- The gross addition needed per top Indian vendor every year is estimated at 25,000.
- IBM's headcount in India is at 38,500 and it is planning for an additional 50,000 over the next 12-15 months.
- Accenture has nearly 20,000 people in India and is targetting a staff of 50,000 in south-east Asia by 2009
- Financial service back offices have added 20,000 people in the last three years
- Wage inflation for the Indian tech industry averaged 12-14 per cent in FY06
- Wipro's attrition at the end of FY06 was 16 per cent up from 14 per cent at the start of the year.
Techies never had it so good. With the Indian tech sector growing at a fast clip, they're in great demand. What's more, there are enough global vendors wanting to grow their India outfits - IBM and Accenture are among the most aggressive. Little wonder then that attrition for Indian IT firms is inching up, despite fairly good increases in salaries of between 12-16 per cent over the last two years.
At the end of March FY06, Satyam's attrition had touched 19.2 per cent and even TCS, which normally is given to boasting about its low attrition has become a trite more subdued now that the number is nudging 10 per cent. That's up from 8.7 per cent in Q3FY06. For Infosys too, the March quarter saw attrition at 11.2 per cent, far higher than the 9.7 pr cent in March 2005.
The situation has been worse for Tier II players: Patni Computers has hit the 20 per cent mark, driving down the net profit for the March quarter to 19 per cent below guidance. Retaining people has become more difficult and attrition is an issue not just because it means higher costs for training, but because it could result in loss of business momentum. For fixed price contracts, it could even mean a financial loss.
Offshoring story gets better
And no company is willing to give up growth just when there are orders aplenty and large ones too such as ABN Amro, General Motors and Pearl BPO, to name a few. Recent data from TPI, a consulting firm, says that Indian companies have been able to increase their share of large deals from 1 per cent in 2004 to 3 per cent in 2005.
Moreover, their share in deals of over $50mn increased to 6 per cent in 2005 from 2 per cent in 2004 (based on the number of deals). Very large deals are being broken down and restructured so that Indian firms have a better chance of bagging orders.
Indeed, companies need not fear any fall in the growth of volumes as the offshoring story only continues to get better. Cognizant has indicated that it would grow revenues at 42 per cent in CY06 to $1.26 bn while enterprise software companies such as Oracle and SAP are optimistic on licence revenues. CIOs in the US are saying IT budgets should grow by 7.8 per cent over the next twelve months.
IT majors making hay
Not surprising then that companies are mining their clients faster: Wipro now has 29 clients billing more than $20 mn compared with 22 at the start of the year. TCS has nine $50mn clients today as against five in Q1FY06 and 31 $20 mn clients up from 25 in March last year.
Across product domains such as package implementation or infrastructure management and BPO, Indian firms are fast scaling up their operations.
Even newer businesses such as consulting or testing services are growing fast. The good news is that Indian firms have been able to reduce the contribution from commoditised segments such as application development and maintenance: for companies such as Infosys and Satyam ADM contributes only half of what it used to five years back.
Wipro's R&D practice is getting stronger allowing it to depend less on traditional spaces. Besides, the geographical spread too is getting better with firms making greater inroads into Europe: in FY06, Infosys earned 24.5 per cent of its revenues from Europe, up from 22.3 per cent in FY05.
For TCS revenues from Europe constituted 24.3 per cent in Q4FY06 compared with 22 per cent in Q1FY06 while for Wipro Europe accounts for nearly 33 per cent of revenues.
So, the revenue outlook appears to be fairly good with pricing expected to remain stable. Infosys has announced a 28-30 per cent growth for FY07. If Wipro's guidance for Q1 appears weak at 4 per cent, it's more to do with a couple of big clients ramping down, say analysts, who believe volumes will pick up in subsequent quarters.
The hiring spree
But, IT firms will not be able to tap into this opportunity unless they have the right people and enough of them. The problem today is that there are any number of companies in the market looking for people. Cognizant has indicated that its head count would go up by 42 per cent in CY06 over CY05 - Cap Gemini and CSC have more than 60 per cent of their offshore employees in India and are looking to add more.
Apart from global IT firms, captive centres among big banks, too are on the rise. One estimate for a set of such centres has seen employment rise to 80,000 from just 20,000 in March 02. In FY06, the Indian IT industry is estimated to have recruited around 30-35 per cent more people than in the previous year: Wipro added 11,471 people while TCS added 21,140.
If players are to continue to grow at 25-28 per cent, between them they would need at least 50,000-60,000 people every year, according to a conservative estimate. The requirement from the BPO space alone is estimated at more than 100,000 annually.
Fatter wage bills
The expansion of captive units and ramp-ups by global vendors will mean wage inflation, especially at the middle management level, where there is a shortage of talent. Raises, say industry watchers, could exceed those of last year (13-17 per cent in FY06) perhaps settling in the range of 15-17 per cent.
Satyam Computers, managing director, Ramalinga Raju has said that salaries for off-shore employees will go up by 18-19 per cent while on-site salaries would increase by 5-6 per cent in FY07. In the last 18 months, Satyam has raised salaries twice - in October 04 and April 05.
Sasken, it is heard, will be offering raises of around 15-20 per cent for offshore professionals while TCS is understood to be looking at hikes of between 10-15 per cent.
Players such as Patni too would need to up salaries in line with peers if it want to retain people.
Jaitirth Rao, CEO, Mphasis said on the analysts call that the problem was not so acute at the entry level because the supply from the campuses was more or less adequate. The demand, Rao indicated, was highest at the middle level.
It's for these professionals that global majors are willing to offer raises of 30-40 per cent. To cope with the situation, companies are trying to hire more freshers - in other words, increasing the bottom of the pyramid.
However, making do with younger teams without jeopardising execution will be a challenge. They are also building up infrastructure in Tier II and Tier III cities where the cost of living is lower and therefore the salaries paid out can be lower.
Margins under pressure
For those who believed that the tech story was all but over because wage inflation would eat into margins, the Infosys March quarter numbers were the last nail in the coffin. With revenues up just 3.6 per cent seqentially and margins dipping by 226 basis points, the results were woefully below the Street's expectations.
But, Infosys guidance for the current year has been more than heartening: it is confident of being able to turn in a 28-30 per cent topline growth and an EPS of Rs 114-116, a rise of 26.4-28.4 per cent.
Nonetheless, analysts are unanimous in predicting a fall in operating margins of between 100-150 basis points in FY07, across the industry. Companies can of course, make up for higher costs by increasing the offshore component of revenues, keeping a check on sales, general and administration costs and managing the bench more effectively so that utilisation and revenue per employee improves.
Offshore utilisation, currently at between 65-70 per cent has room for improvement and with pricing expected to remain stable, there are not too many worries on that front. So, while Nascomm targets for Indian IT-ITES exports at $60bn by 2010 from $23bn in FY06 (estimate) a CAGR of 26-27 per cent, may well be achieved, margins may get a little bruised in the process.Are you working at a BPO, or planning to work at one? Join the BPO Discussion Group
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