IT Companies Stall Recruiting and Compensation Increases Due to Low Utilisation Rate

Analysts believe that compensation increases and hiring by enterprises would remain moderate in FY24, owing to a drop in the utilisation rate of IT companies and challenges emanating from the recent worsening in the banking and financial services (BFS) outlook.

The utilisation rate is the number of employees on any current project. In contrast, the bench is the number of people on a company's payroll who are not on any active project at any moment. While all IT companies maintain a substantial bench strength at any one time, a greater utilisation rate usually corresponds to better cost optimisation.

Over the previous three-quarters of FY23, IT companies like Infosys, Wipro, and LTIMindtree have seen their utilisation rate fall sequentially

• According to a Crisil analysis, revenue growth in India's IT services industry would fall by 700-900 basis points to 10-12% in FY24, owing to global macroeconomic and financial sector challenges in significant countries.  
• "Revenue growth in domestic IT services companies will be hampered by headwinds in key markets, particularly the BFSI segment in the United States and Europe." While revenue growth in the BFSI category will likely decrease to the mid-single digits, it will be offset somewhat by 12-14% growth in the manufacturing segment and 9-11% in other areas. Overall revenue growth would be moderated, on the whole. Client IT spending is shifting away from discretionary spending towards cost-cutting and vendor consolidation, according to Anuj Sethi, senior director at Crisil Ratings.

Margins Under Pressure

• IT businesses' margins have been under pressure for some time now, resulting in unpredictable pay cutbacks for staff. According to JP Morgan's analysis, combined with slowing growth, pricing pressure in most vendor consolidation awards is anticipated to limit the capacity to recover profits, notwithstanding benefits from attrition reduction, rightsizing bench and subcontractor costs, and other pyramid measures.

IT Companies will struggle to recover margins lost in the 2022 calendar year since growth is predicted to be less than 10%

• "While headline utilisation has fallen, this is primarily due to unbilled graduates hired (over-hired) during CY21-22." Utilisation metrics (ex-trainees) are overstated since many benched employees are freshly trained graduates who employers need help to place when growth slows. According to the memo, stopping/slowing external hiring to drive pyramid corrections impacts the capacity to control subcontracted workers.
• While a result, decreasing growth in the 2023 calendar year "makes it difficult to extract sharp margin management as remaining demand for in-demand skills remains," it stated.