Fresh intake, higher offshoring in IT sector impacting revenue per employee

Adding to this, record number of hiring that the industry did means the bench at companies have gone up.

Higher offshoring, work from anywhere/home, and an all-time high fresher intake in the information-technology (IT) sector have started affecting revenue per employee, a measure of employee productivity.

Rather, revenue per employee at top IT firms has fallen continuously in the last two financial years.

According to industry experts and analysts, shifting work from onsite to near shore and offshore during the pandemic, which has continued to rise, has impacted revenue per employee. Adding to this the record hiring the industry did means the bench at companies has gone up.

Milink Lakkad, chief human relations officer, Tata Consultancy Services (TCS), agreed that net addition had outstripped revenue growth for three years.

“One, there was a significant offshore shift during the pandemic due to greater acceptance of remote working, local talent scarcity, and the flow of work to where the talent resides. That was deflationary in nature. Second, we have been hiring additional numbers ahead of demand, in anticipation of continued growth momentum and to have a ready bench to back-fill attrition,” he said in the company’s Annual Report for FY22.

The other factor that has affected revenue per employee is lower utilisation, which basically means more number of employees are on bench. Companies hiring freshers in large numbers to offset rising attrition has meant more employees on the bench. For instance, TCS in FY22 hired 100,000 freshers, which is more than the lateral hiring the company would have done.

TCS does not share its utilisation percentage.

Similarly, Infosys hired more than 50,000 freshers from campus. In Q4 FY22 the company’s rate of utilisation leaving out trainees came in at 87 per cent. Utilisation, including trainees, was 80 per cent in Q4FY22.

In the case of Wipro, net utilisation (excluding trainees) was 86.8 per cent for FY22, up from the 85.9 per cent in FY21. This means more people are on the bench or under training and hence they cannot be billed.

The other consequence of this is that companies are unable to leverage their pricing power to offset rising costs.

“While cloud deal prices are increasing, wage rates are increasing even more. Most service providers are unable to move all the increased wage costs on to their clients,” said Phil Fersht, chief executive officer and chief analyst, HFS.

He added: “IT services firms are treading a fine line between winning businesses and being price-competitive. Over the past few months the cost per employee increase has outweighed pricing increase on new deals. The providers are hoping the Great Resignation calms down soon for these margins to rectify themselves. As of now, this is more hope than strategy!”

The fear among analysts is that revenue per employee will go down further due to demand lowering and revenue as a lever to manage margins will be lost.

A report from ICICI Securities said: “Revenue per employee has largely declined across the IT pack in FY22 and we see it declining further with demand slowing down. This will translate to lower revenue growth leverage benefit to margins especially post aggressive hiring done in FY22.”

The report said margin pressure would become structural.

“IT companies aggressively hired freshers in FY22 and this genre of hiring is likely to be in healthy numbers through the rest of FY23. Converting this fresher headcount into billable headcount against the backdrop of normalising demand will be a key challenge. Attrition still at elevated levels, normalising demand and increase in discretionary costs will add to margin headwinds.”