Outsourcing firms seen gaining from tech turmoil

If you thought India’s outsourcing giants would be the next to slash jobs after the recent mass layoffs at global tech giants and Indian startups, think again.

Despite the contraction in Europe’s top two economies and fears of a US slowdown, demand for outsourcing work remains at an all-time high, according to industry observers.

“What we are seeing is a sort of hesitancy and delay in decision-making. We are seeing early signs of this phenomenon. However, clients are not cutting down on spending on technology. The only difference is they are spending on those areas which give quick returns,” Global IT research firm ISG’s principal analyst Mrinal Rai told DH.

The layoffs at the tech giants are a result of their business models based on their profitability and cost structure, which is different from those of Indian IT firms, Rai explained.

According to the ISG Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, the ACV for the combined global market during the July-September period was at $23.2 billion, down only 3% from the year-ago period.

And most of the slowdown being seen in the global technology industry is among product companies and software-as-a-service (SaaS) firms, analysts said.

Major SaaS firms including ServiceNow, Freshworks, Salesforce and Adobe have seen demand for subscription-based offerings coming down as companies defer spending decisions, ICICI Securities said in a report.

“These companies continue to witness a slowdown in decision-making due to tighter budget scrutiny at the client’s end,” the brokerage firm said.

In comparison, IT services companies are witnessing more cost-saving deals coming their way.

For instance, the management of industry bellwether Infosys Ltd recently pointed out in an interaction with Kotak Institutional Equities that it was witnessing an uptick in cost-saving deals.

A big boon

The layoffs by tech giants and startups are proving to be a boon to the IT sector, which has been coping with record attrition levels in the past two years.

Things are changing now, hiring experts told DH.

“Voluntary attrition has come down in the last two months as reality is hitting staffers about (the virtue of) sticking to present jobs. Salary levels and offers are pretty rational right now. Most of the layoffs have happened as companies adjust wage inflation. I think attrition numbers should come down in the third quarter for IT firms,” said Supaul Chanda, vice-president of technology recruitment firm Experis of Manpower Group.

As a result, many expect attrition numbers to come down to pre-pandemic levels in the next few quarters. This augurs well for IT companies that have seen high wage costs eating into their margins.

“Wage slowdown will still take 24 months to work out but it will happen. Overall, wage cost stability is good for the Indian IT sector,” said Siddharth Pai, an IT outsourcing advisor and founder of venture capital firm Siana Capital Management.

Not another dot-com bubble

Despite parallels being drawn with the dot-com bubble, experts said the current slowdown and associated mass tech layoffs can’t be equated with the dot-com bubble of the late nineties.

Instead, the current events are the outcomes of the policies of specific companies.

“This is not similar. The main difference is that this is a revaluation of existing companies such as Amazon and Facebook (Meta) with successful business models, not small upstarts going bankrupt as was the case with the dot-com bust,” Pai said.

The pandemic has shown the importance of technology-led business models and experts see businesses continuing to invest in such solutions despite recessionary concerns.

The Indian IT industry has gained in the past from economic slowdowns, including the global financial crisis of 2008-09 and the recent Covid-19 pandemic. That is making many industry watchers forecast more technology work getting outsourced to India.

“Whenever there was a recession, it benefitted the outsourcing industry in general. It will depend on the technology areas in which a company works. In the case of emerging technologies like metaverse, there could be cautious spending. But in areas like remote working and automation, there will be demand. So, we think this will be good for the Indian IT industry,” said Rai of ISG.