IT's long dark night

IT industry is set to lose its poster boy status in terms of profit margins & as coveted employers

The deepening recession in the developed economies is rapidly worsening the prospects of India’s export-oriented IT and services industry. Clients of Indian vendors are asking for and getting price cuts ranging between 5 and 20 per cent in their time and material contracts, and there is pressure on vendors to pass on some of the productivity gains they have made in recent years, indicating that even a fixed price is no longer fixed. With client spending down to the bare essentials, industry leaders are staggering the recruitment of freshers where commitments have already been made, and holding out no hope of jobs for the new batch entering the workforce later in the year. In fact, job cuts have already started, with Tata Consultancy Services (the leader in the field) deciding to shed 1 per cent of its global workforce, or 1,300 people, and Wipro indicating that it may have to follow suit. There are reports that 200 TCS staffers in Chennai have had to go because, the company says, they have failed to clear the performance bar, which has been raised. Staff overall have taken a cut in their variable pay and are having to work longer hours. Costs are also being cut by reducing the ‘bench’, those who are between projects and on training, thus improving staff utilisation ratios. Despite such cost cuts, more is likely to come.

It is not as if the need to outsource operations in order to cut costs is gone. The fact is that even smaller firms want to join the queue of oursourcers. Gartner, the technology consultancy, has reported interest on the part of would be offshorers to explore the possibilities, but apparently the sales and marketing teams of Indian vendors are not around to meet them. This may be partly because leading firms have already cut some of their sales staff. But the bigger reason is probably the continuing concentration on existing customers, who are mostly large firms, and the attempt to hang onto them by offering price cuts. Indian vendors who through this decade have enjoyed exponential growth have been happy to live by the low hanging fruit, mostly the largest firms which have been the first to take to offshoring. Thus a change in global marketing strategy seems in order.

Tough as things are right now, it is the longer-term prospects which are truly daunting. India and other emerging economies are likely to be able to shake off the present slowdown ahead of the developed economies. So industries which are primarily driven by domestic demand are likely to recover faster than those which live on foreign demand, like IT. The industry is facing the prospects of a cut in operating margins, which may fall by a half over the next three years. As no one can look far enough to see a period when revived demand will lead to a recovery in prices, the exceptional industry margins that everyone had got accustomed to seem to have gone for good. All the indicators point to the fact that the industry is set to lose some of its shine as a poster boy, in terms of its profit margins and as coveted employers of educated youngsters.