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Has Indian IT shot itself in the foot?


AUGUST 30, 2022

The work from home environment, forced on us by the pandemic, has made the barriers to switching jobs much easier.

I have a friend in the US who served that country’s armed forces. Being a retired serviceman, he is interested in firearms and uses them for sporting activities. He often travels to a firing range near his house to keep his skills up-to-date and joins competitions on a regular basis.

During a conversation with me some years ago, he described how firearm owners sometimes shoot themselves in the foot. He explained that in actuality, these people shoot themselves in the thigh, and the bullet makes its way unerringly down the rest of the leg and into the foot. This occurs when the owner of a firearm becomes overconfident about his or her abilities and carries a concealed firearm on their person. “Concealed Carry” is a special status sought after by American gun aficionados who usually must go through focused safety training before they are issued a license by the authorities to carry a concealed gun on their person.

Evidently, these trained carriers can sometimes become so overconfident that they start carrying a concealed gun on their hips, under their shirts or jackets, that is not only loaded, but also has a bullet in the firing chamber, with the gun cocked and ready to fire.

Despite all the training, accidents happen, as they often do, and even bumping the firearm into a hard surface can cause it to go off, and the bullet in the chamber sears down the cowboy or cowgirl’s thigh and thence firmly lodges itself into the foot. Ouch! It seems to me that it would be far wiser to not have a bullet in the firing chamber, even if the firearm is loaded.

Discretion is after all the better part of valour.

At the risk of dating myself, I have to say I have been in and around the IT services industry for at least three major economic boom and bust cycles: the early 2000s’ dotcom boom and bust, the Great Financial Crisis (GFC) of 2008, and the current Covid-fueled crisis.

During the first dotcom crisis, I was a senior executive at an American IT services firm, and the crude joke in those circles was that the term “B2B” stood for all the Indian origin software programmers who had been retrenched and were going “Back to Bangalore”.

But Indian IT services, despite its oft-heralded demise, went from strength to strength after the world realized that it could send work to the worker, and didn’t necessarily have to bring the worker to the work.

After the dotcom bust, it did well during both the GFC of 2008 and the Covid crisis of 2020-21. This time, however, it may have overplayed its hand, or to use the gun analogy, may have been walking around with a gun strapped to its side with a bullet in the firing chamber.

While it has kept the salary for fresh IT engineering graduates about the same level for 20 years, which has not even kept up with inflation, the need for talent with a medium level of experience during the Covid crisis went up significantly.

So, these firms started a bidding war for such talent, and were poaching staff from one another over the last two years. Many IT engineers in the 3-6-year experience bracket were being routinely offered up to twice (2X) their current salaries to switch jobs.

The work from home environment, forced on us by the pandemic, has made the barriers to switching jobs much easier; after all, you stay at the same desk at home to churn out the same code, all you’re doing now is to churn it out for a different employer for twice the money.

I challenge you to find a 26-year-old who is mature enough to understand that a 2X increase in salary is a fishy proposition; it is simply too good to be true, and even if true, certainly will not last.

Overconfidence is the wont of the young, and no amount of sage advice from an elder can stand in the face of a job offer that promises a youngster double his or her salary.

And last week, right on cue, there is news that India’s IT majors have started indicating that variable pay will be cut, pyramids normalised (by bringing in more fresh graduates whose salary levels have remained static while ejecting high-cost resources), and employees brought back to the office to foster more cohesion between the firm and its employees.

Almost all Indian IT services majors have seen a worsening demand environment, while the indiscriminate hiring and poaching has caused wage bubbles in their workforce, thereby bringing their margins down by several hundred basis points. The use of subcontractors has also gone up, and registrations on IT subcontractor marketplace platforms such as TopCoder have risen by up to 60%. Equity analysts have downgraded most of these stocks and are calling for further corrections in share prices; in many cases, their target prices are 20% lower than today.

While a 26-year-old can be expected to be immature about life-choices, one would expect more maturity from the head-honchos of such companies.

Both the last crises saw the printing of new money followed by later attempts to mop up excess liquidity through interest rate hikes—indicative of a slowdown. Didn’t they see this coming? Why on earth were they poaching each other’s resources at 2X compensation?

Indian IT is facing structural problems from this short-sighted and overconfident approach. The irrational exuberance of the last two years will take time to iron out of the system. Expect more pain before their feet begin to heal.

The article writer Siddharth Pai is a Technology consultant & venture capitalist

Courtesy/Source: The article originally appeared in The Financial Express