Search:



The Web

Rediff








 Latest Business news on mobile: sms BIZ to 7333

Home > Business > Business Headline > Report


Double whammy for Indian IT players

Mobis Philipose in Mumbai | July 25, 2005 10:42 IST

Competition from overseas players is beginning to make a larger dent in the operations of domestic IT companies.

MNC competition is beginning to have a larger impact on established Indian IT players. With players like IBM and Accenture shifting work to India on a much larger scale, Indian IT players face pressure on two fronts - resources and prices.

Last month, IBM opened its fifth global delivery centre in India and Accenture recently disclosed that it had hired 1,600 employees in India in May alone. Its employee base in India now accounts for over 10 per cent of its global workforce.

Of course, much has been written about MNC competition and, as before, the Indian industry has said that it wouldn't impact them much. But a look at the results of top Indian IT companies shows that the competition from overseas players is beginning to have a larger dent in the operations of Indian IT players.

Infosys Technologies, for instance, reported that it lost 1,481 employees in the June quarter, which is a record for the company. The previous high in that regard was when 1,068 employees left in the July-September quarter of 2004.

True, the BPO segment accounted for almost a third of the total attrition figure last quarter, but even after excluding the BPO segment, the number of people that left the IT services division was high at 1,027, again a record number. In percentage terms, too, the attrition rate was high at 15.5 per cent on an annualised basis last quarter.

Similarly, TCS lost 1,223 employees last quarter, the highest-ever attrition since it started sharing employee figures last year. In TCS's case, the annualised attrition works out to 11.2 per cent, much higher than the 8.4 per cent figure in the March quarter, but in line with the 11.4 per cent attrition in last year's June quarter.

Attrition normally picks up in the June quarter, as some employees opt out in order to pursue further education. But the absolute numbers show that the attrition problem is bigger than ever before.

High attrition is a problem not only because it necessitates salary hikes and causes costs such as recruitment and training costs, but also because it could disrupt business momentum and lead to lower margins in case of fixed-price projects, among other things.

Needless to say, the attrition problem has got worse now with MNCs getting aggressive with their offshoring plans lately.

Bill Green, chief executive officer of Accenture told analysts in a call last week, "This (going offshore) was one of many opportunities for growth we had and it was sitting right there, and we had proven to ourselves we could do it. We could do it without making a dramatic investment, and we could execute it profitably. That, and being responsive to our customers, moved us to move more aggressively here."

Accenture plans to add 30,000 to 50,000 people in India China and Philippines over the next three years. IBM, too, has aggressive plans - according to internal documents, it will add 14,000 employees in India this year.

As pointed out earlier, the high demand for software professionals has necessitated significant salary hikes. neoIT's offshore and nearshore salary report for 2004 points out that IT salaries in India experienced the most significant growth (13 per cent) compared to all other offshore/nearshore destinations.

Going by the average 13-15 per cent salary hikes taken in April this year, it's likely that the trend will be repeated this year. High salaries given to either retain talent or attract talent certainly hurt margins, since salary costs account for around 50 per cent of revenues for IT companies.

Worse still, thanks to the increased competition, IT companies have not had a chance to pass on the increase in costs by hiking billing rates. Three of the top four players saw their operating margins fall by over 100 basis points last quarter.

Although price realisations have increased marginally for most players, the fact that margins have been under pressure shows that companies have not been able to pass on cost increases.

For example, Infosys reported an uncharacteristic 0.43 per cent drop in operating profit last quarter, compared to the previous quarter ended March.

This was the first time in at least two years (if not the first time ever) that the company reported a drop in operating profit. Industry analysts point out that rates could be under pressure going forward. With net margins still as high as 25-26 per cent for some players, it does look like there is room for further decline.

Also, the main MNC competition is coming from players based in the US, which is where Indian IT players still get a majority chunk of their business. Earlier, many MNCs would shy away from taking offshore centric work, which helped Indian players. But now, since they themselves have a considerable presence in the offshore segment, it is likely that work-flow to Indian players could slow down.

Answering a question on whether its offshore work was cannibalising its existing client work, Accenture replied to analysts in the call that most of its offshore initiative led to incremental revenue and profit, since it was work that they otherwise would not be doing.

The North American region is already showing signs of stagnation. In the case of Infosys, the share of revenues coming from the US has dropped to 64.8 per cent in the past year, compared to 68.8 per cent in the year till June 2004.

Of course, not all is lost and Indian players have shown that there are other avenues for growth. A senior official at one of the top Indian IT firms said the aggressiveness shown by MNCs points to the fact that offshoring is now a mainstream trend and has much greater acceptability. According to him, the offshoring pie will grow big enough to accommodate all players.

Nevertheless, the aggressiveness shown by MNC players lately will most likely cause a drop in earnings growth rate for Indian players. Even if demand is not affected, pressure on salary costs and realisations is expected to impact margins.

Interestingly, this is not reflected in the valuations of Indian software companies. Analysts point out that top IT companies need to grow cash flows by around 30 per cent for the next 10 years for the current valuations to make sense.

7333: The Latest News on Your Mobile!

Powered by

Share your comments




Article Tools
Email this article
Top emailed links
Print this article
Write us a letter
Discuss this article









Copyright © 2005 rediff.com India Limited. All Rights Reserved.