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Software: Countering slowdown - Views on News from Equitymaster
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  • May 16, 2001

    Software: Countering slowdown

    “Once bitten, twice shy”, that’s what many of the IT users are after the elixir of the new economy failed bring about magical results. Therefore, they are taking a hard look at their IT budget. Not all have burnt their fingers with IT, but in an uncertain economic scenario in the US the clients there are asking a lot of questions. The scenario has changed from the past where there were no questions asked about the IT budget. Some of the companies in the US have reduced their IT spend and therefore, the going for Indian software companies has become tough.

    To maintain the splendid margins that the software companies have always enjoyed, the companies are taking a hard look at their expenses. A very interesting characteristic of the software industry’s expenses is that the employee costs or the wage bill dominates. This comes to more than 40% of revenues for the top rung IT companies. Therefore, as the companies look to cut costs they are trimming the wage bill.

    According to a latest survey by Dataquest, companies have frozen increments, trimmed perks and reduced the number of foreign trips. The increments in the software industry have been more sober compared to those in the past. With more and more companies pushing work offshore to avail cheap billing rates the foreign trips too have been less. Also, the operating margins for offsite business is lower than that for the onsite business.

    The flip side is that these measures might cause attrition, which has always been quite significant in the IT industry, to rise further. However, the slowdown also means that the demand for IT professionals in the US would decline. Therefore, both these factors should counter each other. While the companies trim costs, the demand for IT professionals has not taken a hit as other geographies mainly Europe and Japan. These regions have made up for some of the loss in the demand side of the equation. And therefore attrition has infact increased.

    Even the software education companies are feeling the pinch. Due to news about the job scenario in the US becoming bleak aspirant have become cautions about choosing software as a career. NIIT has recently put out an advertisement in a financial daily explaining about job opportunities in geographies other than the US. Of course the companies themselves are looking for business in other geographies.

    But the critical question is that when will the IT spend pick up? If it does then to what extent? Irrational speculation and expectations have led to a period of economic stagnation and bunch of cynics who argue that the productivity gains from technology have been overrated and in any case, are over. They best way the Indian companies can counter the slow down is to prove these cynics wrong by delivering value.



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