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Party may be over at Indian IT companies

Information Technology firms had put the country on the global map as they grew at breakneck speed, but companies are now cutting costs and downsizing as they have been recording slow growth and falling profits over the years

india Updated: Nov 09, 2017 08:51 IST
Varun Sood
Thousands of engineers began losing their jobs from April as the first wave of layoffs hit the country’s $154-billion information technology (IT) outsourcing industry.
Thousands of engineers began losing their jobs from April as the first wave of layoffs hit the country’s $154-billion information technology (IT) outsourcing industry.(Mint File)

Chetan* is lucky.

The 30-something software executive had lost his job at the Nasdaq-listed Cognizant Technology Solutions one fateful day in June. In the weeks that followed, he contacted an independent union and managed to raise the issue with the Coimbatore labour commissioner. Finally, the company’s human resources team let him back in.

Chetan works with 10,000 other employees at Cognizant’s office in the Tamil Nadu city. The company’s 43 offices across the country were home to nearly three-fourths of its 2,60,200 employees at the end of December last year.

Thousands of engineers began losing their jobs from April as the first wave of layoffs hit the country’s $154-billion information technology (IT) outsourcing industry. Mint reported in May that the largest IT firms were already in the midst of the industry’s largest retrenchment drive, with seven of them planning to send at least 56,000 engineers packing this year. Back then, everybody denied any planned layoffs.

The coming months, however, belied their claim. Six of the largest companies, together employing over 1.24 million people, have seen their workforce shrink by 4,157 people in the first half of 2017. This was in stark contrast with the 59,940 people who were added to the industry in the corresponding period last year.

The companies remain in denial mode. They attribute the headcount loss to a “marginal” increase in the number of poor performers on account of a “more rigorous” performance evaluation process. They, nevertheless, do not contest the challenges faced by the IT industry. Top executives concede that it faces a perfect storm as growth slows, profits take a beating, and many remain saddled with an unwieldy workforce running into hundreds of thousands.

“The carnage has not even begun yet,” warns Vivek Wadhwa, distinguished fellow at the Carnegie Mellon University College of Engineering. “At present, IT companies are just fine-tuning and focusing on profitability. Technologies such as artificial intelligence and robotics will start impacting these companies over the next five years.”

Wadhwa believes that bad as the industry’s troubles may look now, they will only get worse in the times to come.

Four reasons underline the existential crisis faced by the industry, which had put the country on the global map at the turn of the century.

The first one, tepid growth and falling profitability, explains why IT firms are taking a re-look at their workforce. The sector had been growing at a breakneck speed for long. The three largest companies – Tata Consultancy Services Ltd, Infosys Ltd and Wipro Ltd – together made $2.42 billion in revenue while employing less than 50,000 people at the end of March 2003. By 2017, they were handling projects worth $35.5 billion and a workforce of 7.69 lakh.

Still, tepid growth and pressure on profitability has prompted most companies to cut costs. Last year, for the first time since 2009-10, the big trio grew slower than industry body Nasscom’s 8.6% growth forecast in constant currency terms.

This malady of slow growth and falling profitability finds its roots in a number of fundamental shifts these companies are wresting with. Foremost among them is a wider acceptance of artificial intelligence and automated tools for carrying out human tasks.

Companies like IPSoft offer bots or virtual agents that can perform various tasks – including customer support – for Fortune 500 companies. The advent of this technology has made outsourcing firms adopt automation tools for duties that earlier required armies of engineers, even if it means cannibalising their own revenue under the traditional model of billing clients on human hours.

“What required 50 programmers, analysts or accountants five years ago can now be done by a handful of smart thinkers and smarter systems,” says Phil Fersht, CEO of the US-based outsourcing-research firm HfS Research. “If I were Prime Minister Narendra Modi, I would be very concerned that a whole workforce generation now needs reorientation to address work activities that are fast growing in demand.”

The rise of cloud computing is another cause for worry. Amazon Web Services – which rents out computing power by the hour – saves banking behemoths like Citibank or energy giants like ExxonMobil the hassle of spending on servers, which was provided and maintained by IT outsourcing companies in the past.

More challenging still is the business shift that comes from the rise of newer technologies such as data analytics, which have made many large Fortune 500 companies prevail upon technology vendors to offer solutions beyond merely rolling out enterprise resource-planning applications or testing software.

This means IT outsourcing needs to up the share of business generated from areas generally classified as social, mobile, analytics, cloud computing and the Internet of Things, all of which are broadly classified under ‘Digital’, a fuzzy umbrella term.

Finally, US President Donald Trump’s protectionist policies are forcing more Indian IT companies to send H-1B visa holders home. While Infosys announced plans to hire 10,000 US citizens in the next two years, Wipro has already taken in 2,800 Americans over the last 18 months. Today, as much as 52% of Wipro’s total workforce in the US consists of American citizens.

Boffins at IT firms have recognised these sweeping changes, and begun taking corrective steps such as retraining their workforce in newer technologies. Engineers like Chetan, however, continue to fret.

“People like me, who possess over 10 years’ experience in IT, cannot find employment in other industries. If this is just the start of the shakedown, we have no option but to get used to living in uncertainty,” says Chetan.

(*Name of IT employee changed on request)