• MARCH 12, 2010

The biggest threat to Indian IT

Indian IT industry's stellar growth rates remind us of the fairytales where everything appears to be so good. Imagine a perfect professional world. One where every employee is happy and dedicated to his company. He is enthused by his job, satisfied with his salary and motivated by his work environment. Where he is perfectly at peace with his superiors. Also this world has organisations heeding all grievances of their most valued assets i.e. human resource. They pay them well and treat them better. Everyone is happy and contented. Good to imagine but surely hard believing. Alas! We do not live in a perfect world. There is no professional fairyland either.

India Inc is no different. Though looking at a plush multi-storied, state-of-art offices spread over huge stretches of land one might feel the illusion of a fairyland. And the lucrative perks and enviable pay packages do less to disturb this illusion. All this is more true for the Indian IT industry. Things are not perfect even here. Like any other industry employees come and leave. Arguably this is a way of life for any business, but it is a bigger problem for people-intensive IT industry and its ilk.

Yes, employee attrition is a big menace for Indian IT industry. Historically, it has been notorious for high rate of employee churning. The attrition rate has been as high as 25% during boom times. While the attrition rate is particularly high for the BPO (business process outsourcing) industry, IT software counterparts are also plagued by it. Indian IT's BPO sector which usually employs college graduates has witnessed churning rates of over 50%. This means 50% of the employee left organisations, leaving half of the seats vacant. As for the IT service providers, while the entire industry struggled to keep this under control, average attrition figures stood tall at 25% over quite some time till 2008. As the following graph suggests, only the best few could keep it within honourable limits of 15%. Discontented employees left sometimes for better packages, sometimes for better opportunities. However, last year the global downturn changed the scene significantly.

As the job markets remained dry for most of the period, attrition dropped. Employees found it wiser to stick to employers despite all odds. During the recession, as the companies aimed to cut cost, they cancelled all pay hikes and bonus disbursement. All perks and frills were discontinued. Job hours were increased and salaries decreased. What is more is that they even retrenched employees to save cost. Still employees had little option but to whine silently and keep working. Fear of getting a pink-slip rendered them quiet. This was the norm till a few months back. However, the scene is changing again. With the global economy improving, job markets have again become vibrant. Employees are jumping boats at every opportunity.

Attrition rates are again seen as going north. In the next few quarters they can approach the pre-recession levels of 20-25%. This flight to greener pastures is a big concern for the Indian IT sector. The demand for IT services is improving. Companies require best minds to staff their offices and work on these projects. Result? We are seeing a war for retaining and hiring best talent. Companies are now going back to their generous selves. They are giving salary hikes and retention bonuses, promises of better opportunities etc to their best employees. The picture is similar on the hiring front. But poaching of best minds and also attempts to prevent your best assets from being poached are expected to cost them dearly. While retaining an employee has its own cost, hiring new is always a costlier affair. It incurs recruitment expense and training cost coupled with a temporary loss of productivity.

But IT honchos believe that this is a dire truth for the sector and they have to live with it. What they have in hand is to pay their employees better, offer them better career opportunities and invest in their training. We believe that all this will put pressure on the margins of the IT industry going forward. While companies have tackled attrition still managing their margins in the past, what is worrying is the sluggish sentiments still prevalent in the demand markets. Nevertheless, things are on an uptick now. While the employee costs are expected to go up by as much as 10% to 15%, much of this is expected to be cushioned by topline growth. We believe, moving towards more people-independent non-linear growth is the key. On a positive note, high attrition rate can be believed as a strong indicator that the upturn has begun.

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