By Siddharth Pai
We are Witnessing the culmination of another disappointing quarter for Indian IT services firms. Traditionally dominating the lower end of the IT market, these firms have consistently proven naysayers wrong. However, the tide seems to be turning. Notably, Infosys, TCS, and Wipro have announced a significant reduction in their headcount numbers, clearly indicating their challenges.
Equity analysts have been mauling the large firms in their reports on their recently issued earnings, which have been dismal. Some have had a decline in four out of the last five quarters on a constant currency basis. Some smaller firms have had marginally better luck, given that their print could be better. This may be due to the lingering feeling that smaller firms are nimbler and can better reposition themselves for newer business.
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The providers are trying to hold out investors’ hopes on “big deal wins”. These are being touted as saviours. Every company says its focus on such big deal wins is paramount. However, the figures are all in total contract value (TCV). Having negotiated some of the most significant watershed deals worldwide and the initial ones that came to India, I know what TCV means and what it does not.
TCV is only a part of the story. What is unsaid is often more critical, as it often is when firms practise “economy with the truth” while reporting their financial results. TCV only represents the potential value over time. First off, what is the tenure of these deals? Knowing this will give us a clear indicator of these deals’ annual contract value (or ACV) — a far better indicator of revenue sustainability than TCV announcements. In addition, all large deals today come with a “productivity” component, which is a cost-saving that service providers promise to their clients on every large deal. This component is either paid upfront — which is bad for the service provider’s margin — or delivered through a steady decline in the number of people associated with the deal — which means that headcount falls on each deal (as do revenues) in the later years of the agreement.
Then there are deal “renegotiations”, which means that the client reopened a deal that was inked some time ago, demanding more significant cost savings. This has proved to be true in at least one major service provider’s case — it reports that one of its large financial services clients has renegotiated, leading to a 15% reduction in revenues from that client and a consequent hit to that company’s bottom line.
Equity analysts have seen through some of this. Here is a take from JM Financial in August 2023: “Shorter-term discretionary projects continue to be phased out/scaled down. Newer deals (of the efficiency types) are ramping slowly in comparison. In effect, clients are releasing more resources than deploying, resulting in net reduction in billed headcount.” (shorturl.at/lnoQS).
The headcount reduction should have been apparent. During the pandemic, customers saw an unprecedented rise in “remote” IT work as being offshore able to India at a lower cost. Almost all Indian IT service providers jumped at the chance for more business during the pandemic and poached each other’s people, sometimes at twice the existing salary. I warned then that this was unsustainable and that we would inevitably see Indian firms needing to rid themselves of this bulge. Here is JM Financial again on this same topic: “A lot of that ‘excess’ IT spend was to cater to the immediate demand during a pandemic. We might now be witnessing the unwinding of those spend/projects, precipitated by a tighter economic environment. If true, this hypothesis implies that the ‘old normal’ incremental revenues could be potentially offset by unwinding equally large excess IT spend over the next few quarters.”
According to one CFO of an IT major: “Our attrition has also come down significantly. That is the reason for net headcount reduction.” No kidding. Here’s how I would have said that: Our people are not flying to the door since there are no more double salary packages outside, so we need to show them the door instead.
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This is even more striking since the IT majors have been hiring new engineering graduates at more or less the same packages they were doling out two decades ago. The oversupply of engineers has meant that there has been no need to adjust for inflation over the years, which means dismal salaries being paid to engineering graduates. Last year, one major even had the nerve to reduce the promised annual package from `6.5 lakh to `3.5 lakh for the youngsters it had already hired. Another went from hiring 50,000 fresh graduates last year to zero this year.
The sort of short-sighted view of jumping on an immediate opportunity with no thought for the future was a gamble that worked well once in the past: the Y2K boom in the late 1990s that some of the largest Indian IT majors today jumped on when they were much smaller. By a lucky happenstance, the first dot-com bust meant that large amounts of fibre optic network capability that had remained dark due to the bust could be ‘lit’, allowing for the sustained offshoring of work from the West to India. That lucky happenstance allowed for the reabsorption of all their “body shop” staff after the Y2K phenomenon.
Today, with Gen AI and the availability of other “no code/low code” platforms, that re-absorption is far from assured. Hold on for a rough ride.
(Siddharth Pai is a technology consultant and venture capitalist. Views expressed are personal)
By Siddharth Pai
We are Witnessing the culmination of another disappointing quarter for Indian IT services firms. Traditionally dominating the lower end of the IT market, these firms have consistently proven naysayers wrong. However, the tide seems to be turning. Notably, Infosys, TCS, and Wipro have announced a significant reduction in their headcount numbers, clearly indicating their challenges.
Equity analysts have been mauling the large firms in their reports on their recently issued earnings, which have been dismal. Some have had a decline in four out of the last five quarters on a constant currency basis. Some smaller firms have had marginally better luck, given that their print could be better. This may be due to the lingering feeling that smaller firms are nimbler and can better reposition themselves for newer business.
The providers are trying to hold out investors’ hopes on “big deal wins”. These are being touted as saviours. Every company says its focus on such big deal wins is paramount. However, the figures are all in total contract value (TCV). Having negotiated some of the most significant watershed deals worldwide and the initial ones that came to India, I know what TCV means and what it does not.
TCV is only a part of the story. What is unsaid is often more critical, as it often is when firms practise “economy with the truth” while reporting their financial results. TCV only represents the potential value over time. First off, what is the tenure of these deals? Knowing this will give us a clear indicator of these deals’ annual contract value (or ACV) — a far better indicator of revenue sustainability than TCV announcements. In addition, all large deals today come with a “productivity” component, which is a cost-saving that service providers promise to their clients on every large deal. This component is either paid upfront — which is bad for the service provider’s margin — or delivered through a steady decline in the number of people associated with the deal — which means that headcount falls on each deal (as do revenues) in the later years of the agreement.
Then there are deal “renegotiations”, which means that the client reopened a deal that was inked some time ago, demanding more significant cost savings. This has proved to be true in at least one major service provider’s case — it reports that one of its large financial services clients has renegotiated, leading to a 15% reduction in revenues from that client and a consequent hit to that company’s bottom line.
Equity analysts have seen through some of this. Here is a take from JM Financial in August 2023: “Shorter-term discretionary projects continue to be phased out/scaled down. Newer deals (of the efficiency types) are ramping slowly in comparison. In effect, clients are releasing more resources than deploying, resulting in net reduction in billed headcount.” (shorturl.at/lnoQS).
The headcount reduction should have been apparent. During the pandemic, customers saw an unprecedented rise in “remote” IT work as being offshore able to India at a lower cost. Almost all Indian IT service providers jumped at the chance for more business during the pandemic and poached each other’s people, sometimes at twice the existing salary. I warned then that this was unsustainable and that we would inevitably see Indian firms needing to rid themselves of this bulge. Here is JM Financial again on this same topic: “A lot of that ‘excess’ IT spend was to cater to the immediate demand during a pandemic. We might now be witnessing the unwinding of those spend/projects, precipitated by a tighter economic environment. If true, this hypothesis implies that the ‘old normal’ incremental revenues could be potentially offset by unwinding equally large excess IT spend over the next few quarters.”
According to one CFO of an IT major: “Our attrition has also come down significantly. That is the reason for net headcount reduction.” No kidding. Here’s how I would have said that: Our people are not flying to the door since there are no more double salary packages outside, so we need to show them the door instead.
This is even more striking since the IT majors have been hiring new engineering graduates at more or less the same packages they were doling out two decades ago. The oversupply of engineers has meant that there has been no need to adjust for inflation over the years, which means dismal salaries being paid to engineering graduates. Last year, one major even had the nerve to reduce the promised annual package from `6.5 lakh to `3.5 lakh for the youngsters it had already hired. Another went from hiring 50,000 fresh graduates last year to zero this year.
The sort of short-sighted view of jumping on an immediate opportunity with no thought for the future was a gamble that worked well once in the past: the Y2K boom in the late 1990s that some of the largest Indian IT majors today jumped on when they were much smaller. By a lucky happenstance, the first dot-com bust meant that large amounts of fibre optic network capability that had remained dark due to the bust could be ‘lit’, allowing for the sustained offshoring of work from the West to India. That lucky happenstance allowed for the reabsorption of all their “body shop” staff after the Y2K phenomenon.
Today, with Gen AI and the availability of other “no code/low code” platforms, that re-absorption is far from assured. Hold on for a rough ride.
(Siddharth Pai is a technology consultant and venture capitalist. Views expressed are personal)
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Tomorrow, CSK and LSG will clash in an exciting IPL 2024 match. CSK seeks revenge after their previous loss to LSG and will rely on their bowlers and batsmen to secure a win. LSG, currently on a winning streak, will aim to climb higher in the points table.
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