How are top IT companies doing in keeping their flock together?

Information technology companies listed on Indian bourses were historically assessed by the forecast or outlook they gave at the end of each quarter. But in the last two and a half years of the Covid-19 pandemic another parameter became part of the analyst lingo, ‘attrition’.

On the one hand, IT companies were required to take care of their employees physically and mentally even when they were not in offices. On the other hand, companies also had to ensure they move seamlessly to a remote work environment and yet get the workflow streamlined to meet client needs.

Then came the tsunami of the ‘great resignation’, as demand for skilled staff soared not just within the industry and from startups armed with bagful of money from venture capital investors, but also from other sectors. The unprecedented demand led to a war for talent. This reflected in employees’ pay packets as well as companies’ wage bills and also in the attrition levels as legacy IT services firms became the favourite hunting ground for tech talent.

This affects tech companies’ earnings, too, as a churn in the workplace puts pressure on training and integration costs for hiring afresh as replacements. Since the wage cost is a key component of the mix, it has its impact on profits and therefore earnings per share for equity holders.

Over the last few quarters, the attrition levels had surged with the top IT firms seeing on an average about 20% of their staff resigning on an annualised basis. This is nearly double the levels seen before the Covid-19 pandemic.

Given that the top four Indian IT companies—Tata Consultancy Services, Infosys, Wipro and HCL—employ nearly 1.5 million people across the globe, this also means nearly 3 lakh people are quitting jobs every year from the biggest software services companies alone.

But there seems to be a silver lining, as data shared by the IT firms for the second quarter ended September 30 shows.

The silver lining

The top software service companies are not adding to their workforce at the same pace as they were in the recent past. Instead, they are trying to do more work without hiring a large number of people.

This could be partly due to concerns of an impending recession in the US and Europe—the biggest markets for Indian IT companies. Demand from clients in these regions will likely slow down as central banks tighten monetary policy to control high inflation amid the ongoing Russia-Ukraine war and its impact on prices of crude oil, metals and farm commodities.

With the US Federal Reserve and other major central banks still increasing policy rates to fight inflation, costs for companies in these countries will continue to rise and prompt them to control capital expenditure for expansion although some firms may still want to boost productivity to create better value for their shareholders.

Broadly, the top IT companies were adding 50,000 or more additional employees to their headcount in the previous four quarters. This number almost halved last quarter. This is mainly because of Wipro, which recruited just a few hundred staff on a net basis as against more than 10,000 net additions previously. TCS, India’s biggest IT services exporter, also moderated its pace of net additions significantly.

HCL, however, was an outlier on a sequential basis even though it had seen a similar cutback.

Compared with the year-earlier period, both HCL and Wipro added over 30,000 people in their ranks. The number for Infosys and TCS is almost twice and thrice, respectively. TCS still accounts for about 43% of the total employees among the top four IT firms.

Attrition stabilizing?

IT companies, however, can breathe a little easy as the attrition levels are not increasing anymore. Attrition levels for IT services personnel for the trailing 12 months have either declined or remained stable on a sequential basis for three of the four companies—TCS being the outlier.

Attrition levels for Infosys and Wipro in the July-September period fell to the lowest level in three quarters. The level had peaked for Infosys in the quarter ended June 30. For Wipro, attrition has fallen for a second quarter in a row.

HCL’s attrition level also remained at the same level in Q2 FY23 as in Q1 FY23, indicating it also seems to have managed to control the resignation drive.

But TCS is still struggling. A year ago, the company had said that its “philosophy” of investing in people and its “progressive workplace policies” resulted in “industry-leading talent retention”. At the time, its IT services attrition rate was 11.9%, the lowest in the industry. Now, this level is at 21.5%. True, TCS continues to enjoy the lowest attrition level but the percentage has almost doubled, and it is still rising.

The Mumbai-based company says that the quarterly annualized attrition has peaked in Q2 and that it would begin to moderate in the October-March period as IT professionals temper their salary expectations and as talent supply catches up across the software industry.

The bottom line

To be sure, all of the major IT organisations’ attrition rates over the last 12 months have stayed higher than they were during the same time last year.

To deal with the situation, the largest IT service providers in India have switched their emphasis from accumulating talent to increasing their productivity. The tapering of net additions over the past three months reflects this trend.

TCS stands out in this aspect because its attrition rates are still increasing sequentially. But it, too, sees a slowing down in the coming months.

Overall, the good news is that the headache of attrition seems to be becoming more manageable. Moreover, this is happening at a time when new-age startups, who were gobbled up tech talent until recently, have been laying people off as they experience difficulties due to a slowdown in venture capital funding.