Staff costs for IT companies on the rise

Srinivasa Rao Dasari / Hyderabad

With more and more overseas clients moving business to prominent offshore locations like India from onsite, most software companies are increasing their manpower in India. While this means a fall in overheads for MNC companies, domestic companies are feeling the heat. Though domestic companies have for a long time advocated the low cost-high quality manpower of India, MNC companies too have understood the strategic importance of India. Almost every MNC has an offshore base in India today. This in turn has led to the rise in staff costs for Indian companies. A report from Mumbai-based Kotak Securities claims that salaries at MNC companies are typically 50 percent to 60 percent higher at the entry-level and 30 percent higher at the middle management level when compared with Indian IT services companies.

Dramatic increase

The increase in demand for manpower has resulted in staff costs for IT personnel rising exponentially. Look at the following figures: Nasscom predicts that there would be a potential shortfall of 2,35,000 people by 2008, considering the current level of demand for technical talent in the IT workforce. While this figure is debatable, the rising staff costs can be seen from the dramatic increase from 33 percent in 2002 to 42 percent in 2004 .

The increase in staff costs is another potential obstacle for an industry hit hard by factors like dipping billing rates and the sharp appreciation of the rupee against the dollar. In such a scenario, employee retention is key to India’s IT industry continuing its explosive growth. Another factor blamed for the increase in staff costs is the monotonous work especially observed in BPO outfits, which in turn leads to absenteeism and more attrition. This raises cost for companies who have to employ extra manpower on their payroll to fill in for employees who are either absent or quit suddenly.

“The growing demand for quality IT professionals to meet the increasing business volume has resulted in hike in salary levels. There is about 15 percent increase in salary levels compared to last year,” says Shakti Sagar, managing director, ADP.

While most players this writer spoke to believed that the increase in staff costs is a serious concern, industry organisations like Nasscom believe that this issue will ease out after a few years. Says SV Ramachandran, head (operations), Hyderabad centre of Nasscom, “Looking at the demand, it is natural that salary levels will go up. However, the increasing levels of pay structure will not affect Indian IT companies as the wage cost is compensated with the rapid improvement of infrastructure and productivity levels. I anticipate that this trend is likely to continue for the next two years and things would ease out after that.”

No price is high for the right candidate

While rising staff costs are an area of concern, most MNCs believe that the productivity of the right candidate more than compensates for the increased pay package. Take a look at Virtusa where is an average hike of 11 percent in the wage bill of the company.

Says Shantanu Paul, GM (operations) and head (productisation), Virtusa India, “If an employee has become an asset to the company with his skills and attitude, no organisation will want to lose such a candidate. Every company will naturally offer attractive packages to retain such candidates. However, it must be remembered that there should be a limit. We cannot go on increasing the salary levels in any type of competitive markets. Moreover, this is not a good business model also. We counter this by not only offering the best pay packet to our employees but also focusing on their future career growth opportunities by extensive training.”

“Since we work on cutting-edge technologies and deal with core technology rather than supporting services, we need to encourage talent. Innovative skills are required for any IT company to meet the demand and overcome competition in the global market. Taking talent at a premium which in turn can give us a huge competitive advantage is fully justified in the market place,” says Raghu Allamsetty, managing director, Adaptec India. However, Allamsetty believes that as soon there is a slight slowdown, the rising staff costs will stabilise.

Says the HR manager of a leading MNC, “The IT sector is totally dependent on quality manpower and as long as we deliver quality services to meet the demand and expectations of our clients, staff cost will not be an area of concern. Moreover, a majority of IT companies don’t mind paying attractive salaries with lucrative benefits to talented employees.”

While rising staff costs are an area of concern, India is still way behind when it comes to salaries. “The software industry is definitely among India’s top paymasters, but salaries for IT professionals in India are among the lowest in the world. The highest salaries in the IT sector are in Switzerland, while the lowest are in the Philippines,” states Mercer Human Resources Consulting analyses in its recent report on ‘2003-04 IT Function Salary Differentials Worldwide’.