage costs by raising rate cards for their services. But doing so is easier said than done. Historically, the inability of technology services companies like TCS to pass these costs on to customers explains why these companies trade at a discount (at less than 30 times value-to-earnings) compared to fast-moving consumer goods (FMCG) giants. Hindustan Unilever Limited, (which trades at more than 60 times earnings) says.
And so, to keep costs down, IT companies are looking to hire more college graduates. College graduates account for one-fifth of TCS’s nearly six lakh employees, while Infosys has a third of over three lakh employees.
Given that the Indian IT business model is based on low-cost employee benefits, what do rising salaries mean for its future?
There is no cause for alarm yet. For now, there is no immediate threat to the business model of these technology services companies that have put India on the global software map. But a structural change – reduced profitability – is a fact. It remains to be seen whether companies are able to recover the cost from customers in developed markets and whether the rupee’s depreciation against the US dollar can offset some of the fall in profitability.