Mindtree CEO Debashis Chatterjee blamed the information technology sector’s recent cost overruns on “some irrational conduct” in the market for IT workers.
Wages in the Indian IT sector have risen dramatically over the last year and a half as a result of high demand for IT workers and limited supply at a time when the sector’s deal pipeline was at its best in years.
Chatterjee explained the illogical behavior in an interview with Motilal Oswal Financial Services at the brokerage house’s recent investor conference, blaming it on frequent staff movements and big wage increases.
“While some of this is due to low intake in recent years, the sector must protect against becoming uncompetitive,” Motilal Oswal Financial noted in its meeting notes.
Because of the robust employment market for IT workers, attrition rates at large IT organizations have reached multi-year highs. The annualized attrition rate at Infosys, one of the sector’s bellwethers, increased to a new high of 28.4 percent in the June quarter, implying that the business lost one out of every four employees over the previous year.
Most IT organizations’ attrition rates have been in the mid-20 percent level over the last few quarters, indicating experts’ proclivity to chase the next big pay cheque as IT companies sought to satisfy project needs.
The recent surge in salary expenses has resulted in a substantial drop in IT company profitability. Infosys, for example, had its consolidated operating margins fall 140 basis points in the June quarter to 20.1 percent, which is lower than its anticipated range of 21-23 percent for 2022-23.
However, according to a recent survey by recruiting agency Xpheno, IT job vacancies fell 23 percent year on year in August.
In terms of demand, Mindtree’s CEO stated that IT services play a significant part in ‘core’ (revenue generating related) and ‘context’ (activities to support core) company operations, making it difficult for clients to minimize expenditure.
“With change taking place in both Core and Context operations, the IT services industry has matured into a strategic necessity for major Enterprises, which is a significant reason for divergence with macro weakness,” according to Motilal Oswal Financial.
Investors are afraid that the imminent recession in the United States as a result of aggressive interest rate rises by the Federal Reserve and the continuing slowdown in Europe as a result of the continent’s energy problem would cause a severe slowing in the growth of Indian IT firms.
However, Chatterjee stated that customer negotiations are increasingly focusing on cost minimization. However, because these optimizations are driven by technology, customers’ IT budget has not been reduced.
“As long as IT services vendors can help control cost, they can defend growth-related spends,” Motilal Oswal said.