Margins fall as intense competition to attract talent drives wages up after slowdown.
With the economic recovery gather pace in India, IT companies are finding it hard to retain employees. This coupled with rising wages is beginning to hurt bottom lines of companies Earnings before interest tax deprecation and amortization (EBITDA) margins – also known as operating margins. Margins have started to dip for most of the IT biggies in the recent quarters largely because of the spurt in wage inflation.
Operating margins of Infosys Technologies declined by 2.36% in June quarter compared with the March quarter Tata Consultancy Services (TCS) and HCL. Technologies saw their operating margins falling by 0.68% and 1.05% respectively. This slide is not an aberration. The companies EBITDA has e on a decline for the past four quarters.
On the attrition front a report by Motilal Oswal said that Wipro led the pack with 23% followed by Infosys (15.8%), HCL (15.7%) and TCS (13.1%) in the June quarter. The figures have been increasingly for all these companies for the past few quarters.
Attrition at all levels is impacting bottom lines – be it senior mid or junior level. Companies invest significantly in training entry level employees. That cost must also be factored. As for mid year hikes, I don’t think it is a sustainable option and so it is understandable for companies not to opt for that route. It is unlikely to stem attrition.
None of the companies mentioned responded to the report.
The report also states that attrition is likely to stay elevated in the near term after earlier than expected turnaround in demand prompted a knee jerk reaction in hiring from IT companies. The challenge of the churn is higher at mid and senior level positions than at the base of the pyramid. Wage hikes in lateral hiring stands at 20-30% compared with more than 40% three to five years ago. However, wage hikes at senior positions are above 30% highlighting the gravity of problems at that level.
The intense competition for talent is also heating up the market. MNCs are hiring in greater volumes than their domestic counterparts indicating continued strength in the off shoring trend. MNCs draw talent thanks to higher pay scales and better brand perception Captive back offices if global banking companies are the main drivers behind intense BPO hiring.
Employees, who enjoyed 30% hikes every year, face cuts or freeze no salaries during the slowdown. So the attrition issue will not go away in a hurry.
Over the last couple of quarters companies have been aggressively looking at non US /UK markets like Africa and West Asia.
His has increased hiring demands. And when we hire someone for middle management or senior management posts, they tend to bring a whole team with them. This worsens the attrition issue. I would say that replacements in the mid rung or higher bring a cost implications of 20% or higher.
There is still a lot of room to grow in the global IT industry Azim Premji the boss of Indian IT giant Wipro, has said, if the global IT services market s growing at 3% to 5% and global exports from India are growing at 5%, evidently that proposition s more attractive to the customer.
Attrition is a major challenge that many corporates have to overcome in today’s highly competitive business environment. Re-hiring can be a very costly affair; it can be a tedious process administratively too, as the entire process if hiring and training is very time consuming. Losing a key employee has some serious repercussions; it’s a loss of talent expertise and competencies and companies in today’s talent starved environment will find it difficult to find the perfect fit. Also, companies have to incur higher recruitment costs too to fill the vacant position. There are no quick fixes – the only way through which one can minimize risk is by effectively engaging with one’s most important stakeholder the employee.