When the going gets tough at information technology (IT) services firms, it is perhaps the toughest for employees.
Technology companies let go of more employees than they otherwise would, to cut costs and protect profit margins.
This year will be no different, although things are more complicated because of the ongoing shift in demand from traditional services to digital solutions, making some of the staff redundant.
Still, involuntary attrition is expected to remain in low single-digits at top-tier companies. While companies don’t break-down attrition numbers, analysts estimate that top IT services companies typically let go of 1-2% of their staff either due to a shortfall in performance or a mismatch in skills. This is expected to rise by another percentage point or so in the coming year, according to an analyst at a multinational brokerage.
Of course, the exact number is anybody’s guess, since companies don’t disclose it.
Even so, assuming an involuntary attrition of 3% on an employee base of around 2.7 million in the IT services industry (excluding business process outsourcing), job losses could be in the range of around 80,000 in the coming year.
In absolute terms, this is a large number, and it isn’t surprising that layoffs are getting the attention of the media as well as some employee unions.
But relative to the total employee base, the increase in involuntary attrition is estimated to be marginal.
Besides, an increase in involuntary attrition doesn’t mean the industry’s size will shrink. While growth rates have fallen drastically, the industry continues to grow in the mid-to-high single digits. And since employee utilization rates at most top firms are close to peak levels, net hiring can be expected to keep pace with revenue growth.
It must be noted here that for all the talk of automation, artificial intelligence and non-linear expansion, growth in headcount more or less kept pace with revenue growth for India’s top three IT firms in FY17.
Analysts at Nomura Research point out that this was despite a sharp increase in employee utilization at Infosys Ltd and Wipro Ltd, implying pricing pressure in the legacy business.
While it’s ironic that revenue per employee was on the wane last year, it also goes to show that the use of automation and artificial intelligence are nowhere near the levels where they can make a dent on Indian IT’s hiring needs.
According to data collated by Kotak Institutional Equities, India’s top four IT firms and US-based Cognizant Technology Solutions Corp. put together hired 87,500 employees on a net basis (i.e. adjusted for attrition) in FY17, a 5% increase over the previous year.
Coming on the back of two successive years of tepid revenue growth, the increasing headcount of IT firms clearly shows that the industry’s fortunes are still closely linked with its headcount.
Of course, all of this isn’t to minimize the troubles of the IT services industry. The fall in growth rates, combined with the protectionist measures of the Donald Trump administration and the appreciation in the rupee has resulted in a significant erosion in value.
IT stocks have underperformed the broad markets in the past year by nearly 25% since April 2016. A number of companies have attempted to soften the blow for investors by sharply increasing payout ratios. This has helped provide a floor for some IT stocks.
But there is no such silver lining for employees, especially those who are beyond the stage where they can be retrained with new skills and those who are primarily people managers. The shift from traditional to digital services has made things tougher for these categories of employees.
Besides, since hiring has slowed across the industry, voluntary attrition has also come down.
Kotak’s analysts point out in a note to clients that an extended period of low attrition limits the ability of companies to manage the employee pyramid, or, in other words, the ratio of junior employees to mid- and senior-level staff.
In this backdrop, scrutiny of mid- and senior-level staff is understandably on the rise, as companies attempt to optimize cost structures through effective management of the employee pyramid.
The message for these employees is clearly to adapt to new technologies quickly, in order to avoid redundancy.
Having said all this, there’s no wishing away the fact that the next few years will be painful for a number of employees of IT services companies.
For the IT industry, however, the layoffs should be seen as the bitter pill it has to swallow to be ready for a future where automation, artificial intelligence and non-linear growth are more than just buzzwords.
It can be argued that the industry has started this journey later than it should have.
But as the saying goes: it’s better late than never.