India Outsourcing: Pay Is Down, Competition Is Up

[jayanthi mandhalapu]

For Americans looking at India's $58 billion IT and outsourcing industry with both envy and anger, here's a bit of news that might prompt a little schadenfreude: During a year spent languishing in the doldrums because of the global recession, India's largest outsourcing providers handed out the stingiest raises in more than a decade. And for Indian engineers with two to five years of experience, the past 12 months actually saw them lose nearly 7% of their income. The national average raise, according to a survey by IDC, the market intelligence firm, was about 1.4%, with most of the salary gains going to those with the most experience.

That's a big change from the boom years of Indian outsourcing, when wages rose regularly by double digits. They increased 18% in 2007-08 alone, and close to 30% per year for the five previous years. In an industry that was starved for experienced workers, employees could easily jump from job to job, getting more money each time. "I changed jobs three times [and] tripled my salary," says Rajdeep Chakravorty, 28, a software engineer in Noida, a suburb of New Delhi. Chakravorty (who asked not to reveal the name of his employer) makes $28,000 a year, about twice the average pay for software engineers in India.

Now, however, many Indian IT workers like him are worried about the future and choosing to stay put, dropping attrition rates to about 15%. They have good reason to be concerned. The 2010 fiscal year, which ends in March, will be the first time the industry's top players will see a revenue decline, according to their own predictions. Infosys (INFY), the No. 2 player, expects a 3.1% decline in revenue to about $4.5 billion, and Wipro (WIT), the No. 3 player, expects revenues for the quarter ended Sept. 30 to drop to $1.05 billion from $1.11 billion a year earlier. (Market leader Tata Consultancy Services (TCS.BO) does not provide revenue guidance.)
Pay Freezes, Cuts Keep Margins Intact

And competition is tougher. India's IT companies have been trying to nail down contracts around the world, including $2 billion worth of U.S. government deals, and $700 million in Latin America. But in August, when BP (BP) looked for a contract to develop applications for its business, it divvied things up between IBM (IBM), which has some 90,000 people in India, and the top three Indian IT companies. (The contract size has not yet been disclosed.)

Competition is likely to heat up more; Dell's (DELL) $3.9 billion purchase of Perot Systems (PER), which has about 9,000 workers in India, means the Indians will have another large competitor.

Still, even at a time of revenue declines and heightened competition, profit margins for the largest Indian outsourcers have been improving—much of it, say analysts, coming from companies freezing and cutting pay for their engineers. Wipro's profits, for instance, were up 31% in the quarter ended June 30, on a combination of currency fluctuation and employee cost controls. TCS and Infosys also beat estimates, rising 23% and 18%, respectively. "These drops [in employee salaries] are not surprising in a year where the IT companies had taken the scissors out to trim flab, nonperforming employees and done away with the bench," says Ibrahim Ahmed, group editor of Dataquest, the magazine for which IDC conducted the survey.

Indeed, the big Indian companies entered 2009 with quite a bit of flab. As many as one-fourth of their newly hired employees didn't really have any work; instead they were shuffled into training sessions in preparation for the eventual uptick in the global economy. Those new orders were initially slow to come. The value of outsourced work dropped 22% in the first half of 2009 over the same period in 2008, according to data collected by Houston-based TPI Global Resources Management, a data and advisory firm. "Despite signs of a pickup in early-stage market activity in the third quarter, the balance of 2009 is likely to remain challenging and we do not expect contracts to match 2008 levels," says Mark Mayo, partner and president of TPI.
Cautious Recruiting

Some Indian industry executives are optimistic that the worst is over. "We've already entered the end of the recession," says Som Mittal, the president of India's IT and outsourcing lobbying group, Nasscom. "By the end of 2009, we expect deals to pick up, and orders to start coming in." Stocks for the three industry leaders have outperformed the 70.1% increase in the Bombay Stock Exchange's Sensex for the year, with Tata Consultancy rising 141%, Wipro up 131%, and Infosys up 108%.

That's why companies like Wipro, which stopped hiring new engineers in October and cut down on hiring more skilled engineers, are finally reconsidering their hiring freezes. But this time, as the recovery in IT and outsourcing demand remains slow, their recruiting plans remain cautious. "Lately, we've seen demand for billable employees go up," says Saurabh Govil, senior vice-president for human resources in Wipro's IT business. "But that doesn't mean that companies are going out (like they did in 2006 and 2007) and hiring 20,000 people at a time."