As US, Europe open up, new IT challenges emerge for domestic firms

The new fiscal for Indian IT companies comes with a new set of challenges as the economy opens up, especially in the West.

The pandemic has to a great extent retreated in several countries in Europe and in the US, with vaccination levels going up there. One of the biggest challenges IT companies will face is when the clients start reducing budgets for digital transformation and cybersecurity with the revival of contact intensive services.

In FY21, the Indian IT-BPM industry generated $194 billion in revenues (8 per cent of India’s GDP) and employed 4.3 million people. Out of this, the US contributed around two-thirds of the total revenues while Europe and others the rest.

“Our analysis suggests that demand for IT services remains intact, as consumption of software/services — as a percentage of GDP — is on the rise. The Indian IT industry is likely to continue to gain market share on the back of a strong talent base and proven track record,” Reliance Securities said in a recent note to its investors.

Also read: IT sector claims it’s on ‘road to recovery’, analysts say ‘too early to judge’

However, ICICI Securities in an earlier report had pointed out that euphoria around cloud and digital needed a reality check. “Current mobility trends indicate that as economies recover and public transportation resumes, activity in physical channels is already reverting towards pre-COVID levels. WFH (Work from Home) if perpetuated can be a margin headwind, not a tailwind. On the supply front, WFH’s initial (and misleading?) success led to a couple of lofty expectations, viz. furthering offshorisation and margin accretion. One-off factors driving the initial success (e.g. fear of lay-offs) and a simultaneous spike in fulfillment rates on crowdsourcing platforms (e.g. GitHub) make us sceptical,” the note said.

One of the reasons for such scepticism is the fact that the world economy has bounced back from disasters such as the Spanish Flu, SARS and demonetisation. There is no doubt of the fact that the domestic IT companies will continue to perform well because of the strong environment for their services. Going forward, it may have to reinvent itself just as it has done during the pandemic to grow its businesses.

Prabhudas Liladhar in its note to investors shows that there could be a cause for concern going forward for the IT sector. It has pointed out that the tier-1 IT services revenue growth in 4QFY21 was a bit lower at 3.7 per cent quarter-on-quarter (US dollars) as compared to the previous two quarters. But it expects that the demand for Indian IT companies will continue.

Also read: Indian tech firms to cut 3mn jobs by 2022 due to automation: Report

“We believe that the headwinds of supply-side can be partially offset by levers such as pyramid optimization, increase in offshoring, controlling attrition and leverage from revenue growth,” the note said.

But a bigger problem and a wholly unexpected one at that is emerging for the IT sector as clients fast-track their digital journey. With IT companies bagging multi-billion dollar contracts, demand for talent is emerging as a new battleground. Infosys, TCS, HCL Technologies and Wipro are witnessing high attrition rates which weren’t seen earlier. During the January-March quarter of 2021, the attrition rate was in the range of 7.2 per cent to 15.2 per cent. Infosys’ attrition rate peaked at 15.2 per cent while that of Wipro was 12.1 per cent.

This had a direct impact on EBIT (earnings before interest and taxes) margins for tier one companies. The margins for these companies were down around 50 to 260 basis points, because of wage hikes (Infosys and Wipro have already given out two wage hikes during this year to retain talent).

Also read: Work from home to be a norm for services sector post COVID lockdown

Reliance Securities’ analyst flags off two concerns for the industry at present. These are talent scarcity in Key Offshore Markets: Inability to provide digital talent (data analytics, customer experience, cloud and cyber) to key customers in a cost-effective manner. The other one is the failure to step up ecosystem partnerships/alliances. “Indian IT industry has been working closely with various software developers and other ecosystem partners. Failure to step up partnerships with new-age software providers and ecosystem partners (cloud vendors and virtualization partners etc.) may impair client relevancy,” the report suggested.

The top management is putting up a brave front as they try to adjust to the new normal but the fact is that those employed in the IT sector never had it so good even as the rest of the world struggles to overcome the impact of the pandemic.