Software: Cutting the wage bill - Views on News from Equitymaster

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Software: Cutting the wage bill

Sep 25, 2001

Once upon a time, not so very long ago the software companies set standards in pampering employees. The employees were assets that walked out every evening according to the software industry. But now things seem to have changed slightly. The software industry currently is more in the news for laying-off its employees than anything else. The reason the software companies have been laying off is due to the fact that the demand for skill sets has changed in the past few months. While in the past when e-commerce projects were driving the revenues of software companies’, web developers were very much in demand. But for the past two quarters or so, revenues from e-commerce have shown a strong decline for the software companies. Many companies have offset this decline in revenues by taking up more work in areas like maintenance and therefore, demand for professionals with skill sets in COBOL has seen an increase.

However, the real problem the industry has been facing is that of declining demand. Its largest market, the US (which accounts for 56% of software exports), is facing an economic slowdown and thus, IT spend by the US corporates have seen a cut. This has adversely affected the Indian software industry. In FY01 most of the software companies went on a hiring spree anticipating demand in the future. While these companies were hiring they were not sure about the impact of the slowdown in the US. Many were of the view that India’s market size being small the software companies would not be affected.

Hiring spree
  FY00 FY01 Change Increase
Infosys 5,389 9,831 4,442 82.4%
Satyam 5,067 8,141 3,074 60.7%
Wipro 6,647 9,934 3,287 49.5%
Note: For Wipro employees for Wipro Technologies only

The lays offs are a means to maintain the operating margins. The largest cost head for most of the software companies is the employee cost. Therefore, with revenues declining these companies are cutting down their wage bill. Amongst software majors, Wipro was the only company that actually saw a decline in the number of employees for 1QFY02. Other companies like Infosys and Satyam added a few employees. Infosys too delayed the joining of its campus recruitment to match the intake with the demand.

The wage bill
(Rs m) Revenues Employee costs % of revenues
Infosys 19,006 7,178 37.8%
Satyam 12,200 4,713 38.6%
Wipro 30,539 3,907 12.8%
Hughes 1,985 586 29.5%
HCL Tech 7,245 1,321 18.2%

However, it is the second rung software companies that have been the hardest hit and have started laying-off. MBT is planning to lay off around 300 of its employees and Pentamedia Graphics saw strikes by employees who have been laid off, who again number around 300. These companies claim that the under performers are being laid off but in many of the cases fresh recruits and trainees are also being laid off.

Though lay offs are something that India has not seen but the unfortunate fact remains that lay offs do make these organisations more competitive. This is due to the fact that the employee costs are variable rather than being fixed. With employee costs coming to almost 40% of sales, the software companies have room to play with this component in order to maintain their margins in a difficult environment.

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