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IT Industry: Gaining from the slowdown? - Views on News from Equitymaster
 
 
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  • Mar 26, 2001

    IT Industry: Gaining from the slowdown?

    Business has always been the wisdom of managing the 4Ms, (Money, Machines, Materials and Man). Privilege of being the management’s “apple of the eye” has shifted over the ages from Money, to Machine, to presently Man. The IT revolution has re-christened the economy as the knowledge economy. The employee was “the asset- that-walked-out-of-the-door-every-evening”. Software companies led the charge, some even introducing dating allowance to retain its assets (employees). Salaries and increments were unheard of and the software was the hottest profession to be in.

    Why were these companies spending so much on the employees? The primary reason was the dearth of talent across the globe. Good people were hard to find, even if found they were very difficult to retain. Therefore, the fierce battle to recruit. Of course there were a few others factors, like with the demand and supply equation in their favour software companies were calling the shots where pricing power was concerned. The characteristic of the business was such that the costs incurred for daily operations are very low. Therefore, even after spending sums considerably higher on wages costs compared to other industries, software companies were making good margins, industry average being 30% plus.

    Employee cost as a % of revenues
    Companies Jun Quarter Sep Quarter Dec Quarter
    Infosys 40.1% 37.6% 37.2%
    Wipro 14.3% 14.2% 14.4%
    Satyam 38.0% 41.6% 41.0%
    HCL Tech 17.2% 25.4% 15.7%
    Visualsoft 36.9% 35.8% 35.8%

    Nasscom was screaming about the manpower shortage in the future, which would be an impediment to the 50% plus growth rate of the IT industry in India. In the demands put to the Finance Minister before the budget this year, NASSCOM had demanded funds allocation for upgradation of Regional Engineering Colleges (RECs) and ultimately setting of IITs in every state. The Finance Minister obliged, Rorkee Engineering College was granted the status of an IIT.

    And then there were, of course, the projections. Say for example in the US, a shortage of 1.6 m knowledge workers, Eurpoe 0.2 m, Japan 20,000 and Germany 15,000 and we would love to believe their choice destination—India. At home by 2008, according to the Nasscom-McKinsey report, the country will require a minimum of 2.2 m knowledge workers. This translates into a five-fold increase in supply from 0.4 m (December 2000).

    Employee cost as a % of revenues
    Companies FMCG Companies Oil and Gas
    HLL 5.7% HPCL 1.2%
    Cadbury 9.2% Castrol 4.0%
    Nestle 6.6% GAIL 1.2%
    Colgate 4.2%    

    But then something very unexpected happened – the growth engine of the world economy that was more than responsible for the growth of the Indian software industry developed a snag. The US economy was not growing as fast anymore. There was an impending doom of the tech sector in India taking a hit and a few have done so fare that includes NIIT and Visualsoft. But the worst hit are those involved in the business of body shopping. Thanks to the collapse of the dot com’s and of course the slowdown.

    If a recent story by Businessworld is to be believed more than 0.1 Indian knowledge workers have been benched so far. This figure is greater than the total output of technical colleges in India, 73,000 graduates.

    But now having faced lay offs in the US, the jump to the dreamland is certainly going to be treated with caution. The attrition rates in the Indian software industry that hover in the range of 25% to 30% might see a fall. The point is that the slowdown has put the ball into the employers’ court again. Companies that lived under the fear of a projects suffering due to employee leaving for better opportunity abroad might get a breather. But the most important point is that the wage cost might not grow faster than the billing rates. And this might just help the companies to maintain their margins.

    Therefore, along with increased outsourcing, the US slowdown might help in term of redcuing the flight of talent and a drop in the rate of increase in wage costs. As for the war of talent there we might see a letdown for sometime.

     

     

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