Issues related to demand appear to have largely receded for information technology (IT) service providers, given the rebound in volume growth in most verticals, but a new woe has started rearing its head on the supply side.
Lack of enough skilled hands threatens to not only chip away at the margins of these companies, but also their ability to carry projects through.
Unfulfilled business demand resulting from inadequate availability of skills is in fact the bigger threat.
Patni and Oracle Financial are already talking about losing business to rivals because high attrition levels are forcing them to leave projects on the table.
That, says analyst Hitesh Shah of IDFC Securities Ltd, could be a
“costlier” impact of scarcity of talent in the IT sector.
“Unfulfilled demand could mean reduced client confidence on vendor; business left on the table could go away to competition and could be costlier impact in the longer run,” Shah wrote in a report last week.
The problem of short supply of workforce in the IT industry is the fallout of robust demand growth in the last two quarters. IT majors Tata Consultancy Services (TCS), Infosys Technologies and Wipro reported a volume growth of 5-8%, while the US-listed offshore company Cognizant saw record growth of 15% in the first quarter this fiscal.
Such a swift jump in business volume has brought supply under pressure given that attrition is inching up, with the potential that wages could go up and margins impacted. In an extreme case, it could also send a company’s customer acquisition plans awry.
Kris Gopalakrishnan, CEO, Infosys Technologies, had foreseen the resource crunch in the industry as early as June.
“Things are turning around and sourcing people really means
getting the right resources, talent, enabling them. Retaining them will be the biggest challenge facing us and our peers,” he had told DNA in an interview.
Infosys has recently spoken about a mid-year wage hike in addition to the June hike of 8-10%.
Wipro, too, is reportedly giving a second increment to its employees in October.
The solution, according to Gopalakrishnan, lies in recruiting experienced people from other industries. “We need to poach from other industries such as infrastructure, manufacturing, etc, people, who have project management experience, who have customer management experience, who understand the construction industry or who understand banking etc. Give them the technical knowledge and they can be on the operations,” he said.
S Janakiraman, president and group CEO - product engineering services, MindTree Ltd differs. He believes what the industry is currently facing is an “artificial scarcity”.
According to him, there is enough capacity in the market even today as the industry has hired very little over the last two years.
“This has left surplus capacity in the industry.”
Janakiraman blames high attrition rates caused by employees taking advantage of opportunities due to a revival in IT business for the artificial scarcity at the mid-level, which consists of people with 3-8 years of experience.
“There has been excess capacity in the market for the last two years because of low attrition, low salary hikes and freeze in fresh hiring. Now that there is a demand rebound, those who had been waiting for the right opportunity to switch jobs for higher gains are doing that. This, however, does not mean there is a capacity constraint,” he said.
Janakiraman expects the phenomenon to dissipate as soon as domestic software services companies make their new campus hires productive. “None of us hired freshers from campus last year. Though, this year we have all hired. It is only a matter of making them (freshers) productive and we will resolve part of our supply problem. Had we hired last year, the freshers would have been productive by now,” he said.
Till then, the companies have to stretch their systems by increasing the productivity of existing resources to meet commitments with tight deadlines.
Alok Shende, founder of Mumbai-based IT and telecom market research firm Ascentius Consulting, feels the supply squeeze is specific to firms and not generic to the entire industry. “The supply side constraint is there given the fact that companies are poaching from competitors and hiking salaries. But when a company has to leave a contract on the table, it manifests the firm’s specific execution issues and may not be linked to supply side constraints,” he argued.
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