India’s biggest IT services companies moved swiftly when a lockdown to contain the coronavirus outbreak became imminent in March. They moved employees to their homes and worked to retain clients disrupted by the coronavirus. At least 90 per cent employees of the five biggest IT companies now works from home. Next, IT companies are bracing for another challenge: clients reducing their spending on technology or asking for discounts. Technology contracts worth at least $3 billion and renewed monthly will likely be priced lower, analysts say. Yuvraj Malik explains how IT companies plan to get business as they stay at home.
Yuvraj Malik, Business Standard
The neigbourhood liquor shop and airlines are among businesses humming back to life as India eases a weeks-long lockdown to contain the coronavirus pandemic. For the IT services sector, which employs about 4.3 million people and depends heavily on global clients, returning to work will be vastly different.
Companies for one or two years will have smaller teams that work from home, collaborate virtually and sporadically travel to office, said industry leaders and executives. Only work involving sensitive information, like banking transactions and government data, will return to offices under rules for social distancing and hygiene.
Indian IT—led by Infosys, Tata Consultancy Services (TCS), Wipro, Tech Mahindra, and Cognizant—generates $191 billion as revenue annually. The top three listed IT firms, which are Infosys, TCS and Wipro, delivered 15 per cent-plus revenue growth annually in the last five years, sometimes fetching operating margins to the tune of 25 per cent (in the case of TCS).
Change, and work from home
That was before the coronavirus spread across the world, forcing countries to lock up and companies to reduce expenditure. Companies in travel and hospitality, retail, and financial services are more likely to shrink their IT spending. Sales for Indian IT will decline in the first two quarters of financial year 2021-21 (FY21) as a result, according to analysts.
Gains in savings on office rent, electricity and employee travel will somewhat offset the loss in revenue, according to the post-earnings commentary by IT firms. One-time projects for implementing remote infrastructure for clients will fetch money, too.
That will be some comfort but as travel is curtailed, new large deals will be hard to come by and signing contracts for them will take longer. Business might reduce from North America, which is hurting in the pandemic and comprises 50-60 per cent of Indian IT services revenue.
There is also pricing pressure: technology contracts worth at least $3 billion and renewed monthly will likely be priced lower, analysts said.
IT firms have said they will honour job offers and continue “need-based” hiring despite revenue pressure. This, however, should be seen in the context that the top five IT firms have hired 28 percent fewer people in FY20 compared to FY19.
When a nationwide lockdown became imminent in early March, IT companies frantically moved employees and computers to their homes: a task that involved re-positioning 10 lakh people.
Wipro formed three teams to manage the crisis, said CEO Abidali Neemuchwala in a post-earnings con-call on March 31. One team helped the company's 1.7 lakh employees in India to work from home and ensure business continuity; a second team looked at customer crises and opportunities; and a third calculated costs.
Simultaneously, business heads took clients’ permission to enable work from home for their projects. In two weeks, “165,000 billable client-facing employees were moved to working from home,” said Neemuchwala.
TCS’s Secure Borderless Workspaces model, which enables cloud-based project management, monitoring and reporting and which was set up before the pandemic, has become the regular tool for work. On April 16, the system tracked “more than 23,000 projects across the organisation on a real-time basis,” said Kedar Shirali, global head of investor relations at Wipro.
Pravin Rao, Chief Operating Officer (COO) at Infosys, said work-from-home offers long-term saving. “Work remotely also means that it doesn't matter whether you are in India or in a different part of the world. So it's possible to leverage people and capability wherever it exists,” said Rao in an Infosys earnings con-call on March 31.
At least 90 per cent employees of the five leading IT firms works from home now. Nasscom, the trade association of the industry, has suggested companies gradually return 50 per cent staff to offices by the year-end, but analysts said not more than 15-20 percent will come back in six-eight months.
“No-one wants to take back employees and put them in one office,” said an analyst with a Mumbai-based brokerage. “They (companies) have spent money and effort in transporting people and equipment to residences, and it doesn’t make sense to reverse the process until you are absolutely sure the virus is completely removed and that there is no risk.”
Running up to 2025, TCS will ask 75 percent of its 4.48 lakh employees globally to work from home, said COO N G Subramaniam on April 29.
The office won’t shut though, considering the sensitive work IT companies do. “Large multi-national banks like JP Morgan, Wells Fargo, etc have huge back-end offices in India, with 10,000-20,000 seats each. Their information is confidential. I don’t see work from home being adopted by this segment, unless there a drastic reconsideration of security protocols,” said Chaitanya Peddi, co-founder, Darwinbox, an HR-tech software-provider.
A working relationship at home
Work-from-home will change relationships, said experts. Once upon a time employees sought permission to work from home, but now employers will be seeking their consent to get them to office.
“New employee contracts will be re-drafted to include work-from-home clause,” said Milind Kaulgud, chief human resources officer and vice president at Pune-based T System, a 2,000-emplyees strong IT services subsidiary of Deutsche Telekom.
“Leave policy will also get modified and people will be paid for the actual hours they clock in.” Other changes could include tax rebates for home-stationed employees for lightening their carbon footprint, he said.
“The pandemic has led (to) a complete re-imagination of workforce structures,” said Ravi Shankar, an independent HR consultant and former HR leader at HCL Technologies and MindTree.
Large IT companies are considering breaking down workforce into smaller teams, which collaborate in-person and communicate with others digitally. They are also getting in place digital systems for learning, feedback, and collaboration.
The industry is considering having shorter shifts (of 6 hours) over six working days, instead of five. External meetings will be approved by the department head and documented rigorously. In offices, temperature checks at entry gates, contact-less attendance, 1.5-m distance in common areas like canteens, and sanitisation will become the practice.
Business as usual
Infosys, TCS and Wipro independently suffered a sequential revenue hit of 1.4-1.8 percent in the March quarter and analysts said the impact will be worse in the June quarter. The companies had a combined cash and cash-equivalent of Rs 34,316 crore, as of March 31, giving them strength in the coronavirus crisis.
The 2000-01 dotcom bust and the 2008-09 financial crisis hurt demand, but the coronavirus disease (Covid-19) has pulled down both demand and supply.
“The impact of Covid was largely about $30-million-odd, two-third of that was supply led…and a third was demand led,” said Rao of Infosys, adding that the $3.6 billion in cash in debt-free balance sheet gives the company "ample liquidity”.
“Based on various estimates, the global GDP growth rates are expected to decline by at least 2 percent,” said Neemuchwala of Wipro. “This assumes that the virus peaks in the April/May/June quarter, but if it peaks—if the peak goes into the July/August/September quarter, then the decline could be even more dramatic.”
Wipro is seeing instances of clients making budget reductions, cutting discretionary spend, or requesting temporary discounts. “Sectors like retail, hospitality, airlines, energy especially oil and gas, and auto segment in the manufacturing business are experiencing a more immediate and deeper impact,” Neemuchwala said.
Most Fortune 500 companies have issued profit warnings and this will have a cascading impact on IT spending. “We estimate that 60 per cent of clients will ask providers to reduce prices by 20-50 percent,” Aniket Pande, of Prabhudas Liladha, wrote in a report in April.
Global travel bans will affect ability to close deals, make fresh sales and it will lengthen sales cycles in general. “All this can potentially affect revenue growth for firms over Q1 and Q2 FY21,” according to Pande.
IT companies are focusing on costs. Infosys is using a combination of delayed on-boarding of new employees, deferring salary hikes, performance-linked involuntary attrition and other recurring cost optimisation modes.
In its post-earning commentary, TCS said it expects cloud, automation and cyber security technologies to gain traction in the long term. The company expected challenges to peak in June and a revival in the second half of FY21 on the back of existing deal wins and market share gains. TCS’s revenue over Q1 and Q2 could be 7-8 per cent lower, said Devang Bhatt, an analyst with ICICI Securities, in report in April.
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