SYSTEM DRIVERS: The move by TCS could well become the IT sector’s very own bird flu Okay, it’s official now. the Indian information technology sector can no longer sustain its margins. Mumbai-based Tata Consultancy Services (TCS) has cut its employees’ performance linked variable pay component, reducing salaries by an average of 1.5 per cent for this year.

Unless contained quickly, TCS’ nod to the current circumstances could well become the Indian IT sector’s very own bird flu. “Even if it does not become a trend, it certainly is going to impact the overall compensation growth expectations in the industry,” says Rajesh Pandey, founder of People Factor, an HR Solutions company, and former senior executive at Hughes Software Systems.

BW'’s Salary Survey 2008 showed that IT sector’s salary hikes would only be 8 per cent; a resurgent financial and banking services industry, on the other hand, anticipates a growth of more than 18 per cent.
It could be seen coming a mile off. The Indian IT industry is almost entirely driven by the software services segment. In the past few years, software services have battled the shortage of an employable work force with high salaries. “It (the pressure on margins) was waiting to happen since Indian IT companies were more focused on becoming cyber coolies rather than focusing on creating a product,” says political analyst and activist Praful Bidwai. “Variable pay should take this aspect into account.”

In the past couple of years, the ‘cost advantage’ model has come under serious threat with competition from the likes of China and Philippines. “As a result, the industry has started moving up the value chain towards consulting and product development,” says Pandey.

“It is an ongoing debate: when will Indian software wizards create a product company like Microsoft?” says J. Mahalingam, HR head of Symphony Services. “We have started work but we are a long way off yet. It will take years to change the DNA of the top 10 Indian IT giants, who are leaders in services. Meanwhile, the solution is to enhance operational performance.”

But if the margins were already thinning, it was nothing compared to the hits taken when the rupee grew strong. Already, the TCS variable salary cut is sending mild tremors across the industry. Truth is, no amount of soothsaying can dilute the moment of reckoning.

The First Cut

The first Indian IT company to earn $1.5 billion as revenues, a 37 per cent year-on-year growth in dollar terms, TCS posted a net of Rs 1,331 crore, up 6.72 per cent, in the third quarter of 2007-08. Last month, TCS CEO and Managing Director S. Ramadorai had assured investors that the IT major was confident its business model was robust, agile, innovative and quite up to challenges.

But this past week, TCS told its 100,000 employees that its economic value addition (EVA) had fallen. Variable salary took a hit because it’s linked to EVA, adopted in April 1999 to survive the intense competition that marks the sector. Variable pay is determined by the company’s expected performance for the quarter.

The variable pay component of most TCS employees is about 30 per cent of the total compensation package. For senior management employees, vice-president upwards, the variable portion of pay is more than 40 per cent. “During the past five years, variables in compensation have gone up in the industry,” notes Mahalingam.

However, S. Sankar, partner at PricewaterhouseCoopers, is perplexed at all the agitation. “Organisations need to take the younger lot into confidence while recruiting them and make them understand the concept of variable pay,” he says The concept has been around for years now.

“Variable pay is the way forward. In a world competing for talent, compensation strategies can be made attractive through a healthy mix of fixed and variable pay. The whole philosophy of variable pay is to pay more when the company is doing well, and to shrink payout in tough times,” says Hema Ravichandar, a strategic HR advisor and a former head of HR at Infosys Technologies.

Keeping The Herd Together

Certainly, the cut in variable salary may raise a few doubts in the minds of fresh graduates. It also offers an opportunity to a few of the existing 700,000 IT professionals. They may want to move out of this sector. A number of non-IT companies claim that even with a variable a pay packet, they remain insulated from the effects of rupee appreciation. The infrastructure sectors like power and constructions are facing a crunch of engineers, both software and electronic. This sector would hope to pull some of the talents with additional incentive and perquisites.

However, Sankar warns, “The variable pay will have to be adopted by every sector. It looks more prominent now due to various factors including Rupee appreciation, but others sectors too would be hit sometime due to other developments.”

Tight Belts Are Back

HR heads are already sharing the burden by benching non-performers. On 6 February, 500 TCS staffers were shown the door, in what the company says is a normal annual practice. The numbers match those of last year. TCS’ biannual appraisal system rates employees on a scale of 1 to 5 (the highest being 5). Middle managers scoring less than 2 are sent for counselling, while freshers repeat their training programme. Those who do not meet performance requirements have to look for other jobs. A week ago, 500-600 new staffers at IBM, which employs 73,000 people in India, were asked to leave.

Other tough options include austerity. Most companies have started tightening their belts. Executives are now required to cut down on telecom, entertainment and travel expenses. An ex-HCL Technologies employee found the emphasis was on advance planning, travel on low cost airfares, and using credit cards to earn air miles.

Mahalingam says chief financial officers (CFOs) of IT companies are already spending more time on improved hedging for insulation from financial upheavals abroad. Renegotiating the price during a mid-review to improve quarterly margins is another new trend. Placing the right mix of people onsite and offshore is helping limit infrastructure costs.

While the rapid appreciation of the rupee could not have come at a worse time, “Nevertheless, the Indian IT industry has shown that it has the capability to deal with this issue and, in fact, this will push the industry to quickly move up the value chain,” says Pandey. “The rising rupee may be able to bring in some amount of sanity in this entire process by acting as a balancing force.”