Employee cost proportion rises for large IT companies

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%.

HCLTech’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, chief executive and chief analyst at HFS Research, says that 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 HCLTech’s margin declined sequentially from 19.6% to 18.1%.

Pareekh Jain of Pareekh Jain Consultancy says 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 that with a higher bench (lower utilisation), the revenue per employee will come down, making it look like the company has a higher expenditure on employees as a percentage of the revenue.

He takes the example of Infosys which recorded an employee utilisation of 76.9% compared to 77.1% in the previous quarter and 80% in the March quarter of FY22, and made $53,400 per employee in the March quarter, compared to $54,200 in the December quarter, and $57,700 in the March quarter of FY22.

Jain says that as companies get new projects, and the demand environment improves, employee costs as a percentage of revenue will come down.