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  • Writer's pictureChesapeake Group

Expense rationalization in the Indian IT sector



Overview:


The diminished revenue growth of Indian IT firms stems from a cascading impact of layoffs and cost-cutting initiatives implemented by prominent US technology corporations.


Indian IT firms have shifted focus to their margins and are adopting various cost tightening measures such as reducing headcount, cutting sub-contractor costs, increasing productivity and adjusting appraisal cycles.


Cost trimming measures:


Firms are in cost cutting mode to bring down the wage bills that ballooned following the excessive hiring post the Covid-19 pandemic. As a result, companies are looking to rationalize fresher intake this year.


Infosys CEO Salil Parekh said that the company is carrying inefficiencies in its employee pyramid and has room to tighten utilization to 84-85%.


According to market reports, IT companies may recruit 40% fewer freshers in FY24, mainly due to companies wanting to honor the offers made before. Infosys, which had hired 51,000 freshers in FY23, has announced that it will not be visiting college campuses this year to hire freshers as the company still has a significant bench that comprises of freshers hired last year.


With ~60% of expenditures in an IT company attributed to its workforce, salary increases and bonuses are being implemented with increased scrutiny and careful consideration.


For existing employees, Infosys will roll out pay hikes in Nov 2023, after deferring it for nearly two quarters. It will also be giving a quarterly performance bonus of 80% variable pay to eligible employees at position level 6 and above. Meanwhile, TCS is paying 100% of variable pay to about 70% of its workforce.


Corporations and recruiters anticipate a continued weakness in the labor market for at least the next couple of quarters, pending a resurgence in deal flow and pressing needs that would prompt renewed recruitment. As per Quess IT Staffing, the headcount decline will continue to for another quarter. The exits are largely taking place in the two-four years of work experience category, as they are getting hired in the global capacity centers.


Cognizant has initiated a strategy to cut costs by $400m. This plan involves trimming overheads and introducing agility and efficiency to navigate the current delicate business environment. CEO Ravi Kumar stated that the company will concentrate on streamlining the organizational structure, minimizing attrition, and reemphasizing India's role, both in terms of leadership and the enhancement of its delivery centers.


Cognizant anticipates savings of $350m in 2023 and an additional $50m in 2024. Approximately $200m of these savings will be derived from employee severance and other expenses linked to non-billable personnel, while another $200m will result from the consolidation of office space. The company is also exploring the possibility of relocating its operations to tier-2 cities.


Firms are grappling with the challenge of overcapacity and are adopting various strategies to address it. Some companies are streamlining workforce expenses by adjusting performance appraisals, placing more employees in lower pay bands, lowering bench period thresholds, and implementing a freeze on variable pay for underutilized resources to encourage voluntary attrition. These efforts also involve the termination of non-billable staff and the relocation of resources from high-cost locations to more cost-effective geographies.


Although the top IT firms have witnessed a reduction in headcount, their employee costs have not decreased. This is because the recent hiring undertaken during the peak attrition period in the last fiscal year was done on a higher cost structure. Another contributing factor is the incremental onshore hiring done to mitigate subcontractor expenses.


Companies are also prioritizing the upskilling of current employees in emerging technologies over new hires, with a particular emphasis on training in emerging technologies such as Generational AI.


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