Tuesday, January 13, 2015

Hiring fresher and firing experienced: Will this be the model ahead for TCS and Indian IT services sector?

Layoffs are not uncommon in IT industry. But for TCS it was quite uncommon. Theirs was an IT company with Indian values. Whenever things turned bad they always managed well, at least in the past, in retraining the employee and making him/her billable again by re-tooling and showing patience until the employee brought in the revenue. Now the news of layoff in a big scale at TCS shows that they too are running out of options. At the end of the day, TCS too is a business and they too are worried whether they are making desired money on each employee. What TCS is doing would become a new norm and other IT services companies would follow suit over a period of time.
  • When billing rates do not go up but the costs do, higher wage employees become a firing target.
  • Either salaries in the higher band will start tapering out or the number of employees in that band has to come down to keep up the margin.
  • They would also constantly look out for other options to cut the costs of business operations

But the question to be asked is will this be the way forward? Why they are not able to earn on those experienced employees who were the bread winners for the company for so long but redundant now?

First, we need to understand why the billing rate per employee is not going up but reducing. No business or technology remains a taboo for long. IT services too is no more a business only a few companies know and execute. There are numerous service providers now in the market who do it efficiently and willing to do it for a lower margin. That puts pressure on the likes of TCS, they need to become efficient to remain competitive, so shedding fat becomes a necessity. Reducing number of seniors and having more juniors in a team would help deliver the project at a lower cost and help retain profit margin. It would not stop with this but these businesses will explore all avenues to reduce costs such as reducing their employee travel, relocating their offices, cutting down on benefits provided etc. but all of which just provides breather but not a solution to the persisting demand from customers to drive down the costs.

When cloud-based applications become mainstream and software-as-a-service (SaaS) catches up, that would reduce the maintenance activities by a larger extent. It can make IT services a non-mass business leading to firing the seniors but not much hiring at the bottom, a worse situation than now.

If Indian economy catches up and Rupee gains back some of its losses against dollar, let us say it gets back to Rs.52-55 range; it would put further pressure on the margins of the IT services companies which have contracts in dollar terms and cannot hedge completely against currency valuation changes. What will they do to keep their margins up then?

All of this clearly suggests that it makes sense to diversify and not just depend on services as revenue stream. Get into products? No, these companies would lose more money as products business require a different kind of talent management and business strategy which does not gel well with the service business mentality. So what lies ahead for IT services? Resize and reshape in the maturing market. 

And it may be time to sell your TCS stock as the stock may not command the same P/E multiple unless there is a big shift in business strategy which does not seem to be on the radar.