Incremental IT services jobs will halve in four years

Shift towards high-value service offering will increase revenue per employee at a CAGR of 7% for period 2015-18

Incremental recruitment by the information technology (IT) services industry, which accounted for nearly a quarter of the organised private sector employment in India in fiscal 2014, will halve by fiscal 2018 despite a 13-15% growth forecast in the industry's revenues during this period, says Crisil.

The paradigm shift will come as IT services vendors struggle to crank up profitability in a milieu where global weakness is forcing their clients to optimise costs to hold on to margins.

On their part, vendors responded by rationalising their bench strength, improving utilisation rate and trimming operational costs. This contrasts with the hiring pattern of the last decade, which had mirrored revenue growth in the industry.

This shift, importantly, has ramifications for future engineering graduates because it will narrow the opportunities available in future. Crisil believes despite revenue growth, companies will run very tight ships because of which incremental employment will be curbed.

Vendors are gradually adopting just-in-time hiring and increasing the proportion of fixed-price contracts in their portfolio, which reduces the need to maintain flab on the bench. Additionally, they are migrating towards higher-value service offerings such as consulting, investing in intellectual property (IP)-based products and leveraging on the emergence of social media, mobile, analytics and cloud (SMAC).

Ramraj Pai, President, Business Head - Ratings, Large Corporates, Crisil: "These initiatives will increase revenue per employee (RPE) at a compounded annual growth rate of 7% between fiscals 2015 and 2018. This, along with improvement in employee utilisation, will over time delink hiring from revenue growth. We also foresee a transformation in the recruitment pattern where employers become more focused and picky, increasingly seeking specific skill sets. This will lead to greater lateral hiring."

India's IT sector, with revenues of $118 billion in the last fiscal, employs 3.1 million people, or around 24% of organised private-sector employment in India. The sector has practically driven growth in organised private jobs in the country over the past decade.

Its initial phase of high revenue growth between fiscals 2003 and 2007 also saw a substantial growth in recruitments. This was followed by the global financial crisis between 2008 and 2010 and moderate recovery during fiscals 2011 and 2013. Yet hiring rates mirrored revenue growth. Crisil believes the sector is now entering a new phase where this will gradually delink.

Anuj Sethi, Director-Ratings, Crisil: "We believe despite healthy revenue growth of 13-15% for IT services foreseen in the medium term -- aided by recovery in discretionary spending by clients -- job additions will gradually shrink by about 50% to 55,000 by fiscal 2018 from 105,000 in fiscal 2014, as companies opt for more-focused, higher-value initiatives."

This process has already been set in motion, as evidenced in the reduction in employee costs from 69% of total costs in fiscal 2013 to 64% in the last fiscal.