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IT cos raise rates by 5-40% to bake in wage hikes

 

Informist, Friday, Aug 27, 2021

By Sai Ishwarbharath

CHENNAI – Indian information technology service providers have raised their billing rates for some segments by 5-40% as they look to pass on some costs of double-digit wage hikes and other incentives for employees.

"Most, if not all, IT firms are looking to raise prices on both new and existing business," said Peter Bendor-Samuel, chief executive officer of IT research and consultancy firm Everest Group. "Increases range from 5% to over 30% in some of the new digital skill areas."

Industry Insiders Said Onshore Rates Are Rising Much Faster Because Talent Crunch Is More Intense In Western Economies On The Back Of Travel Curbs And The Rise In Inflation.

Rates had not risen significantly in the past decade, and the digital and cloud-led technology upcycle are the perfect backdrop for the price increases, analysts said. Moreover, cybersecurity has become imperative in the wake of rising threats, especially due to risk associated with remote working since the onset of the COVID-19 pandemic.

"In specialist areas such as cybersecurity and complex artificial intelligence algorithm development, rate increases are significant--as high as 40% in some cases for immediate project needs," said Phil Fersht, founder and chief executive officer of global IT research consultancy HFS Research.

Thus, demand for talent in these segments is outstripping supply, and candidates with these skills are commanding higher packages with multiple offers in hand, industry experts said.

In fact, top players such as Tata Consultancy Services Ltd and Infosys Ltd hiked salaries with effect from April and July, respectively, for the second time in six months.

"The race to the cloud and the desperate need to function effectively in the virtual economy are showing no signs of abating," Fersht said. "I fully expect this talent squeeze to get more acute over the next year, which will push prices even higher." 

Industry insiders said onshore rates are rising much faster because talent crunch is more intense in Western economies on the back of travel curbs and the rise in inflation.

To combat the challenge, technology companies have boosted offshoring efforts by shifting delivery work to India. This will also help them reduce costs and maintain profitability.

Infosys' employees working offshore rose to 76% in Apr-Jun from 72% for the same period last year and 70% in 2016. For Wipro Ltd, it stood at 54%, up from 50% last year and 45% in 2016. Tata Consultancy Services Ltd and HCL Technologies Ltd do not disclose any numbers with respect to offshore-onshore mix. Analysts believe this trend will continue, especially with several jobs becoming remote.

MARGIN IMPACT

Besides increasing offshore hiring, service providers are also looking to reshape pricing to make it more outcome-based, instead of normal hour-based rates. This could prove beneficial in the near term in the case of revenue-linked pricing since their clients are seeing increased sales.

In June, Infosys Managing Director and Chief Executive Officer Salil Parekh, had said digital transformation deals indicate technology companies offering more value to clients than before. 

"If we are able to successfully demonstrate (bringing more value addition), my sense is that there is a possibility to improve the share of that benefit with the clients...we think there is a possibility (of price increases in deals)," he said.

These price increases will act as a cushion against the fall in operating margins for IT companies in the coming quarters, said analysts.

However, many firms will not be able to recover all the cost of wage inflation, analysts said. “This combined with other factors such as the return of travel expenses will likely reduce margins from their COVID high," said Bendor-Samuel.

Brokerage HDFC Securities expects the average operating margin level of Indian IT companies in its coverage area to fall to 21.4% for 2021-22 (Apr-Mar) from 22.2% clocked in 2020-21.

The mid-year pricing revision, further increase in offshore mix, and training intensity to support faster deployment of billable resources will be the top levers to defend margin against the inflationary impact of wages, HDFC Securities said in its report.  End

Edited by Patricia Hou

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