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Home / Industry / Infotech /  Tech cos turn to austerity as West braces for recession

MUMBAI : India’s software services companies are scaling back on payouts, anniversary hikes, and lateral recruitments as they combat wage inflation and a threat of recession in western markets, where they generate most of their revenues.

However, it’s not just salaries. With global travel curbs easing, increasing travel and visa costs are also squeezing margins.

“IT services companies are facing multiple headwinds—return to office, increased travel costs, highest ever subcontracting cost, recession threat from the US, lower margins in recent quarters. And to top it all, there is a sense of reality check that they may have over-hired in the preceding 12 months," said Kamal Karanth, co-founder of Xpheno, a staffing solutions company whose clients are mainly IT firms.

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The pandemic-era lockdowns had forced companies worldwide to digitize processes to reach customers and allow remote working, bringing in a tidal wave of work for Indian software companies and forcing them to hire aggressively to meet demand. But with covid restrictions easing in most of the world and tighter monetary policies tipping the US and Europe towards recession, software companies anticipate that the record order flows of the past two years might soon shrink.

Companies are preparing for such an outcome by cutting wage costs, hiring freshers and utilizing their existing employees by imparting new skills that are more in demand instead of hiring expensive workers laterally.

Recently, Tata Consultancy Services (TCS), the country’s largest IT services firm, stopped its first-year anniversary hikes, underscoring efforts by the sector to arrest high staff costs. While rivals such as Infosys are rolling out 70% of variable pay, Wipro delayed payouts for certain employee categories.

The brakes on manpower costs come at a time the sector is expected to hire more than 150,000 fresh graduates. According to Karanth, the companies are using this opportunity to reduce the costs of lateral hires.

“This allows them flexibility to lower costs by optimizing their workforce. Hence we see tough stances around return to the office, variable pay withholding or pushing increments to the future," Karanth said.

In IT services firms, salaries make up about 70% of costs. Tata Consultancy, Infosys, Wipro, HCL Tech and Tech Mahindra have seen staff costs shoot up as high attrition continued to plague them in the June quarter. On average, wage costs as a share of revenue rose from 54.3% in the March quarter to 55.2% in the following three months. The hiring frenzy of the past four quarters, involving multiple counter offers, higher-than-normal increments, and out-of-turn promotions, were acceptable until now but are going out of fashion, making way for a more austere approach.

Tech firms are replacing junior management lateral hires with new graduates, said Aditya Narayan Mishra, chief executive of Ciel HR Services. “Those who were getting paid 8-10 lakh now will see much of the work being done by juniors. Firms said they would rather train to upskill staff than hire from market," Mishra said.

In a July report on IT services, brokerage Kotak Institutional Equities said clients are reprioritizing tech spending but not compromising on digital initiatives. “Focus on cost efficiencies has increased, which presents a set of opportunities that can offset pullbacks in discretionary spending," it stated.

With fresher hiring and a drop in projects, the bench strength of tech firms will increase. Both analysts and recruiters say this will be the chance for firms to upskill and reduce costs. Employees between projects are said to be on the ‘bench’.

“As recruits are placed on projects and become billable, utilization will increase hand-in-hand with the better pyramid. Higher supply and declining attrition will lower both lateral hiring costs and subcontractor usage," Kotak added.

Attrition for the June-ended quarter for tech firms was: 19.7% for TCS, 28.4% for Infosys, 23.8% for HCL, 23.3% for Wipro, and 22% for Tech Mahindra. Wipro and Tech Mahindra were the only ones to see a slight dip in attrition from the previous quarter.

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