India is expected to see moderate salary hikes in its tech job market over the next nine months, as the slowdown in hiring persists. However, HR practitioners in the country believe the sector is poised for a rebound in the coming decade and will introduce millions of new jobs.
For now, K. Sudarshan, managing partner of global executive search company EMA Partners International, said only the top four to five IT companies are growing comfortably, due to economies of scale. Most tier-2 companies are struggling, Sudarshan told ZDNet Asia in a phone interview.
In fact, there has been a considerable drop in lateral hiring, he said, noting that tier-1 organizations mostly do not recruit laterally. "They feed the market bottom up--through campus recruitments. Tier-2 companies recruit laterally, mostly by hiring employees from the tier-1 firms," he explained.
Even the bigger IT companies have seen a drop in hiring. For instance, Infosys Technologies plans to hire about 25,000 candidates this fiscal year--8,000 fewer than in 2007. The company expects the first two quarters of 2008 to go slow, yielding no improvements in pricing or billing rates.
The U.S. economic slowdown and strengthening of the rupee have adversely affected recruitment, as well as salary hikes .
However, overall, there will be growth.
According to the Ma Foi Employment Survey, by December 2008, the Indian IT sector is expected to add 74,693 employees, accounting for a 7.3 percent growth over 2007. The ITES (IT-enabled services) sector is expected to add 56,221 employees, a 7.2 percent hike over the same period in 2007.
According to Nasscom, India's chamber of commerce for the IT-BPO (IT-business processing outsourcing) industry, the country's ITES-BPO exports grew from US$6.3 billion between 2005 and 2006, to US$8.4 billion fro 2006 to 2007. This market is expected to grow to US$10.5 billion to US$11 billion in between 2008 and 2009.
Another Nasscom study found that for every 1 per cent rise in the rupee against the U.S. dollar, the operating margin of the Indian IT sector will be affected by 0.4 to 0.5 percent, thereby impacting the net profit of IT companies. The rupee appreciated by 14 percent in 2007.
Sudarshan said: "Operating margins of IT-ITES firms have come down to 12 to 14 percent, from unrealistic levels of 30 to 40 percent."
Indian companies have been taking several remedial measures to fight the impact of the rupee by increasing productivity and operational efficiencies.
Navnit Singh, global technology, and business and professional services practices partner, of executive search company Heidrick & Struggles, told ZDNetAsia in a phone interview: "The larger IT-ITES firms have reduced the number of employees on the bench from around 15 percent to 12 percent."
Incessant salary hikes and appreciation of the rupee have also reduced India's cost arbitrage.
An official of Manpower Services India told ZDNet Asia by e-mail interview: "A close comparison of Indian and U.S. salaries in the IT sector indicates a narrowing gap in cost arbitrage during 2006 to 2008."
According to a Manpower study, the U.S.-India salary differential will be reduced to US$110,168 in 2008, from US$139,691 in 2006, at the executive level.
Sudarshan said: "The cost arbitrage is reducing all the time. Compensation levels today between India and the U.S. are becoming more comparable."
Recently, his company was looking for two Indian IT professionals who were to be stationed in the United States. "We found it very difficult to get professionals from India. They were demanding very high salaries," he said.
Despite a reducing compensation arbitrage, costs continue to remain in India's favor. "The 80:20 rule applies in the area of recruitment as well," the Manpower report stated. "As long as the cost arbitrage exists and major companies remain profitable, the chances of a slowdown in recruitment may not be in the offing."
Reverse brain drain
A plethora of opportunities in India, a decent lifestyle and comparable salaries are also drawing Indian professionals working in the United States to come back to their homeland. In addition, the American economy is flat now.
Singh said: "Growth is happening only in the Asia-Pacific region."
Sudarshan explained: "When delivery gets offshored to India, an employee of Indian origin working in the U.S. invariably moves to India to handle operations here."
At the macro level, the Indian IT-ITES industry will see more consolidation and mergers and acquisitions. Midsize IT-ITES companies are facing challenges on three major fronts: finding the right talent, currency fluctuations; and withering cost arbitrage. As a result, many of them are only too eager to sell out.
Singh said: "We will see more deals like Hewlett-Packard's acquisition of EDS."
Added Sudarshan: "Worldwide, there is a trend toward freeing up assets and consolidation." According to him, smaller IT-ITES companies that did not manage their costs properly, are suddenly realizing that outsourcing is not their core competence and want to exit. The current stock market valuations of mid-tier companies are also making them attractive buys.
For tier-2 organizations, the challenge is to break into new accounts, which are today going to the larger players due to their proven credibility. Therefore, tier-2 IT-ITES companies are recruiting more business development professionals, Sudarshan said.
The larger tier-1 players, on the other hand, are trying to expand their bouquet of services. "They are venturing into new domains, that were earlier the preserve of the Accentures and Deloittes in the U.S.," he added.
The industry is not expecting fancy salary hikes this year.
"If senior officials are not getting lucrative job offers, the hikes will come down," Sudarshan said.
The West is seeing 3 percent to 6 percent salary increases, he said. "Here, we are used to 15 to 20 percent hikes, which are today not feasible," he added. "Eventually, salary hikes will come down to around 6 percent, just about enough to cover inflation."
Infosys employees in India, for instance, will be getting an 11 percent to 13 percent salary hike in 2008.
However, according to Singh, this trend will last only over the next three to four quarters. The industry is here to stay and will grow by leaps and bounds in the years to come.
According to a recent Nasscom-AT Kearney report, the IT-BPO industry today employs around 2 million people, which is set to increase to 8 million by 2018. "By the beginning of 2009, things should definitely look up," Singh added.
Swati Prasad is a freelance IT writer based in India.