May , 2017
Not Trump alone, technology progression is threatening IT sector’s growth
14:23 pm

Tushar K. Mahanti

“It’s not Trump, it is technology. Humans are being replaced by intelligent machines faster. New systems and software are creating havoc”- is how IT experts are looking at the changing scenario of India’s software industry.

The question is: is the software industry becoming the victim of its own doing? After growing at a breakneck speed for nearly four
decades, the industry is now facing a survival challenge. The growth of the IT industry is coming down and if one goes by the projection of the industry body Nasscom, the growth rate in the current year will be lower. The industry is feeling the impact of the global slowdown and global political uncertainties as clients go slow on their decision-making and investment processes. The industry is projected to grow about 8% in FY2017 – from $ 143 billion in FY2016 to $154 billion according to Nasscom.

A lower growth rate, however, is not a new thing as it had happened earlier. The problem is coming from higher automation and technological innovations, which are putting pressure on the functioning of these companies. The industry is transforming quickly due to the proliferation of advanced digital technologies like business analytics, cloud, mobility, internet of things (IoT), security, artificial intelligence (AI), machine learning, and robotic process automation (RPA).

This has shifted market spend; the spending on digital platforms is increasing with a major focus on all these technologies while the spending on traditional IT services is declining. This would provide an opportunity of a different kind but would leave many of the present hands redundant.

In the early 1980s when computer entered India’s commercial space there was a general fear that it would cut jobs as machines would now do human’s work. It did affect the job market as one single machine now did the jobs of a hundred humans, accurately and faster for that matter.

Things changed as did perception when software companies grew at a geometrical progression and created more and more white-coloured jobs. The country saw an unprecedented growth in engineering institutes to supply fresh manpower to this industry. The growth continued as did new job creation.

The software industry has now become the country’s largest and most diverse private sector employer with a direct workforce of about 3.5 million, and affecting over 10 million indirect jobs. At the same time the industry’s relative share in India’s GDP has swelled to 9.5%.

So far so good, but automation in the industry is now threatening to cut lower end jobs, which are more repetitive in nature and can be done with minimal human interference. The industry is at cross-roads- something that the country experienced when computers were introduced in the workplace. This would provide new opportunities but of different kinds and for that, companies need to focus on reskilling in a major way- something the country needed to do some four decades ago.

The reskilling process is painful and would compel companies to lay off a large number of employees who would come short of expectations. The IT majors are doing exactly that. Thus, the Cognizant’s latest move to lay off its senior employees is not an isolated phenomenon.

Over 6,000 employees or 2-3% of the total workforce at Cognizant Technology Solutions are reportedly facing lay-off threat for being ‘relatively under performers and for skill mismatch’. At the end of December 2016 quarter, the US-based software company had a total of 2.60 lakh employees globally with over 75% of them employed in India. Two years ago, Cognizant laid off 1% of its total employees and in 2016, it sacked 2% of the employees.

The retrenchments are reportedly a part of the appraisal process, as digitisation and automation become the new normal for Indian IT firms; and Cognizant is not different from Infosys, Wipro, and TCS.

The way IT services are being delivered is changing. Add to that, America’s growing protectionism is making offshore business difficult. Clients want a higher degree of automation, and digital services have already started contributing 20% of IT services’ revenue.

The decision to lay off Cognizant’s senior employees this time was reportedly, caused by pressure on margins. Cognizant’s operating margins had dropped to 19% last year and the company hopes to take it to 22% this year.

Another multinational IT major Capgemini is reportedly letting go off nearly 9000 employees or about 5% of its workforce. A large part of them are erstwhile employees of Igate, the company that Capgemini acquired in 2015.

Back home, India’s third largest software major Wipro has laid off a number of employees as part of its annual performance appraisal. According to media reports, Wipro laid off some 600 employees.

At Infosys, nearly 1,000 employees in job level 6 and above (group project managers, project managers, senior architects and higher levels) are expected to be asked to leave. Managers at these levels have been asked to identify, in terms of performance, the bottom 10% of their reportees.

And if TCS has not yet hinted at any lay off, the employees are at tenterhooks following the development in the IT sector. Of course, there is a certain amount of attrition of about 1 to 1.5% every year. Given the current size of TCS at 3,78,000 employees (as on December 2016) this would translate into about 4,000 employees.

The lay offs in India’s IT companies, one of the largest private employers providing are worrying. Combined with the backlash the IT industry is facing in the US on the H1-B visa front, and in countries such as Australia, the future of  the industry as a beacon of hope for young professionals is dimming.

Another development that is worrying India’s job seekers is that following problem on the H1-B visa front many of the IT majors have begun employing locals in respective foreign market. With the governments in markets like the US, Australia, and New Zealand tightening their work visa norms, Indian IT companies are hiring more local talents in offshore markets to ensure compliance with rules. TCS recruited over 11,500 people outside India in 2016-17 including graduates from engineering and B-schools in the US to tackle the visa-related challenges.

Hiring locals in overseas markets often pushes up operational costs for IT outsourcing companies. This would further increase the wage bill of the Indian companies which are already suffering from high wage expense bills.

In fact, if automation or geopolitical developments are forcing IT companies to reduce workforce, the rising wage expenses is eating into its margins. Look at the figure for India’s three IT majors, TCS, Infosys, and Wipro. The aggregate wage bill of these three companies has increased by a whooping 90.7% in last four years, between 2012-13 and 2016-17 but their revenue has increased 66.8% during this period. This clearly indicates that mismatch between expenses on employees and their earnings capacity. The wage spend of TCS has increased 181% between 2012-13 and 2016-17 against a 91.4% increase in revenue. 

Put to statistical rigours, the data would show the rising discrepancy of wage expenses and revenue earnings. The incremental wage output ratio (IWOR) that shows how much additional output is generated by an additional unit of wage spent, of the IT companies has sharply deteriorated. Statistically, higher the IWOR figure lower is the labour efficiency. The average IWOR of the three IT majors has gone up from 0.38 in 2013-14 to 0.67 in 2016-17. This means that while in 2013-14 these companies on an average earned one rupee worth of additional revenue by spending 38 paise additional wages, they spent as much as 67 paise additional wages in 2016-17 to earn one rupee additional revenue. TCS has suffered the most on this front. It spent an additional 83 paise to generate one rupee additional revenue last against 27 paise it spent in 2013-14 to earn one rupee additional revenue. As for operating surplus, whose deterioration was cited by Cognizant as the cause for laying off, Indian IT majors seem to have remained stable during the last five years. Although the ratio declined for all these three companies last year against 2015-16, they have stayed at a reasonable level. Understandably, a decelerating labour productivity or a falling operating surplus will affect the performance of the sector, but it would be oversimplification of fact to take them as the reason for the current lay off spree. The malady is much bigger and owes its origin to technological progression. Then, the solution to present crisis would lie on adapting the new technology.

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