Falling headcount big challenge for IT firms

Campus hiring is a positive sign. Also, a small handful of providers whom we track actually had sequential headcount increases, which could be an early indicator of deal pipelines getting stronger and or deals closing faster, highlighting growing confidence in the economy - Mrinal Rai, Assistant Director & Principal Analyst at ISG,tells Bizz Buzz

Manpower Needed

• IT firms have less space to further improve employee utilisation levels
• Headcount addition becomes an imperative to cash in from demand recovery
• Delay in project execution slowly receding
• Experts see discretionary spend coming back in H2

Bengaluru: Fall in the overall headcount by IT services providers throughout 2023 may spell trouble for the industry if IT firms wait for too long to ramp up headcount given the robust deal pipeline.

Experts said that though demand recovery is unlikely to improve sharply, current deal pipeline requires enough number of employees for smooth execution. They, however, opined that recent uptick in headcount addition showed IT firms’ growing confidence in fast closure of outsourced contracts.

“Campus hiring is a positive sign. Also, a small handful of providers whom we track actually had sequential headcount increases, which could be an early indicator of deal pipelines getting stronger and or deals closing faster, highlighting growing confidence in the economy,” Mrinal Rai, Assistant Director & Principal Analyst at ISG, a global IT consulting major, told Bizz Buzz.

A study done by ISG comprising 22 IT companies that employs 3.3 million IT & business services executives showed that overall headcount contracted for four consecutive quarters of 2023 after a record hiring in 2021 & 2022.

“Service providers have been delaying hiring – especially at the entry levels – in response to softness in discretionary enterprise spending. When these delays combined with ongoing attrition in 2023, the industry saw four consecutive quarters of quarter-on-quarter headcount reduction,” the report said.

While the industry headcount was down 2.4 per cent after four consecutive quarters of headcount reduction; only 350,000 people were hired in the last 12 months, which made up approximately 11 per cent of the workforce. Similarly, the report pointed out that attrition stood on an average at 13.5 per cent, which was around 430,000 people in 2023 for these 22 IT companies.

In India, most IT firms including TCS, Infosys & Wipro saw reduction in the headcount during the last three quarters of current fiscal year. During the third quarter, Market leader Tata Consultancy Services saw its total headcount falling by 5,600 to 603,305 employees. Similarly, the overall headcount of Infosys fell by 6,101 to 322,663 by the end of December quarter. Wipro’s headcount declined for the fifth consecutive quarter, as total employee count fell by4,473 to 240,234 during this period. HCL Tech was the only exception, which saw its headcount rising by 3,617 in the third quarter.

However, deal bagged by these large firms remained robust. According to ISG, 2023 saw record contract bookings of over $40 billion.

Industry experts are of the opinion that delay in projects is slowly receding, though slowdown in discretionary spend continues.

“We don’t see any scope of a sharp recovery at the moment, but we are forecasting discretionary spending to come back in second half of 2024,” Rai of ISG said.

In case the discretionary spend comes back, IT firms will require more resources to support the project work. Currently, most IT firms are running at an optimum employee utilisation level, which if stretch further, will lead to quality deterioration in project delivery.