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Over the last 18 months, a surge in employee departures at technology services companies came to be known as the Great Resignation. Tech workers resigned in hordes and joined elsewhere at higher salaries while companies tried to retain employees by offering unprecedented hikes and benefits.

That appears to be nearing an end.

Since the pandemic-induced lockdowns forced people to work from homes in March 2020, technology services companies were caught in a nearly two-year war for attracting and retaining staff.

During the last two years, there was a surge in demand for services offered by homegrown technology services companies. As the world was wrought by the pandemic, businesses, across industries, upped their spending on technology. Banks allowed customers to use their services from the comfort of their homes. Retailers wanted to allow curbside pick-up or even home delivery of goods. At the same time, Fortune 500 companies were spending less on buying servers and were instead using the infrastructure offered by Amazon Web Services or Microsoft Azure, which rents out computing power by the hour.

Both these factors made IT services companies go on a tear as they needed more people to fulfill the demand. A shortage of engineers conversant in data analytics, cyber security and machine learning tools further created a demand-supply mismatch in the market for skilled workforce.

Understandably, technology services firms took the simplest way to retain employees—bunging more money at them.

In 2021, both Tata Consultancy Services Ltd and Infosys Ltd gave two salary increases to most of their employees. Wipro Ltd, India’s four-largest technology services company handed out three increments to its top performers. This year, TCS and Infosys have given their first annual hike last month while Wipro will give its first one-a-year salary increment to its top managers that comprise a fifth of its workforce, only in September. Unsurprisingly, many analysts like Pankaj Kapoor of CLSA, a brokerage, estimate that the impact of wage hikes on the profitability of the largest IT services companies would not be significantly higher than last year.

Now fears of an imminent recession in the US have made IT services companies temper their hiring plans. During the April-June quarter, the five largest IT services firms added the least number of employees in over six quarters. HCL Technologies and Cognizant Technology Solutions Corp. hired a net of 2,087 and 900, respectively, in the latest quarter, to their workforce.

Even Accenture Plc, which has added the highest incremental revenue in the last two years, has become a tad cautious as the company added in the latest quarter the least number of employees to its workforce in the last seven quarters.

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A slow pace of hiring comes at the back of fewer people quitting their jobs. Quarterly attrition at Infosys declined sequentially while attrition over the last twelve months fell at Wipro. Both TCS and HCL Technologies Ltd are confident of attrition rates to decline by the end of the September period.

Finally, for the first time in almost a decade, the profitability of all technology services companies is under pressure. The operating margin of both TCS and Infosys is at a multi-year low while Wipro’s operating margin of 15% is its lowest ever.

For analysts and investors, who are concerned about the rising costs in the IT industry, this news should be music.

Wage costs now account for 52-58% of the revenue at the largest IT companies. A higher salary bill is eating into the profitability of these companies, and consequently impacting the earnings per share. This has led to shares of IT companies underperforming: The BSE IT Index is down 29% compared to a 56% fall in the BSE Sensex between 1 January and 30 July.

Nonetheless, a bigger challenge for IT services companies in the coming years will be how well they can manage the break-neck speed of hiring made over the last year and a half with overall growth.

The Great Resignation can't keep rolling on. As recession fears mass over the US and a possible global downturn coming too, not many would venture to try their luck by switching jobs as they did in the last two years. Most would want to hold tighter to their jobs, making attrition rates fall. If the slowdown gets worse, it could force the IT companies to look at streamlining their operations which would invariably mean layoffs. At the least, the tech sector will not be as short of talent as it was when the pandemic created new demand in the sector.

All that means one thing for sure—the end of stratospheric salaries for tech workers.

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