Crunch time for India’s IT firms
Mint analyses prospects of Indian IT firms as they struggle with US visa curbs effected by Donald Trump and automation impact that have resulted in job cuts
Bengaluru: The fallout was inevitable. As growth slows, profits decline and existential questions over their relevance in the era of Big Data and Artificial Intelligence become louder, India’s information technology (IT) firms have started going for layoffs.
The $150 billion industry is now in the midst of its largest retrenchment drive ever. Seven of the biggest software services firms are planning to ask at least 56,000 engineers to leave this year—a number that could multiply as the bad news piles up.
“This is just the first wave of tsunami to hit these companies,” said Kris Lakshmikanth, founder of Bengaluru-based Headhunters India, a staffing firm with a pan-India presence. “I believe over 100,000 jobs will be lost in this year. In the coming years, I believe, only the fittest and best companies will survive.”
To be sure, the numbers are still small, given that India’s IT industry employed 3.9 million people at the end of March 2017, according to lobby group National Association of Software and Service Companies (Nasscom).
Yet, it is at least twice the number of employees laid off by the seven companies last year, reflecting their under-preparedness in adapting to newer technologies and dealing with fallout from protectionist restrictions enforced on foreign companies by US President Donald Trump under his “Buy American, Hire American” policy.
In the past, between 1% and 1.5% of a large Indian IT firm’s employees would be asked to leave every year on account of poor performance. The number was 3% for foreign firms with large Indian operations. In 2017-18, the range is likely to be 2-6% across Indian and foreign companies, according to 22 current and former employees across these seven companies who spoke on condition of anonymity.
The seven firms—Infosys Ltd, Wipro Ltd, Tech Mahindra Ltd, HCL Technologies Ltd, US-based Cognizant Technology Solutions Corp. and DXC Technology Co., and France-based Cap Gemini SA, which together employ 1.24 million people, plan to let go of 4.5% of their workforce in 2017.
Nasscom tried to assuage concerns of any large-scale layoffs, maintaining that involuntary attrition will be 1-3% this year, just like in the past.
Nonetheless, some executives at these firms and a few experts contest this, and a few are already painting a doomsday scenario for the IT sector.
Change in business model
Once completed, the most likely outcome of this exercise will be that most firms will end the current year with fewer employees than they started with, despite continuing to hire young engineers, according to the human resource (HR) heads at two of the seven companies.
At the heart of the problem is the fundamental change in the business model that Indian IT companies are wrestling with in the digital area. The traditional business of writing software codes and managing the IT infrastructure of clients based in the US and UK still makes up a lion’s share of sales for these companies.
“Digital revenue is still less than one-fourth of traditional business. Meanwhile, traditional business is slowing. All of us have to re-look at the existing talent pool to make sure it is aligned to future needs,” one of the HR heads cited above said on condition of anonymity.
As IT firms start working on newer technologies such as cloud computing, they are fast moving from a people-led model—which means they need fewer employees. Meanwhile, many of the IT companies have embraced automation tools to perform the mundane, repeatable tasks that were performed by an army of engineers earlier.
The earnings announcements by the largest IT companies in the past financial year showed how they were hurting.
In the year to March, India’s three largest software services firms—Tata Consultancy Services Ltd (TCS), Infosys and Wipro—grew at a slower pace than in 2015-16. Worryingly, for the first time since 2009-10, TCS, Infosys and Wipro, which together make up a quarter of the industry’s total business, grew at a slower pace than the industry’s 8.6% growth in constant currency terms in 2016-17 (see table 1).
Constant currency eliminates the effect of currency movements.
Challenges pile up
At TCS, revenue per employee, an important metric of gauging if the firm is able to deliver more value-added work to its clients, further declined (see table 2).
Understandably, poor growth and geopolitical developments made investors dump IT company shares last year: In calendar year 2016, shares of TCS fell 3.2%, Infosys 8.5% and Wipro 15.33% even as the BSE Sensex rose 2%. All three companies have now announced that they would consider share buybacks.
The IT industry confronts more challenges in the current financial year than it did a year ago, prompting Nasscom to delay its annual revenue growth forecast.
Infosys’s lower growth outlook (6.1-8.1% dollar revenue growth and 6.5-8.5% in constant currency terms in 2017-18 against dollar revenue growth of 7.4% in the year to March 2017) is reflective of the challenges.
Infosys’s outlook is lower than the growth projected by Nasdaq-listed Cognizant, which follows a January-December fiscal year and expects to grow between 8% and 10% in 2017.
So, what were the reasons behind the tepid performance of the three largest IT companies and their growth outlook?
Since the start of the year, the new Trump administration has taken steps to curb work visas, which until now allowed India-based outsourcing firms to bring in foreign nationals at relatively lower wages to the US, helping them win more business from American customers.
Although details of the new H-1B visa policy that governs tech professionals are sketchy, it is widely agreed that the Trump administration’s moves to curb visas will hit profitability and could impact business in the coming years.
Impact of protectionism
“My prediction is that based on the bi-partisan and executive support for the regulatory policy proposals, implemented changes will certainly strike a huge blow against the industry,” Erin Green, former head of immigration for Infosys in the US, said.
Trump’s protectionist policies mean more Indian IT companies are asking Indian H-1B visa holders to return home.
Infosys has already announced that it plans to hire 10,000 US citizens over the next two years. Wipro has hired over 2,800 Americans in the past 18 months and expects half of its total workforce in the US to be locals by the end of June 2017.
“IT industry grew on the twin premise of talent and mobility. Now, both these are being questioned. Because of protectionist policies across the world, we have to go for more localization,” the first HR head cited above said.
“And the business requirements of clients are in newer areas such as data analytics. Traditional maintenance work is getting automated. So, we are seeing a more stringent appraisal process and more people being asked to go.”
Worries about retaining their existing workforce have been amplified by under-investment in newer technologies or digital technologies.
Despite claims of higher growth by both TCS and Wipro in digital services, which remains a fuzzy phrase, and Infosys’s CEO Vishal Sikka’s so-called ‘New and Renew’ strategy focusing on new technologies, growth has remained anaemic. That’s the reason many analysts have questioned if existing traditional contracts are merely getting re-badged as digital.
A case in point: TCS claims its digital business grew 29% in the past year and now brings $3 billion in business. Wipro claims its digital business grew 28% to $432 million in January-March from $338 million in the April-June period last year. Finally, Infosys, although it does not separate digital and non-digital revenue, said 45% of its revenue stems from new offerings and is growing at about 20% year-over-year (y-o-y) in constant currency terms.
“This implies the remaining portion of (Infosys’s) business is declining 1-2% y-o-y (in constant currency)” Keith Bachman, an analyst at BMO Capital Markets, wrote in a 16 April note.
Most analysts think this is unlikely; and for this reason, claims of a higher proportion of digital revenue have not excited them.
For now, most of these companies are preparing the ground for layoffs, with each of these seven companies having already put a higher number of employees on notice by awarding them the lowest ratings.
In denial mode?
Cognizant has placed more than 15,000 employees in the lowest category (bucket IV), and Infosys has placed more than 3,000 senior managers in the category of employees needing improvement.
DXC Technology, a company formed from the merger of Hewlett-Packard’s enterprise-services division with Computer Sciences Corp., is in the midst of a three-year plan to reduce the number of offices in the country from 50 to 26. The firm plans to ask 5.9%, or 10,000, of its 170,000 employees to leave this year.
Cognizant, Capgemini, Wipro and Tech Mahindra Ltd started letting go of employees in February, while Infosys, HCL and DXC are expected to do so later this month.
Most employees being asked to leave are engineers with at least six-to-eight years’ experience.
All seven companies are still in denial mode and attribute the planned exits to a “marginal” increase in the number of poor performers on account of a “more rigorous” performance evaluation process.
“Cognizant has not conducted any layoffs,” a spokesman said, adding that the performance-based reviews this year are consistent with the past ones.
“Our performance management process provides for a bi-annual assessment of performance,” a spokeswoman for Infosys said, declining to share the number of employees asked to leave in the current quarter. “We do this every year, and the numbers could vary every performance cycle.”
“Performance appraisal may also lead to the separation of some employees from the company and these numbers vary from year to year,” said a Wipro spokesperson.
Spokespersons for Wipro, Infosys and Capgemini termed the numbers cited in this article, in terms of employees being laid off, speculative. A DXC spokesperson declined to comment.
“We continue to implement strategies to meet the changing demands of business in the current global economic environment. As a performance-driven organization, we assess employee performance on a regular basis and take necessary actions wherever necessary,” said a spokesperson for Tech Mahindra.
A spokesperson for HCL said the firm does not have any plans to ask more employees to leave in the current year than in the last year.
TCS, which employs close to 390,000 employees, does not have any plans to ask anyone to leave this year, said a spokeswoman.
Still, hiring at TCS, Infosys and Wipro is slowing: Infosys saw a net addition of 6,320 employees last year, the second lowest number added in a year since 2003 (in 2013-14, Infosys hired only 3,717 employees on a net basis).
A few of the smaller outsourcing firms started trimming their workforce in the year to March: Bengaluru-based Mindtree Ltd and the India operations of WNS (Holdings) Ltd, which together had 38,000 employees on their rolls, saw their headcount shrink by 527 people last year, compared with 2015-16.
“The entire pyramid structure (organizational structure) is getting disrupted,” the second HR head cited earlier added.
That speaks of a bigger problem, said an expert.
“What required 50 programmers, analysts or accountants five years ago can be done by a handful of smart thinkers and much smarter systems,” said Phil Fersht, CEO of US-based HfS Research, an outsourcing research firm. “If I were Prime Minister Narendra Modi, I would be very concerned that a whole workforce generation needs reorienting to address work activities that are growing in demand.”
“Big is no longer beautiful,” Fersht said.
The only solution ahead of these large companies to tide over the challenging times is to increase the pace of making themselves future-ready. Homegrown IT giants, especially TCS, need to step up investments in new technologies, and the managements need to shed their ‘invented here’ approach.
TCS has stubbornly shied away from making any acquisitions; the management says it can build new technologies in-house. When companies across the globe are struggling for growth, small acquisitions can not only help bring in technology and talent but also growth.
Accenture Plc, a company twice the size of TCS, is one that over the years has used inorganic growth rate to beat slowdown blues. Accenture, which follows a September-August fiscal year, saw its 15 acquisitions account for 2 percentage points of its overall 10.5% constant currency growth.
Bringing about change in a large organization isn’t easy, either. Until now, Sikka’s 33-month stint in the CEO’s job at Infosys and Abidali Neemuchwala’s year-long stint at Wipro have been patchy at best. TCS has a new boss in Rajesh Gopinathan, who took over as CEO and managing director after N. Chandrasekaran became chairman of Tata Sons Ltd in February.
The rest of this year will test the mettle of the three leaders in an IT era when change promises to be the only constant.