New hirings in the IT sector are likely to drop by 50 per cent over the next four years, according to a report by Crisil. The prediction is extremely negative for lakhs of engineering students across the country as the IT sector has traditionally been the biggest employer in the private sector.
More than 7 lakh engineering students graduate every year. In fiscal 2013-14, Crisil estimates IT hiring at 1.05 lakh and says the number could come down to a mere 55,000 by 2017-18. The IT sector currently employs 31 lakh people or 24 per cent of total private sector jobs in the organised sector. The sharp slowdown will therefore impact the overall hiring sentiment in the economy.
IT jobs growth is slowing down because margins in the $118 billion outsourcing industry are under pressure. Frontline IT companies such as TCS, Infosys and Wipro earn nearly three fourth revenues from North America and Europe, where growth is still anemic. As a result, clients are asking companies to cut costs. (Read: What Infosys Results Signal for IT Graduates, Campus Hiring)
Since employee salaries account for the biggest cost component for IT companies, domestic outsourcers are reducing bench strength, improving employee utilisation rates and reducing other operational costs, Crisil says. In 2013-14, employee cost accounted for over 60 per cent of total cost of IT companies.
"Companies will run very tight ships because of which incremental employment will be curbed," Crisil says.
The report says Indian companies are increasingly looking to maintain a leaner bench by adopting just-in-time hiring to improve utilisation rates. The current utilisation (or productivity) rate stands at 80 per cent and Crisil expects it to go up by 500 basis points in the medium term. A 100-basis-point improvement in utilisation impacts the employee growth by 105 basis points, the report says.
Companies are gradually migrating towards fixed price contracts, which eliminate the need for maintaining a large workforce for billing purposes. Such contracts weigh on hiring as revenue per employee goes up, Crisil notes.
Finally, Indian companies are planning strategies to move further up the value chain towards services such as consulting and software products, Crisil says. These services are currently dominated by global majors (such as Accenture, IBM), who have higher revenue per employee despite comparable employee bases.