Don’t expect IT firms’ war with attrition to end soon

The Indian IT industry is reeling under high attrition for the last two years. Despite several initiatives including a record number of fresher hiring, employee churn is refusing to come under control. Management commentary of just-released fourth-quarter results of Tata Consultancy Services (TCS) and Infosys indicates that it is going to stay here for some time despite signs of plateauing.

HR experts and industry watchers are of the opinion that the trend may continue for another two quarters. This phenomenon, in the meantime, has started to take its toll on the operating margin of major IT players with high wage costs.

“High attrition is a two-sided story. Employers are offering (Jobs) & employees are looking out. While currently, employers are not asking critical questions related to short stints, employees are looking at maximising their earning potential. This is pushing employee costs to an unsustainable level. So, the sooner it comes down, it is better for the whole industry,” Aditya Narayan Mishra, Director, and CEO of CIEL HR Services told DH.

Talent demand cycle

Demand for technology talent has also seen such spikes in past occasions. Data from the last 15 years suggests that such an attrition spiral had happened between 2010-12 for most large and mid-tier companies. But, employee churn in FY22 was the highest in the last decade.

In the last two decades, the technology talent demand has gone through various cycles. In early 2000, overall demand for techies was shaped by Y2K and dotcom like events; and subsequent demand was influenced by the phenomenon of many global financial services giants setting up R&D centres (global capability centres) in India.

While the global financial crisis dampened the hiring activity in 2008, it was followed by a recovery on the back of the emergence of digital technologies, the setting up of R&D centres by engineering giants in India among others. Demand for tech talent was tepid in 2018 and 2019 when IT firms were busy right-sizing their employee pyramids, resulting in many mid-level employees losing jobs.

However, the Covid pandemic has given a new lease to the demand environment as digital adoption accelerates across the globe. Currently, apart from robust IT spending, technology talent is also keenly wooed by India’s ever-evolving startup ecosystem & burgeoning GCCs of global companies.

However, company officials are confident that as more fresh engineering graduates enter the system, supply-side woes will subside.

“We (the whole IT industry) are all interconnected. My attrition is somebody else’s lapses, and somebody else’s attrition is my lapses. And therefore, if the industry has to come out of this, it is fundamentally through freshers. Volume in the industry in the long-run has to be only freshers. And therefore, as we start pumping in more freshers, you’re seeing all the benefits of this, not only with us, (but) we’re also seeing that with the industry as well,” Nilanjan Roy, Chief Financial Officer at Infosys said during the analyst call.

No wonder, the top two IT firms of India- TCS, and Infosys- hired a whopping 1.85 lakh freshers in FY22. Behemoth TCS hired 1 lakh fresh engineering graduates, while the rest was by Infosys. And such a hiring trend is not likely to change in FY23 as both have aggressive hiring plans in this space.

“We expect attrition to start moderating and ease off by 2HFY23 given strong hiring plans of companies,” Kotak Institutional Equities said in a report. Apart from fresher hiring and subsequent hike in entry-level salaries; many employee engagement initiatives including wage hikes, promotions, generous rolling out of employee stock options, and many more are being employed in parallel to contain high attrition numbers.

Is it structural or transitory!

High attrition, frequent wage hikes, rising employee backfilling, and subcontractor costs have started to eat into the operating margin of Indian IT companies. In the fourth quarter ended March 2022, TCS witnessed margin headwinds to the tune of 90 basis points from supply-side challenges that had to be adjusted from operational efficiencies.

During this period, Infosys’ subcontracting cost (cost arising from reliance on third-party vendors) rose to 11.1% of sales as compared to 7.5% reported a year-ago period. So, the impact on expenses is clear. Against this backdrop, questions about the falling margin profile of Indian IT firms in the coming years have arisen.

At a time, India is gaining more ground as an offshore destination, startups are seeking tech talent aggressively and more GCCs set up centres or expand; this question is nothing but natural. However, HR experts feel that employee attrition is a transitory issue.

“Indian IT industry had dealt with such spikes in the past successfully and this will also pass. There may not be the long-term impact of supply-side issues on Indian IT firms,” said Mishra.

“All stakeholders should make efforts to ease supply-side constraints, failing which India may lose its edge as an offshore destination. Because, all said and done, cost plays a critical role here,” he added.

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