Perspective on Wipro’s Cost Reduction | Sherpas in Blue Shirts

Wipro is reportedly looking at headcount and cost-reduction exercise in the realm of $300+ million. Why are they doing this? Is it a good idea? Of a few possible interpretations for wringing out costs, here’s my opinion – starting with my belief that this undertaking was inevitable. The more important question is how will they do it?

Wipro’s action comes on the back of similar news about TCS and IBM and is predicated by the pricing pressures hitting leading service providers. As I blogged recently, pricing pressure has become acute with existing clients looking for significant cost reductions.

In addition, the market is changing and clients are more insistent about requiring onshore resources; this raises operational costs for the Indian firms, which need to invest in a richer set of capabilities on shore. These resources located close to the customer are substantially more expensive for Wipro and other providers than their India-based resources.

It’s a case of when push comes to shove; if Wipro and other providers are to maintain reasonable margins or be competitive, something has to give. That “something” is the necessity to take out costs to allow them to meet the pricing pressures and allow them to hire the onshore resources that clients increasingly insist upon.

How will they achieve the cost reduction? 

I think Wipro and others will move further into the industrialized factory model, which relies on an ever-widening pyramid that pushes work down to lower-cost resources and eliminates middle-management roles.

However, I think the strategy of moving deeper into the pyramid model raises the risk of further commoditizing the space and increasing churn. And clients are more and more intolerant of churn. The likely result is that it will open the door for firms like EPAM and others that differentiate around persistent teams of experienced engineers.

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