Indian IT Companies Cautiously Optimistic About Future While Employees Face Job Cuts

The third-quarter earnings of most IT companies indicate that they haven't done as badly as feared earlier. While revenues and margins are under pressure, they remain optimistic about the future. Yet, many of them do not want to hire. Worse, several big companies have shedding jobs for a variety of reasons. Campus recruitments has also hit a new low.

Sample this:

Kicking off the earnings season,Tata Consultancy Services (TCS) reported better-than-expected results during the October-December quarter. Its revenue grew 4 per cent year on year to Rs 60,583 crore, while net profit rose 2 per cent from a year ago to Rs 11,058 crore.

TCS CEO and managing director K. Krithivasan said, “We are seeing strong deal momentum across markets, resulting in a solid order book providing visibility into long-term growth.” He added that services for Generative AI from customers are driving a good part of the revenue growth. At the same time, the company said it was cutting its headcount by more than 5,500 employees.

Not to be left behind, Infosys Technologies reported it was shedding more than 6,000 jobs, even as the company gave a slightly upgraded guidance for the coming quarters."Our performance in Q3 was resilient. Large deal wins were strong at $3.2 billion, with 71 per cent of this as net new, reflecting the relevance and strength of our portfolio of offerings ranging from generative AI, digital and cloud to cost, efficiency and automation," CEO and MDSalil Parekh told analysts and investors during acustomary earnings call.

Q3 revenue at the country'ssecond largest IT company rose 1.3 per cent on year to Rs 38, 821 crore while net profits rose 7 par cent per cent to Rs 6,106 crore.

“We are starting to see healthy indicators of growth,” saidThierry Delaporte, the Paris-based CEO and MD of Wipro Ltd.C Vijayakumar, CEO and MD of HCLTech echoed similar optimism, “We remain positive about our medium-term growth enabled by a laser-sharp focus on delivering innovation and hyper-automation to our clients. It’s been a remarkable quarter with all-round performance,” he said

HCL Tech was an exception in the top league, being the company that added more jobs. Compared to its competition, HCL Tech’s performance was perhaps the best. Its third-quarter results beat the Bloomberg estimates. Revenue grew 6.5 per cent year-on-year (Y-o-Y) and 6.7 per cent quarter-on-quarter (Q-o-Q).

Despite the positive sentiments, the paradox is that most IT companies are shedding employees when guidance is largely positive. One report suggested that major IT companies in India had already let go of more than 20,000 employees in the quarter of July-September 2023. Why is India's IT sector, once the hub of lucrative jobs and driver of aspirational India, losing its sheen? Two key reasons:

Impact of Generative AI

Experts suggested that the financial year 2023-24 could be the first in the last quarter century that the US$ 110-billion Indian IT industry will end up with fewer employees than it started with. One of the major reasons for this is the emergence and growth of Artificial Intelligence (AI) and Generative AI.

This affects the companies in two ways. First, global clients (companies) of IT companies are increasingly moving towards the use of AI. Because of this, Indian IT company employees have to be adept at AI. Second, our software companies in an effort to boost operational efficiencies and cut costs are increasingly using AI. In effect, AI is double-edged. TCS’s Krithivasan stated at the recent World Economic Forum in Davos that the company has trained and have a 100,000 AI-ready workforce. These developments are likely to have an impact on the overall headcount of the company. Similar would be the case for other IT majors.

"There is a company-wide and industry-wide buzz about AI today. It is not that everyone is worried about the loss of jobs because we are taking steps to ensure that employees are trained in AI. Depending on the skills needed, there are three-day, one week, and even month-long training," says an employee of a Big Four Bengaluru-based IT company employees, who is a team leader in the AI-vertical.

Global economic headwinds

The OECD says that the global economy continues to exhibit slow growth at 2.9 per cent in 2023 and will go down further to 2.7 per cent in 2024. One of the key reasons for the dampener is the geo-political and geo-economic conditions arising from the Hamas-Israel war and the continuing Ukraine-Russia war which does not seem to find a resolution. The impact of slow global growth will have a major impact on developed economies like the United States and Europe. This will consequently have a cascading effect on corporations in these geographies, their revenues and profits and the IT contracts that they give to Indian companies.

Tech copycats

Interestingly in an NPR article, experts like Jeff Shulman, a professor at the University of Washington's Foster School of Business, says that “there is a herding effect in tech.” In other words, “Layoffs are contagious.” Again, Jeffrey Pfeffer, a professor at the Stanford Graduate School of Business, who is an expert on organisational behaviour, says that when one major tech company downsizes staff, the board of a competing company may start to question why their management is not doing the same.” In fact, in the US it is contrary to what happens in India. An industry tracker Roger Lee says that the markets reward IT companies that lay off employees and bring in cost efficiencies.

Is the Duality of Promise and Peril Sustainable?

Rahul Mishra, Professor of Strategy at IILM Institute of Higher Education feels that “this trend is partly temporary and partly medium-term, based on the fundamental reconfiguring of the IT industry in India now. Companies are increasingly moving away from low-value projects to higher-value ones based on Saas and cloud computing. Additionally, because there is a mild recession in the West, lesser projects are coming from global corporations. But this could be a temporary phase.”

Even though the global economy is in a gloomy phase, the Indian economy is one of the bright spots around the world. The latest assertion by the government’s Chief Economic Advisor, V. Anantha Nageswaran that the Indian economy will continue to grow by 7 per cent (despite global risks like the Red Sea crisis) also adds hope for companies including IT companies. An IBEF report is optimistic. It said: India's IT industry is likely to hit the US$ 350 billion mark by 2026 and contribute 10 per cent towards the country's gross domestic product (GDP).

Then, there is the need for IT companies to answer the call of quarterly earnings. A senior team leader in the office of a top four IT company in Pune said that even some of the HR policies like that of travel are calibrated according to quarterly expectations. For example, if an employee is entitled to travel in business class, but the particular quarterly expectation is low, then he would have to travel economy class. It would revert back to business class when earnings are better. The inference: duality of strategy is short-term and pragmatic. A related issue is that when downsizing happens in an IT company, there is a short-term impact on its reputation. Therefore, soon enough companies will take steps to overcome the image issue through appropriate HR and hiring policies.

Clearly, pragmatism and optimism are the watchwords.