One of the concerns for everyone in the Indian IT Industry – for both the insiders and the (abroad) customers are the rising cost of manpower. In the last 3 to 4 years (Indian Financial Years Apr-Mar) the industry has grown tremendously. All the 3 Indian IT majors have joined the billion dollar club, continued to double there revenue every year and are now multi-billion corporations. All of them are close to having over 100,000 employees. They have been joined closely by Tier 2 IT companies as well in the multi-billion dollar club and many of them have over 50,000 employees with them. This is formidable human resource capital but they don’t come cheap, this unprecedented growth has been pushing the salary further to unsustainable levels.

Furthermore, for Indian IT services firms, nearly 50% (it ranges from 40%-60% depending on the size and offshore/onshore mix) of their revenue is spent in salary and related expenses. Only in few other industries, a single raw material* costs nearly 50% of the revenue. Certainly, no other industry (maybe Oil and Steel in recent years) has seen its raw materials* cost increase over 30% year on year. So far the Industry has been able to cope with this in several ways – productivity gains, fresh resource augmentations, training, process/tool improvements and more but this certainly gives sleepless nights to CEOs including myself. I strongly believe whether it is stock market, the economy in general or salaries, all of them cannot defy gravity for long and keep growing upwards. Indian Stock market which skyrocketed with its BSE Sensex hitting 21,000+ a few months back is now trading at 15,000 levels. All goes through cycles of ups and downs; bearish days are also good for the economy in the long run. In Australia conservationist welcome forest fires because they burn the outer layers of the trees which fall down and add nutrients to the soil. In the long run, this helps the soil to remain fertile and nurture new life. This is nothing new, it has been happening this way there for millions of years.

Am I forecasting doom days here? – Certainly No. Tough days – Definitely Yes. There are several indicators for this trend. First is the obvious US Slowdown (and a short recession), second is the Indian Rupee to Dollar appreciation, Third is the increasing cost of raw materials and the lower margins – gone are the days of hefty profit margins in IT industry. All these have started to show their impact – news are trickling in of delayed joining dates for campus hires by the IT Majors (at this time this sounds more as rumours to me) and if slowing down in the rate of lateral hires/job market. The best indication I follow for sensing Chennai’s Job market is “The Hindu” newspapers Wednesday Opportunities supplement – this week I hardly saw 1 or 2 IT related openings. Normally you see here several full pages and half-a-page advertisements by all popular IT brands.

What are the consequences of this:

  • First, it will separate boys from men (girls from ladies). The “me too” players will get killed and consolidation will happen in the industry, which is good for any industry to mature
  • For the 3 Indian Majors, this will mean little, it is likely to be business as usual. The senior teams there would have easily seen this coming for several quarters and they certainly had time to fine tune there strategies
  • It will be difficult for Tier 2 companies who are aspiring to get into the elite league as their growth rates will slow down
  • For small and emerging companies tough days are certainly ahead. There will be churn but the bloodbath may be limited and short
  • Niche players depending on their offerings and geographies have better chances of surviving this and also growing a little due to easier talent access and lesser competition.<Shameless plug begin> This includes companies like mine “Vishwak”. We are focused on Media Industry and have been investing heavily in the Indian domestic market for last few years. We are witnessing good growth in both these areas and our investments in the Indian market are starting to paying off. Here first mover advantage give us significant head start along with our better understanding of the market<end>

I know this can start a lively debate here and I welcome it, please start posting your comments, observations and thoughts.

*I prefer calling them as Human Assets but that will give a different financial meaning in this context, so let us have them as raw materials here