IT companies see spike in staff cost ratio

BENGALURU: Employee costs as a percentage of revenue has risen in large Indian IT services companies in the past quarter, which explains why some of them are laying off staff, or sharply reducing hiring.
TCS reported a sequential revenue increase of only 0. 6% in constant currency, and the employee cost as a percentage of the revenue went up sequentially from 55. 8% to 56. 9%. HCL Tech’s revenue saw a dip of 1. 2% sequentially, and employee costs went up from 64. 2% to 65. 1% of revenue. Infosys revenue dropped 3. 2% sequentially, and employee costs rose from 52. 9% of revenue in Q3 to 54. 2% in Q4.
Phil Fersht, CEO and chief analyst at HFS Research, said companies are compensating their employees well so that they can be retained instead of finding a replacement from the market. “That (cost of finding a replacement for an employee who leaves) is as high as 40% more than retaining an employee. In addition, pricing is staying fairly static due to intense competition and client constraints. So, most providers have accepted raising wages in the short term and making small margin sacrifices of 1-2%,” Fersht said.

TCS’s operating margin remained steady at 24. 5% between the third and fourth quarters. But HCL Tech’s margin declined sequentially from 19. 6% to 18. 1%.
Pareekh Jain of Pareekh Jain Consultancy said the rise in the proportion of employee cost is because the revenues of IT services firms have been flat. “They hired people last year in anticipation of higher growth and high attrition. Both have come down and they have a higher bench now, which is creating higher employee costs,” Jain said.
He said with a higher bench (lower utilisation), revenue per employee will come down, making it look like the company has a higher expenditure on employees as a percentage of revenue
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Jain said as companies get new projects, and the demand environment improves, employee costs will come down.