Double trouble for Indian IT companies

By agencies   |   Monday, 25 July 2005, 07:00 Hrs
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NEW DELHI: 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 center 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 percent 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 percent on an annualized 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 annualized attrition works out to 11.2 percent, much higher than the 8.4 percent figure in the March quarter, but in line with the 11.4 percent 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 off-shoring plans lately.

Going by the average 13-15 percent 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 percent 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 realizations 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.

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