2022: A year of paradoxes for Indian IT industry

The year 2022 has been full of contrasting forces pulling each other in opposite directions and the Indian IT industry has had a ‘seen it all’ year. What started as a euphoric period of growth, has slowly led to an uncertain environment with a foggy outlook. The January-March quarter had a record number of hirings with an elevated employee attrition level. As we enter the last week of this year, hiring momentum has halted with companies witnessing a respite from high employee churn.

As the world struggles with high inflation and the effects of the Russia-Ukraine war, recessionary fears are prompting companies to hold back technology spending. In turn, hyper-growth witnessed by Indian IT firms seemed to be on its last legs. All in all, the IT industry has had a roller coaster ride in 2022.

“The interesting fact about 2022 is how it started and how it is ending. At the beginning of the year, demand was good and supply (of talent) was the problem. Towards the end, demand seems to be moderating and supply-side issues are easing with the overall environment remaining uncertain,” Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting told DH.

Contrasting traits

Management commentary during the beginning of the year pointed towards a bullish outlook. Most companies guided a double-digit rise in revenue growth. While market leader Tata Consultancy Services (TCS) was confident of achieving double-digit revenue growth in FY23, Infosys revised its guidance to 15-16 per cent for the year from earlier 14-16 per cent. Similarly, HCL gave initial guidance of 13.5-14.5 per cent in constant currency terms. However, towards the end of the year, the management of HCL Tech turned cautious and said revenue growth would come towards the lower end of its guided range. If Accenture’s first quarter results (which follows the September-August financial year cycle) are something to go by, such cautiousness is likely to be the predominant trend for all companies going ahead.

“We believe from Q3 FY23 management commentary of Indian IT services will start to weaken and impact on revenue growth will be visible in Q1 & Q2 of FY24,” ICICI Securities said in a note.

Such moderation in demand is driven by slowing spending in some key verticals. According to experts, the telecom, hi-tech, and mortgage industries are showing signs of stress, prompting companies to relook at their growth projections. The year also saw a demand surge seen for digital projects slowly fading. With an approach to the new year, clients’ preference to spend on traditional services is growing.

“Demand for digital services was very high at the beginning of the year. Now, we see demand for traditional services growing. Similarly, more cost takeout deals are coming to the marketplace (in the last one-two month) as compared to digital deals,” said Jain.

Global consultancy major ISG, which tracks outsourcing deals worldwide, pointed out that large deal sizes are giving way to many smaller deals. No wonder, during July-September 2022, mega deals touched a five-year low at a combined annual contract value (ACV) of $705 million globally. “Enterprises are favouring smaller, shorter engagements. There are a lot of reasons for this: companies need to realise the results of outsourcing faster, and they need to reduce transformation risk. Companies also are increasingly carving out and rebidding less successful components of larger transactions,” ISG’s principal analyst, Mrinal Rai pointed out. And smaller deals are making it difficult for IT firms to conduct proper manpower planning.

Consultancy firm CIEL HR chief executive officer Aditya Narayan Mishra pointed out that while companies were facing huge supply-side issues at the beginning of the year, this has certainly eased for now. “We have seen a huge amount of volatility in 2022. During the January-March quarter, moods were up, and hiring momentum was strong for Indian IT firms. However, slowdown fears have impacted hiring with significant slowdown since October,” he added.

With employee attrition levels at more than 20 per cent, Indian IT firms were on a hiring spree in the first half of the year. Fresher hiring, similarly, was strong. However, layoffs in the startup ecosystem and mass firing by global technology firms including Meta, Twitter, Google, and many more led to fewer job opportunities. Subsequently, all industry estimates suggest a reduction in attrition and hiring numbers going ahead. While the Indian IT industry witnessed a change in most indicators, pressure on operating margin remained relentless during the year. With high wage costs and cross-currency headwinds, domestic IT firms didn’t see any respite on this front throughout the year.

Uncertain times ahead

As we are on the verge of entering 2023, the Indian IT industry may have to face growth bumps. After a period of hyper-growth induced by the Covid-19 pandemic, an impending slowdown is likely to pull down growth to pre-pandemic levels. Amid such a pessimistic outlook, Indian IT firms’ ability to navigate a difficult environment may save the day.