Changing trends in the software industry

Software, they say, is absorbing the world: As business processes get automated, more and more software needs to be created, updated, and maintained. Therefore, as a dominant provider of software services, India is at the center of the action.

Indian software industry during the pandemic

The value of India’s IT services exports grew 2 percent last year which is the slowest in two decades. Growth in effort accelerated measured in person-hours. Revenue growth slowed due to business disruptions for customers and onsite work falling sharply. Onsite work where engineers travel abroad to work in the offices of their customers' yields more than thrice the revenue per hour of offshore work but also incur higher costs as employees get paid in line with their much higher local cost of living and have lower profit margins. Offshore work is a win-win scenario where both customers and service providers are benefited. Customers pay less and service providers to see healthier margins. But all services cannot be delivered from offshore. After a sharp fall till around a decade ago, the onsite/offshore mix had stabilized at one-third. The limit has been redefined by changes forced by the pandemic, as growth in offshore business last year was the strongest in many years. For some firms more than three-fourths of work was done offshore. This would not be sustained completely but a part of it may remain. A higher offshore share of work brings down the average cost of services making Indian IT services more competitive.

Retaining industry growth post-pandemic

As the customers’ businesses of the software companies stabilize, and digitization accelerates, Indian IT Services firms’ revenues may grow for a few years stronger than the pre-pandemic levels. Firms were unprepared for this acceleration in business and many are having to let go of business due to a lack of spare staff (“bench”) to handle the rush of new work. To address this shortage and to re-build the bench, they are hiring more. The top five IT Services firms have announced 1,20,000 new hires. Several other types of firms are also expanding their hiring of IT staff at the same time. Tech-focused Indian start-ups have raised more than $40 billion over the past year, of which 10-15 percent may be spent on hiring developers to write software (the rest spent on advertising, discounts, acquisitions, technology capacity, or physical capacity like warehouses). Software-as-a-Service (SaaS) firms are also flush with funds, and will mostly use them to hire engineers. SaaS companies are also generally profitable and are seeing strong growth in revenues, facilitating more hiring.

Hike in hiring after the pandemic

Global software and SaaS firms are also increasing their presence in India, with some of them now offering salaries that appear to be benchmarked to dollar-based compensation in the US. Conventional Indian businesses are spending more on technology, with spending on software growing more than 15 percent last year despite the pandemic-related uncertainty. For the economy, one-third of investment is on intangibles, which is mostly software. This is growing faster than conventional investments in machinery and buildings and has accounted for more than 40 percent of incremental investments in the economy over the past three years.The community of software developers in India which is 4.5 million may expand by nearly 10 percent this year. Over the past five years, 1,60,000 people have been added. The net hiring this year may reach around 4,00,000. Job openings on various portals are soaring, and human resources managers are as worried about retaining their staff as they are about hiring for the growth of their companies.

Wages for the growing employee strength

India produces 3 million engineers a year. Therefore, hiring 5,00,000 should not be a challenge. However, much of the estimated $12-13 billion increase in the industry’s wage bill is likely to be for experienced software engineers, particularly for those in the 5-12-year experience. As the size of this group cannot be expanded quickly, this means substantial wage hikes for these engineers.As positive as this trend is for the Indian economy, adding substantially to India’s balance-of-payments and overall gross domestic product, this also throws up new challenges, both for companies and policymakers. Policymakers must help to keep the industry’s costs low so that more work comes India’s way and also must work on the ability of cities to handle the influx. Around three-fourths of India’s software engineers are based in just four cities: Bengaluru, Chennai, Hyderabad, and Pune. Most of the new openings are also in these cities. To avoid congestion and to tap a larger talent pool that may not want to move to these cities, the industry has tried to develop alternative centers, which have not succeeded. The number of engineers with the right skillsets must grow otherwise India may quickly become uncompetitive. Students shell out lakhs of rupees for an engineering degree, after which the hiring firm put them into a 6-12 month retraining course. The need for skills like Artificial Intelligence or Machine Learning may be too dispersed across firms for them to solve the problem themselves and they may end up hiring abroad. This becomes a public good which the government can plan for and facilitate.

The challenging task of sustaining the hired talent

Apart from the challenge of attracting/retaining talent, larger firms must also collaborate to enable an ecosystem that sustains the inflow of quality manpower with cost-efficiency. For larger IT services firms staff costs grew 16 percent in the June quarter and may rise further. As they compete with MNCs which are well-funded than start-ups and SaaS firms which generate much more revenue per employee. They may need to innovate the software development process again like they did while scaling up in the years after Y2K.