IT staff cost to hit tier 2, 3 firms most

June quarter earnings reported by the Indian IT services firms have been marked by the impact of rising staff costs. In a business model that hinges on users saving money by doing work offshore, growth, for the vendors, requires hiring thousands of talented people every quarter.

So, pressure from rising staff costs is unlikely to ease. This is also the beginning of the end of the cost advantage that India offers, "but an end that will not play out for 8-10 years", one senior analyst said.

"Instead, the wage pressure will be hardest on the 2nd and 3rd tier Indian firms that are not well known and do not have as deep a bench," he said. This will get worse as "established multinational companies like IBM and Accenture, start hiring more freshers out of school". Then competition will increase even at the entry level front, for the smaller Indian firms.

That most Indian companies tend to be weighted towards freshers will also add to the impact on the smaller firms, when the multinational firms start hiring large numbers. While the larger IT firms say entry level wage hikes are not being considered, they acknowledge that recruits between three and five years of experience will come dearer. "But, none of the companies have pointed this out as a serious risk," said one senior executive at an IT firm here.

John McCarthy, the analyst, from Forrester, said, "Remember, half of the wage increase is offset by productivity investments that the top-tier (IT) suppliers are making." That is, firms such as TCS, Infosys and Wipro are always finding faster and better ways of doing a given task. They aim to use fewer people and less time to perform the task the next time round and ensure fewer errors as well.

So what factors are in play? Overall growth in the market, the fact that the newer, more advanced services such as packaged applications implementation are growing rapidly, and the shortage of experienced people with specific skills. Such skills are in such areas as SAP, the enterprise planning software.

With the multinationals - either services firms such as IBM or Accenture or captive centres such as Mellon Bank or Cisco - do not pay the same rock bottom wages as the Indian vendors traditionally have and "this has made employees more aggressive in their negotiations knowing they have other options."

The larger firms, Indian and foreign, will now take the competition to the second-tier cities also. Pune, will be followed more closely in the future, by locations such as Mysore. The firms will also invest more overseas, in China.

The evolution of services will continue as firms build their testing, infrastructure management, engineering/product development, packaged application implementation, consulting and business process outsourcing, McCarthy said.

Nowadays a lot of the business is driven not just by cost advantage but by other aspects such as speed to market and intellectual property. For example, in our research and development outsourcing business we invest ahead of the curve in innovations, in technologies such as wireless communication and radio frequency tagging, the Indian firm's executive said.

So, smaller firms, will have to do something other than relying on growing by hiring large numbers. Perhaps, they may have to become specialists.

Tougher times for smaller players

This is the beginning of the end of the Indian cost advantage, "but an end that will not play out for 8-10 years".

Wage pressure will be most hard on the 2nd and 3rd tier Indian firms that are not as well known and do not have as deep a bench.

As global firms start hiring more freshers, competition, for recruits, will increase even at the entry level.

Newer, more advanced services such as packaged applications implementation are growing rapidly, and the shortage of experienced people with specific skills.

"Multinationals, such as Mellon Bank or Cisco, could pay better making employees more aggressive in their negotiations knowing they have other options."

Smaller firms, will have to do something other than rely on hiring large numbers. Perhaps, they may have to become specialists.