High attrition not always a sign of IT industry growth, finds study

Attrition can be because of other factors such as swapping or lack of opportunities rather than industry growth

Conventional wisdom says that if higher numbers of employees are leaving there might be something wrong at the company.  This is especially true in the software sector which is completely manpower driven. Analysts measure the number of employees quitting the company on a quarterly basis in the IT sector and measure it as a percentage of total employees in the company. This, in management terminology, is called the ‘attrition rate’.

 

Infosys has been at the receiving end of analyst recommendations on account of poor sales growth and record attrition rates. This leads to the question of whether attrition is an indicator of business momentum. A JP Morgan report answers the question in a August 27, 2014 report on Indian IT services.

 

The study which was begun on April 8, 2013 titled ‘We like higher industry attrition’ concluded that step changes in attrition (up or down) have historically led to corresponding changes in business momentum, with typically a one-quarter lead time (more than 80% correlation). What is interesting is that JP Morgan has looked at attrition at the industry level. If attrition in only one company are high, then there is a problem. But if the entire sector faces higher attrition then JP Morgan had concluded in April 2013 that it was not bad. 

 

However, in its new report, the bank says that there are recent findings that seems to negate their earlier report.

 

According to JP Morgan attrition has been increasing significantly at the industry level in the last four quarters. Collective attrition for the top 5 IT companies hit a three-year high in the June 2014 quarter, yet industry growth has not picked up on an annual basis for the past two quarters. So what went wrong?

 

JP Morgan says there are three reasons why growth has not picked up despite higher industry attrition.

 

• First, lack of opportunities in current roles, as companies are not growing fast enough, is inducing more departures. Thus, while the industry is adding to headcount at the net level, concerns about a company’s growth and personal career advancement are leading to employees switching jobs. This leads to what is called ‘swapping’ when employees (of, say, Infosys quit to join Wipro and vice versa) swap firms in the hope of finding better career advancement opportunities in their new workplace. Because of the high number of employee departures, firms such as Infosys/Wipro will find their hiring substantially backfilling roles of those departing, and not really creating new roles/positions that come with growth.

• Business mix plays a role in the overall attrition number. Contribution of BPO, testing and IMS (information management system) are increasing across the board. JP Morgan says that attrition in BPO and IMS segments is generally two times higher than that in IT Services. Attrition in the application segments (ERP, consulting, system integration) is generally much lower than in BPO/IMS/testing. Thus a higher contribution of BPO/IMS/testing in overall revenues may also lead to higher attrition number.

• Finally, captives (fully owned IT divisions of parent companies like Tesco, GE, Philips among others have become reasonably strong net hirers in the recent past (last three to four quarters). JP Morgan believes that a large number of workforces, especially from Infosys and Wipro may be leaving for captives where pay is generally better. Captives are strong draws today for employees at third-party firms, more so at a time when onsite opportunities are not as plentiful in third-party firms today as they have been in the past.

 

JP Morgan believes that attrition cannot keep ticking up without favourable implications for demand at some point. If the September 2014 quarter too shows a higher attrition number across the industry, JP Morgan says that it is not necessarily a worrying signal. Rather it would more likely indicate an uptick in demand activity in the market. Industry-wide attrition is a good gauge of the state of ferment.