IT industry's 'people' conundrum may delay its revenue growth targets

The current talent crisis may delay the industry's efforts to move up the value chain by delinking headcount and revenue streams

A decade or so ago, the Indian IT services industry started talking about the need to increase non-linear revenue streams, which means delinking employee headcount and revenue growth. But the current war for talent and the struggle that the industry is going through to add people to meet demand suggests that the quest for non-linear revenue remains an elusive target.

In fact, all the top four IT players reported higher attrition in Q1FY23, which also impacted top and bottom lines. At TCS attrition was 19.7 per cent, Infosys 28.4 per cent and HCL Technologies 23.8 per cent. Only Wipro, at 23.3 per cent, saw a drop in attrition on a sequential basis.

In a recent interview with Business Standard, N Ganapathy Subramaniam, executive director and chief operating office, TCS, said that at $25 billion in revenue, the company has already crossed 600,000 in headcount. TCS aims to be a $50-billion company, he added, so they want to achieve that without doubling its headcount.

When the discussion started on non-linear models — TCS spoke about it as far back as 2013 — the primary objective was to look for business models that were recession-proof. Headcount growth is the biggest cost for IT services players and directly impacts margins.

Initially, the industry was fairly successful in moving up the value chain with increased automation, offering services bundled with software products and platforms. Some of the delivery models that were launched or discussed a decade ago are now fixed elements such as outcome-based pricing, risk-reward, and fixed-price models, as an alternative to the traditional time and material (per-hour payment for services) model.

But this shift has not meant much when one looks at the scramble for talent. Rajesh Nambiar, executive VP and CMD, Cognizant India, said: “The truth in the services business is that most of us will be linear. The only difference is that when you shift your business model into higher value, there will be a slightly different trajectory, because either you declare yourself to be a services company or a product company, you cannot do both. I believe that we will continue to see the size of the organisation correlated with the growth that we have in the marketplace.”

Companies have invested significantly in creating non-linear business models. For instance, at TCS, products and platforms have crossed the $2-billion milestone. From TCS BaNCS and a few platforms for SMEs, TCS now has a platform approach for almost all verticals and cloud is driving revenues. A few years ago, Infosys launched one of its most successful platforms, Cobalt, one of the company’s biggest launches after Finacle. HCL Technologies pivoted and set up a products and platform business unit and went on to acquire product business from IBM. Wipro has been beefing up its consulting focus by acquiring niche players.

Despite all these efforts, the compounded annual growth rate (CAGR) of revenue and employee cost tells a different story (see chart: “Growing pangs”). Only in 2020 did the CAGR in employee cost fall sharply, but 2020 was the first year of the Covid-19 lockdown, and companies hardly hired. But 2021 saw a huge jump in hiring. TCS fresher hiring for FY22 was 100,000. Or take Wipro. At the Q1FY23 results media briefing, Thierry Delaporte, CEO and MD, said the company was making the corporate structure more pyramid-like, with more hiring at the fresher level, representing a reversal of the industry trend. For Q1FY23, the company hired close to 15,000 freshers, the highest by its own parameters.

“The non-linear movement was and is about service providers investing in automation and changing contracts away to per unit or per outcome. This has worked in places but has not radically changed the market as the vendors hoped,” said Peter Bendor-Samuel, CEO, Everest Group.

The reason for this is that many, if not most, of the clients have looked to make their own investments in technology rather than solely rely on their service providers’ tech, he added. “So customers set about evolving their own software-defined operational platforms and use the service providers as part of their operations, not the operation as the service providers had hoped.”

Added Pareekh Jain, founder of IT outsourcing advisory Pareekh Consulting, “One of the reasons we do not see non-linear initiatives translating into revenue growth is because all the companies focused on leveraging these for improving margins and hence, though they started a decade back, these are still not a substantial part of the revenue.”

The other more important shift has been the technology landscape. While cloud has become a default platform, models such as Software as a Service and no-code/low-code technologies have disrupted the models and player landscape.

Bendor-Samuel agreed: “One of the very significant constraints of the non-linear models is they are not dynamic enough in today’s fast moving software-defined world,” he said.

Sangeeta Gupta, senior vice-president, Nasscom, said that in her discussion with the industry, companies want to focus on creating new platforms, productisation of solutions and services rather than non-linearity. “These initiatives may not get traction in terms of revenue immediately but certainly two or three years down the line this will make an impact on revenues,” she added.

She also believes that with the changing tech landscape and newer technologies becoming mainstream in a shorter time, talent in selected technologies will always be scarce and hence the shift to non-linearity that IT companies are seeking may not happen in a major way.