Tech companies on a drive to cut the salary bill

The IT sector, known for its generous pay-packets and perks, is tightening its purse strings. Employee expenses are under companies’ lens as they seek to improve margins so as to invest in new technology and services.

In 2013-14, TCS, HCL Technologies, Tech Mahindra and Mindtree cut employee costs as a proportion of sales by around two percentage points compared to the previous year. Other companies managed a more moderate pruning.

Speaking to BusinessLine recently, Krishnakumar Natarajan, CEO of Mindtree and a former Chairman of industry body Nasscom, said that double-digit wage increases may be a thing of the past. Going forward, he said, there will be at least a 5-percentage-point difference between the rate of revenue growth and wage cost increases.

This could be because tech companies are moving away from a business model where the revenue growth was closely linked to employee addition. Before 2010-11,, the pace of employee addition was either equal to or more than the revenue growth rate.

Also, over the last couple of years, there has been a moderation in wage hikes, with increases at 5-8 per cent levels. As a result, a company’s employee expenses have been rising 2-4 percentage points lower than its revenue growth rate, resulting in higher margins.

A factor responsible for the reduced wage bill is the greater focus on platform-based solutions that cut down the need for manpower.

Krishnakumar Natarajan points to companies investing in creating platform-based offerings, delivering via new areas such as cloud and social media, and raising productivity by increasing the employee utilisation level.

Clients are also partly responsible for this trend. Heads of almost all top and mid-tier IT companies say that clients want fixed-price contracts and would like to be billed on business outcomes rather than the traditional time-and-material mode. Increased platform-based service allows companies to sell on the ‘pay as you use’ model.

Thus, hiring by software companies has slowed. While revenues of TCS, Infosys and Wipro grew 12-36 per cent in dollar terms over the past couple of years, their employee strength rose only by 7-25 per cent. This has led to an emphasis on productivity. TCS and HCL already have utilisation rates of 82-84 per cent, while the rest of the industry is playing catch up from the mid- to high-70 per cent levels.

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