All-time-high attrition proves biggest challenge for Indian IT firms

Domestic IT services companies that are adding billion-dollar contracts for most quarters since the pandemic began are facing their worst nightmare.

Attrition levels which are at an all-time high have unnerved domestic IT services companies as they struggle to retain talent. The attrition rate at Infosys has grown 12 per cent to 27.7 per cent in Q4 of FY22 from a year earlier while at TCS, the attrition rate rose 10 per cent to 17.4 per cent during the same period. In other words, nearly 80,000 employees quit Infosys between January and March this year whereas around 1 lakh resigned from TCS, the country’s largest IT services company, during the same quarter.

Also read: Corporate India set to offer 9% salary hike to rein in attrition, says report

But then numbers, even though they are quite alarming, don’t tell the full story. Even as the pandemic struck the world over two years ago, several multinationals across the world started closing down their physical offices, and retail giants shut down their stores and moved most of their operations online. This led to apprehension that IT services companies will soon start losing several contracts and would have to let go of most of their workforce. On the contrary, these companies started bagging huge contracts as clients started shifting their tech budgets to invest in digital as COVID norms of social distancing and work from home kicked in.

Contraction of margins

For example, Infosys in December 2020 bagged its largest contract to date from Daimler worth $3.2 billion. TCS bagged a $2.25 billion contract from Nielsen earlier this month, according to Inventiva magazine, while Wipro bagged a $700 million contract from Metro AG in December 2020.

This forced employers to fast-track the recruitment process and retrain their existing staff to enable them to navigate through the digital maze. Very soon, demand outstripped supply and that’s when attrition rates started climbing as the employers started wooing engineers from the competition with better salaries and incentives.

The post-pandemic period has actually accentuated the problem of attrition further. Analysts say that this has led to a contraction of margins. Infosys had to revise its margin guidance downwards in its recent quarter. It was downgraded to 21-23 per cent for FY23 vs expectations of 22-24 per cent factoring in headwinds from – 1) supply-side pressures due to elevated attrition levels, 2) return of travel and facility costs, 3) investments in building deeper digital capabilities, highly skilled tech talent and sales and marketing to continue gaining market share, 4) further drop in utilisation levels (comfortable levels of 85 per cent vs current 87%).

These headwinds will be partially offset by pyramid optimisation, value-led pricing gains and operating efficiencies, Aditi Patil, an analyst with financial services company, Prabhudad Lilladhar, said in a note to investors.

Long-term plan needed

The impact of attrition has been so huge that reports surfaced about how Infosys was forced to read the riot act to its employees by drawing their attention to the fine print in their respective employment contracts which states that they cannot join a similar kind of company before the completion of six months after resigning from the company. Infosys, however, dismissed the news reports claiming that it was nothing unusual for companies like theirs to include such clauses.

“It is a standard business practice in many parts of the world for employment contracts to include controls of reasonable scope and duration to protect the confidentiality of information, customer connection and other legitimate business interests. These are fully disclosed to all job aspirants before they decide to join Infosys, and do not have the effect of preventing employees from joining other organisations for career growth and aspirations,” Infosys said in a statement.

Meanwhile, a Pune-based IT employees union, NITES, has written to the Ministry of Labour & Employment and the Ministry of Corporate Affairs seeking their intervention to stop IT companies from enforcing such clauses which they claim infringe on the rights of the employees. The government may, however, keep away from interfering in this matter as the ruling party is known for being supportive to the employers since it came to power in 2014 and has tweaked certain clauses in the labour laws to favour them.

Perhaps the bigger issue which IT services companies will face soon is how they are going to build a pipeline of talent and how deeper will their involvement be in making graduating students of educational institutions job-ready. They will need to put together a long-term plan to solve what is turning out to be perhaps their biggest challenge to date.