THE INFORMATION TECHNOLOGY INDUSTRY–PARADISE UNDER SIEGE?

BY:

Chanakya Anand

MBA (IT) Semester-I, IIIT- Allahabad

 

Over the last month, the Indian IT sector has been in the news for all wrong reasons. First there was the news that employees in the blue chip companies like TCS and IBM (in India) are being given the pink slip. This was accompanied by screaming headlines in most of the Indian dailies taking about pay cuts in TCS. At the same time Forester Research downgraded its earlier forecast for 2008 global IT spending from 6.4% to 5.2%. Indian IT companies have confirmed that US it budgets are taking more time than usual to firm up and its is this lack of clarity on IT spend that is making Indian IT companies cautiously optimistic of the near future. Given all these, it is imperative for us to analyze the IT growth Engine (given that it is one of the major drivers of Indian growth) and keep our ears to the ground to look out for any more indicators of a possible downward spiral.

The Indian IT industry, which in early part of this decade grew up at an impressive 30% over the last 3 years while most industries would be happy growing even at half this rate; two key factors have raised the alarm bell. Firstly the strengthening of rupee with respect to dollar by as much as 15% over the last one year has implied that sales growth has not necessarily translated into bottom-line gains. IT companies earn most of their revenue in dollars while their expenditure is mostly in rupee terms. This has meant that operating margins are under pressure. Secondly, the slowdown in US owing to sub-prime crisis and overall recessionary pressure means that IT budget of companies in US will be under pressure. While the world has over the last few years learnt to avoid catching cold when US sneezes, the same cannot be said about Indian IT industry. After all, the US contributes to as much as 50% of the Indian IT industry revenue.

Given the backdrop of these two macro factors, we can analyze the twin issues of pay cut and employee retrenchment. The reduction in salary is due to a lower variable pay. Given the fall in operating margins, it was only expected that the variable pay factor which depends on company’s performance would see a fall. For an industry which was used to exceeding target and therefore getting more than 100% of the variable pay component, this fall has come as a shocker. Moreover, the IT sector which enjoyed annual salary hikes, is now forced to tighten its belt. Given that employee cost contributes to nearly 70% of overall cost, it is but natural that companies have begun to bring in greater discrimination between performers and non-performers.

On the retrenchment front, it is difficult to ascertain numbers. A quick look of the techie blogs seems to indicate the IT companies have retrenched freshers. Unlike its IT peers, TCS seems to have shown the door to more than 500 employees. News report attributes to TCS also indicate that such retrenchment has happened after giving employees adequate time to improve through continuous evaluation and performance improvement plans. In order to tackle this long term problems, IT companies have already begun to partner with engineering campuses to share industry knowledge thereby increase the employability of fresher. These moves of the IT companies are a clear signal to freshers to upgrade their skills and a warning to high cost middle managers to shape up quickly if they want to avoid being dumped.

Indian IT exports amounted to $32 billion in NASSCOM amounted to same to reach $60 billion by 2010. These numbers are surly not a sign of a sector under siege. The retrenchment woes and pay cut is not a sign of a declining industry but are clearly a sign of an industry which has moved from high growth to a more mature and steady phase in its life cycle. But this change in the life cycle will cause pain to many IT employees and employers in the short run. And worse still, some of them which cannot transform might even enter a declining phase sooner rather than later. This therefore implies that the Indian IT companies will have to transform themselves from doing just low-end coding, staffing call centers and managing back office processing into businesses which are involved in high end product engineering, innovation and creation of intellectuals. In fact backed by their strong balance sheets, some IT giants are buying up companies at home and abroad to boost their product portfolios and acquire new skills and technologies. They began to hire high end researchers, consultants and product managers.

Now how the ITES and BPO industry poised for future?

If the recession in US has become a reality, the IT industry could all see a slowdown. Moreover, the higher margin projects could even come to a grinding halt in the short run. Also pricing which has remained stagnant and sticky over last few quarters is unlikely to increase beyond 5%. In fact, US recession could mean a dramatic negative impact on the pricing power of these IT companies. In this backdrop, the employee’s salary hike of 15% seems to make life difficult for IT companies. And all this in a world of an ever strengthening rupee can only men dark clouds.

But these dark clouds, as always, are accompanied by a silver lining. After all, a slowdown in the US is not permanent and surely the dollar will start strengthening against the rupee as US economy begins to recover. Even if that does not happen in the short run, the IT companies do have various levers to manage their margins by factors such as employee utilization, relative composition of projects, the average time of deploying a trainee and bench costs. However in the long run irrespective of exchange rate problems and economic concerns over US, the IT industry will have to learn to innovate and move up the value chain. This changeover will take time. But the present crisis provided the industry an opportunity to hasten the transformation process whereby the present tech coolies may be morphed into innovating consultants of the future.