India’s IT talent shortage is creating a cost crunch

India’s top IT firms are increasing digital project prices to cover the cost of hiring skilled IT workers in an increasingly competitive market. The competition for digital skills is also resulting in high attrition rates for them — and perhaps also in the enterprise as IT workers are lured elsewhere.

Among the largest IT service providers, TCS has done the best job of retaining staff with an attrition rate of 15.3%. Wipro’s rate was 22.7%, and Infosys’ 25%, the companies recently reported. While the three want to hire more talent, they are preparing to pass on the cost that comes with it by increasing the price of digital projects for their clients.

Wipro CFO Jatin Dalal told financial analysts, “We are definitely seeing a slight positive step on pricing.” One reason for the increasing price is the scarcity of certain skills in the marketplace, he said in a conference call to discuss the last quarter’s earnings.

Deloitte India’s partner and TMT leader PN Sudarshan told CIO India that newer technology areas like cloud, data analytics, cybersecurity will command premium pricing. “Coming at the time of elevated attrition levels in niche technology areas and skillsets, some of this cost will also be priced in,” he said.

Analyst firm IDC sees employee costs as the major contributing factor for the rise in digital project pricing. “Since last two years, due to COVID-19, there has been a drop in business travel, and most the employees are not using the office facilities. Despite that, if we see a cost escalation, it should be attributed majorly to employee costs,” said Sharath Srinivasamurthy, research director, enterprise solutions and ICT practices at IDC India.

Price pressures

The CEOs of Infosys and TCS also commented on the price pressures in their latest earnings calls. Infosys CEO Salil Parekh said his company is negotiating on pricing and communicating the value that they deliver through digital programs. He also mentioned the increase in wages. TCS CEO Rajesh Gopinath said there would be an uptick in pricing in the current quarter: “In long-term existing customer relationships we will need to be more nuanced about it, but overall there is definitely an expectation of a rising pricing.”

At Gartner, senior director analyst DD Mishra warned that by engaging in this kind of price escalation, companies risk of losing competitiveness and impacting overall ROI: “The price of services and resources will escalate in the medium term due to a surge in demand. It will be difficult to speculate any number at this point, but at a minimum, 10-20% price escalation may happen, which can be higher depending on many other variables.”

Top IT firms are major recruiters of IT talent, but CIOs shouldn’t only be worried about losing IT staff to the big players: There’s a strong demand for IT talent among startups too, and for some IT workers they may seem a more attractive destination.

“Startups are known to be working on cutting edge technologies, and for skilled resources, start-ups are looking more attractive from a pay as well as a growth perspective,” said IDC’s Srinivasamurthy. “Hence, there is an escalation in costs of digitally skilled resources. IT firms need to compete with these start-ups to get the best of the talent and invariably end up paying more to acquire them.”

So should CIOs give up on hiring for now, and simply contract out for services?

Quality gap

Not so fast, said Gartner’s Mishra: Another risk that the skills shortage brings is that progress on outsourced projects can slow if providers try to fill the gap using junior resources. This may lead to quality issues.

“A supply-side issue will translate into a demand-side problem and further complicate the overall situation. The only good news is that providers may see better than average growth in revenue for the short term. Some acceleration in digital transformation and cloud adoption will go up, which may have long-term opportunities, but managing this situation will be challenging in the medium term.”

IDC’s Srinivasamurthy said the sudden surge on the demand side will put pressure on the supply side as IT firms need to have highly skilled delivery teams in place. The challenge here is that it isn’t easy to have skills across digital technologies in IT firms. When new technologies evolve, building that skill base in any country takes time.

“For example, skills around AI, machine learning, data science are in demand and there are not enough experienced resources who can deliver complex projects that can deliver business value,” he said. While IT firms have invested in reskilling existing talent, the demand is high to meet the requirements with reskilled resources.

“Cost of IT will go up and CIOs need have a justification for the business value the IT investments deliver. However, CIOs need to realize that new-age solutions come with a price but can deliver benefits like never before,” he said.

If CIOs have the right project in place, this could turn out to be a big opportunity for them, he said. New technologies will enable CIOs to come up with new business models, new ways of engaging with customers and employees, and to build operational efficiencies at an accelerated pace. “It is a great opportunity to build capability on digital skills. If they can articulate business value to their clients, they can still command a premium pricing in their deals.”

In the medium term, another way employers of IT workers can help bridge the skillset gap is to make sure professional colleges and institutions introduce digital technologies as a part of the curriculum so that they can train industry-ready resources, Srinivasan concluded.