Wage cost grew faster than revenue for top four IT firms in Q1
The top four IT firms in the nation reported total revenues for the June quarter of around Rs 1.47 trillion, a highly modest sequential increase of 0.2%. Their aggregate income for the March quarter of FY23 was around Rs 1.46 trillion.
Their total cost of employee benefits was Rs 82,470 crore in Q4FY23, but it rose 0.5% sequentially to Rs 82,925 in Q1FY24. Unsurprisingly, the top four IT juggernauts’ operating margins decreased in the first quarter of FY24.
Despite declining personnel at the top four companies to 18,258 in the June quarter, the cost of employee benefits increased. The top four companies collectively employ more than 14 lakh people.
Three of the four corporations have either delayed or are hesitating on their employees’ yearly compensation reviews due to the assault of declining margins and limited top-line growth.
The attrition rate for all four organizations decreased to 18% in the June quarter of FY24 from over 21% two quarters prior due to abysmal job prospects.
The top four have also lowered their FY24 growth forecast due to a quarter of projects being ramped down and customer decision delays.
The unexpected news came from Infosys, the second-largest IT business, which on Thursday drastically reduced its revenue projection for FY24 from the previously projected 4-7% to just 1.0-3.5% in constant currency terms. Nevertheless, it kept its 20–22% operating margin forecast.
Wipro, a rival, also gave a gloomy forecast between July and September. It stated that the second quarter’s sales in constant currency terms might range from -1% to -2.0%.
TCS, a leader in the IT industry, doesn’t provide a forecast, but management said during the post-earnings press conference that a double-digit increase seemed challenging to achieve.
The third-largest IT business, HCLTech, has maintained its revenue and Ebit projections for the whole fiscal year. Constant currency sales guidance for FY24 is 6-8%, while the operating margin estimate is between 18% and 19%. Despite sequentially negative growth in all its crucial indicators, including sales, operating profit, and net profit in the June quarter, the firm is still sticking to its projection.
Significant agreements have flowed to the top four, but client decisions have taken longer than expected.
The number of clients worth $100 million for Infosys decreased by 2 to 38 in the June quarter, while it remained constant at 60 for TCS since the March quarter of FY23.
The top four IT companies globally—IBM, Microsoft, Accenture, and TCS—have recently experienced a unique financial challenge. In the first quarter (Q1) of 2023, these giants found their wage costs growing faster than their revenues, which could have profound implications for the IT sector.
This article will delve into the details of this occurrence and its ramifications for these IT heavyweights and the industry.
The Q1 2023 reports of these four companies showed a surprising trend: wages and salaries have begun to outstrip revenue growth. This implies that while these IT corporations are still making profits, a significant portion of their revenue goes toward paying their employees. This surge in wage cost can be attributed to various factors, such as competitive market conditions, the need for specialized talent, and inflationary pressures.
As the demand for IT services and digital transformation grows, the competition for the best talent intensifies. Companies are vying for the same pool of talent—those with specialized skills in artificial intelligence, machine learning, data science, cybersecurity, and cloud computing. This intense competition has driven up the cost of talent, causing wage costs to rise significantly.
The rapidly evolving technology landscape necessitates the hiring of specialists. Workers with skills in emerging tech fields command higher salaries due to the scarcity of such talent and the high demand for these skills. To maintain their competitive edge and deliver innovative solutions, these companies have to pay a premium for such specialists, increasing wage costs.
The global economy is experiencing inflationary pressures, causing a rising cost of living. As a result, companies have to adjust their employees’ salaries to match these changes, contributing to the rise in wage costs.
While wage cost growth outpacing revenue growth may not be dire, it’s undoubtedly a cause for concern.
This could lead to decreased profitability if not appropriately handled. Companies might have to reduce other operational costs, raise service prices, or seek innovative ways to improve efficiency to maintain their profit margins.
There could also be a potential impact on the hiring process, where companies become more selective, focusing on hiring specialists rather than generalists.
The wage cost versus revenue growth scenario paints a challenging picture for the top IT companies. However, it’s also an opportunity for these firms to recalibrate their strategies, invest in employee upskilling, and adopt technologies like automation and artificial intelligence to boost productivity and reduce dependence on human resources for routine tasks.
With their financial prowess and innovative capacities, these four IT giants, IBM, Microsoft, Accenture, and TCS, are undoubtedly equipped to navigate this challenge. It will be interesting to observe how they adapt to these changes in the coming quarters and set trends for the rest of the industry.
While the present situation tests their resilience, it also underscores the value of human capital in the IT industry. As wage costs rise, the sector must recognize and adapt to the changing dynamics of the labour market and global economy. The future of the IT industry hinges not just on technology but also on the people who drive it.
