Indian IT Companies battle wage costs innovatively

Their profits eroded by rising wages and the appreciating rupee, India’s information technology firms are finding innovative ways of hiring talent at lower costs. That includes hiring more science graduates who could earn 30% less than engineers, looking at development centres outside India, and increasing the utilization of the existing workforce. IT salaries are rising by around 15% a year and the rupee has appreciated almost 7% against the dollar, the currency in which most software firms bill a majority of their revenue, in the three months ended 30 June.

Tata Consultancy Services Ltd (TCS), India’s largest software company by revenues, plans to hire anywhere between 3,000 and 4,000 science graduates this year, as opposed to 500 last year, according to S. Padmanabhan, the company’s executive
vice-president in charge of global human resources development.

That strategy could increase the training costs, said Anand Pillai, vice-president and global head, talent transformation, at HCL Technologies Ltd, “but not so much that the cost saving on salaries would be counter balanced.”

Wipro Technologies, the software services arm of Bangalore-headquartered Wipro Ltd, isn’t hiring science graduates yet, but it is focusing on undergraduate computer science students who get to work for a stipend at Wipro and enrol in a distance learning course run by Birla Institute of Technology and Science, Pilani.

The Rs9,000 a month these workers get is “half what we pay engineering graduates,” said Achutan Nair, who is the vice-president of strategic sourcing for Wipro Technologies. Nair said the company plans to increase the number of employee-students in this programme to 3,000 this year from 1,500 last year.

Looking outside India

Other companies, especially multinationals, are looking to move business to countries such as the Philippines. Salaries in India, for at least lower- end jobs in IT services such as call service agents, are rising faster than in the Philippines. According to Vardhman Jain, head of the business process outsourcing division of Perot Systems, growth in salaries in the Philippines is 10-12% a year, compared to 15-17% in India.
“Temporarily at least, we do see the Philippines as a lower cost centre than India,” Jain added. He said the company’s Philippines centre was 10% more efficient than similar centres in India.

Subroto Bagchi, co-founder and chief operating officer of MindTree Consulting Ltd said that there is a growing impression in the West that Indian IT companies are going to pay themselves out of the market. He added that customers in such countries were encouraging Indian companies to hire employees in other countries. Brazil, China and Eastern Europe are the strong contenders for development centres being set up by Indian companies, according to Padmanabhan of TCS.

HCL Technologies is also looking at these regions, and Pillai said that the ratio of employees will stabilize in the future at 50% in India, 20% each in China and Eastern Europe, and 10% in Brazil.

Currently, the salaries in each of these countries and regions are growing at between 6% and 8%, said Padmanabhan.

Smarter methods

All large software services firms have a bench of workers whom they can press into a project at short-notice. Consequently, their worker utilization levels are usually around 75% to 85%. Over the past 18 months, HCL Technologies has implemented a ‘talent transformation’ programme that has helped it increase utilization by 3-4% and reduce attrition by 3%. “Instead of playing the wage game alone, HCL has been experimenting with giving its employees additional training resources to make them more employable over a period of time,” said Pillai.

Mass recruitment and large-scale training programmes are not an option for smaller firms such as Aricent (formerly Flextronics Software Systems), a company that develops telecommunications software. The top five software firms in India can hire generic engineers and convert them into programmers, said Aadesh Goyal, vice-president, HR, Aricent. “In a company of our type, however, that is into product development, we need to hire people with domain expertise—so if we make campus offers, it will have to be in the computer-science-and-equivalent-degrees space, because we need system engineers, not programmers,” he added. Goyal said that because of this, wage inflation for Aricent could be as high as 20%, almost 5 percentage points higher on average than what it is for the top five software firms.

Scaling up business

Experts said that Indian companies were facing problems related to wage inflation because their business model revolves around adding more people for every dollar of additional business they get. At a recent HR summit in Chennai, Kiran Karnik, chairman of Nasscom, India’s software lobby said that if the revenues of Indian IT companies doubled from their present levels by 2010, they would perhaps end up increasing their workforce by 85%. At the same summit, Lakshmi Narayanan, the president of Nasscom, added that the lobby would look to encourage IT firms to move up the value chain, offer services such as IT consulting and earn more from each employee.
Aadesh Goyal said that is clearly the way forward for Aricent. “The only way of dealing with the situation is to get more into the product space, to innovate in the technology side,” he added. The company would have anyway done this, he said, but the pressure on profits would make it do so faster. “Necessity is the mother of invention after all,” he added.