Hiring in the Information Technology services sector has slowed to pre-pandemic levels. Employee counts soared immediately after the pandemic to support unprecedented demand. However, employee growth has been slowing of late and, in the third quarter of 2022, returned to pre-pandemic levels, according to a report by global IT research firm ISG.
Prior to 2020, annualised employee population growth averaged around 8 per cent when the annual contract value (deal size of over $5 million) was $7.2 billion. Then, growth surged post-pandemic, peaking at over 26 per cent in 3Q-FY21 with an ACV of $9.2 billion. The sector has generated over $9 billion of ACV for five consecutive quarters. To support this surge in demand, providers ramped up their hiring engines in a big way – for both entry level and lateral hires.
Data from Xpheno, a specialised staffing company, says that over the last ten quarters the top eight companies have done 8.12 lakh replacement hirings and 5.38 lakh net additions.
According to ISG report, as of 3Q22, over 35 per cent of employees in the sector have been with their firms for less than a year. Nearly 40 per cent of IT service companies saw annualised employee growth of 6 per cent or less. Given the tight linkage between employee growth and revenue growth in the sector, that number suggests that these firms are likely to forecast for low single-digit growth; struggling to hire fast enough to backfill for attrition in an exceptionally tight labour market. Or they are feeling more comfortable about their ability to hire just in time, which has been a big challenge over the past two years.
Providers that can hire (and retain) talent – especially in areas like apps, industry-specific business process work and product engineering – will be well positioned to capture a share of the solid demand we’re projecting over the next several quarters, ISG said.
Nitish Mittal, Partner at Everest Group, believes that the market for IT services will decelerate from 10.4 per cent organic constant currency growth in FY22 to 6.7 per cent in FY23 (March ending). This is due to tougher comparison to the bounce-back in spend in 2021 compared to 2020. The macroeconomic environment (recessionary fears + hyperinflation) is making companies more cautious / prudent on their spend for 2023-24.
Slowdown, not decline
“This is still a slowdown, not a decline, as we believe the market for digital transformation remains strong as clients continue their journeys to become more technology-led,” he told businessline.
“This market context will mean that the peak for attrition in IT services is near. We are 1-2 quarters away from the peak as demand undergoes a correction. We also believe the slowdown in hiring at big technology firms like Amazon, Meta and Google is an early sign of correction after the boom years of 2021-2022 as tech led the bounce-back during and from the pandemic.
“While the talent market corrects itself, we don’t believe the fundamental demand-supply shortfall for hot skills like data & AI, cloud and cybersecurity will change. Demand for these skills still outpaces supply”, Mittal said.
Lowest in 22 months
According to Kamal Karanth, Co-founder, Xpheno, a specialised staffing company, the IT Services sector’s hiring action and talent demand has recorded its lowest volume in over 22 months. With the sharpest YoY drop of over 50 per cent in hiring volume, the sector gave up the domination of active jobs it held for over 20 months. The 8 month decline that the sector has registered is its longest ever slide in hiring action.
“With global tech spending on a slowdown, if not a pause, Indian IT Service players are in for a winter of low-to-no hiring phase. With margin pressures on the rise and attrition not entirely in control yet, both expansion hiring and replacement hiring are set to be on the backburner for some more time,” he said.
Returning to pre-pandemic levels of hiring volume and velocity is a sign of a larger correction and calibration underway. While action will resume and rise over the quarters to come, the unusual hyper-hiring and wage wars may not return in the form and intensity as seen in 2021 and early 2022, he said.