IT firms tighten purse strings amid slowdown

Trimming Variable Pay

- On average, Q1 margins lower at 15%

- IT firms reducing variable pay

- No variable pay to C level staff at Wipro

- Freshers to team leader levels will receive 70% of target variable pay

Bengaluru: Macroeconomic uncertainty seen has started to influence the decisions of Indian IT services firms with operating margin on focus along with growth. While companies like Wipro have decided to hold back variable pay to mid and senior-level employees, many others have started reducing marketing budget, cutting unnecessary travel expenses and among others.

Experts are of the opinion that such tightening of belt is an indication that operating margin is taking precedence over revenue amid slowdown fears in key markets such as the US and Europe.

"Earlier, companies have gone on to do record fresher hiring, spent on sales and marketing to cash in the growth. But, with slowdown fears lurking, companies are now tightening their belts. As a result, margin is coming to fore over growth at any cost. That is the reason that we are seeing steps like holding back variable pay, staggered onboarding of freshers, reduction in marketing spend and other measures," Pareekh Jain, an IT outsourcing advisor & founder, Pareekh Consulting, told BizzBuzz.

Last week, Wipro in a mail informed its employees that it would hold back variable payouts for the April-June quarter for mid and senior-level employees amid significant pressure on margins. With this move, employees belonging to C bands and above (managers to C-suite level) will not receive any variable payouts, while associates in A and B bands (freshers to team leader levels) will receive 70 per cent of the target variable pay for the quarter.

"We've seen some continued pressure on operating margins. Our Q1 margins were lower at 15 per cent due to inefficiency in our talent supply chain, project margins and our investments in talent, technology and solutions during the quarter. Given our underperformance on margins this quarter, our variable pay (including sales incentives) takes a hit," the communique said. Wipro's operating margin stood at 15 per cent in Q1 of FY23, which was the lowest since FY19.

Not only Wipro, all big IT services companies witnessed contraction in operating margins during the first quarter of ongoing fiscal.

Infosys' operating margin stood at 20 per cent, which was a decline of 3.7 over the last fiscal and 1.5 per cent drop over the last quarter. Similarly, operating margin for the quarter stood at 23.1 per cent, down from 25.5 per cent a year earlier in Q1 of FY23 owing to the impact of annual salary increases, elevated cost of managing the talent churn and gradually normalising travel expenses. Most mid-tier IT companies had also seen contraction in demand during this period.

"It may be difficult for both Infosys and TCS to reach their targeted margin band this year. If that happens, it will be towards the lower range of the band," said an industry source.

Margin is coming to fore over growth at any cost. That is the reason that we are seeing steps like holding back variable pay, staggered onboarding of freshers, reduction in marketing spend

- Pareekh Jain, IT outsourcing advisor & founder, Pareekh Consulting