Indian IT service providers are facing a peculiar situation these days.
While attrition rates and travel costs are trending higher unlike in the early days of the Covid-19 pandemic, utilization levels are falling.
Employee utilization levels, or the percentage of total workforce employed in projects while the rest are benched or undergo training, are typically higher when fresher intake is low.
But a heavy influx of freshers of late has meant that software services exporters are using the addition of freshers and lower utilization levels to solve two issues – improve margins and reduce subcontracting costs.
IT firms consciously make use of lower utilization levels to avoid making desperate offers that give the illusion of higher market salaries and thereby shore up attrition rates, said Ravi Menon, IT and tech analyst, Macquarie Group.
The utilization levels, including trainees, have been one of the lowest in the case of Infosys and close to the lowest seen in recent history for cross-town rival Wipro, he said.
IT firms would not want to increase utilization levels till attrition rates normalize, he added.
“Utilization’s impact on margins is complicated, as it depends on whether this is onsite or offshore and the level of employees who are on the bench,” Menon said. “Tata Consultancy Services (TCS) has the longest planning horizon and that is evident from its sustained hiring of trainees across quarters that seems to lead that of other firms.”
Numbers down, but no worries
In the April-June quarter, Infosys’ utilization number, including trainees, was 77.6%, its lowest since the January-March quarter of financial year 2016-17. Wipro’s gross utilization levels were 72.7%, the lowest since the third quarter of the financial year ended March 31, 2020.
“We have hired a lot of freshers last year, and many of them have also gone into the training pipeline… if you see our utilization, there's a 2% gap between the excluding trainees and including trainee number on a year-on-year basis as well,” said Nilanjan Roy, chief financial officer, Infosys. “We continue to deploy them into projects.”
"Fresh talent needs to be trained on the specific technologies, client environment and expectations. It takes some time. We continue to continue to drive all the levers that we have to be competitive and deliver the guided margins" — C Vijayakumar, Chief Executive, HCL Technologies
Typically, freshers undergo 3-4 months of training before being put on client projects.
TCS, India’s largest software services exporter by revenue, and HCL Technologies do not disclose their utilization numbers. They have, however, said that their utilization levels have fallen due to a higher influx of freshers over the past year.
The gap between its revenue and employee addition indicates that TCS has been gradually lowering utilization levels ahead of peers, Menon said.
“If you look at it from a cost management perspective, through the last year, we started hiring trainees at scale at a very early stage and that helped in multiple perspectives. It's not just cost management,” TCS chief financial officer Samir Seksaria told ET.
In short, increasing utilization levels will be a key margin lever as operating margins have taken a hit due to higher wages, return of travel expenses and other costs, according to the top IT companies such as TCS, Infosys, Tech Mahindra and HCL Technologies.
“Fresh talent needs to be trained on specific technologies and specific client environments and expectations. That takes some time. So, we continue to drive all the levers that we have to be competitive and deliver the guided margins,” said C Vijayakumar, chief executive of HCL Technologies.
Read More at https://economictimes.indiatimes.com/tech/information-tech/the-bad-and-the-good-of-utilisation-benchmark/articleshow/93385486.cms