Tag: Service Provider Layoffs

What’s Driving the Upcoming Wave of Indian Service Provider Layoffs? | Blog

Recent news reports of upcoming layoffs in India’s IT-BP industry are painting a pretty gloomy picture for 2020. Indeed, the reported layoff numbers from Cognizant, DXC Technology, IBM, and Infosys collectively amount to more than 20,000 employees and account for 4-5 percent of their total India headcount. Coupled with the economic slowdown in the country, these layoffs will add to India’s high unemployment rate over the next few quarters.

What’s driving these layoffs? Is it the maturity of legacy systems, as Cognizant and Infosys said? Is it due to workforce restructuring and cost pressures, as Capgemini, DXC, and IBM cited?

There are four reasons that many of India’s IT and BP providers – not just those mentioned above – may have to trim their workforces in 2020.

Cost and margin pressures

The slow economic growth is putting pressure on providers’ ability to meet their target margins. Heavy discounts to retain existing clients, building new relationships, and slow revenue growth are exacerbating the situation. Letting some employees go helps them streamline their costs.

Rise in reshoring

Reshoring continues to grow for multiple reasons: stricter visa regulations, new data security regulations (i.e., the introduction of GDPR in 2018), and buyers’ increasing desire for providers to grow their onshore presence for ease of coordination, better alignment/training, and promotion of customer intimacy.

Given their dependence on multi-national and global clients, service providers have drastically increased hiring in some onshore locations to localize their business presence. This not only adds to the overall costs of operations but also translates into a reduced number of transactional roles in India to optimize overall costs.

Digital uprise

Legacy technologies are fast giving way to new digital technologies like cloud, Internet of Things (IoT), Machine Learning (ML), and Artificial Intelligence (AI). This is increasingly reducing the need for workers with expertise in legacy technologies. And automation adoption has made jobs redundant, leading to lower headcount demand than before.

Rationalization of the experience mix

One lever service providers are pulling to help their clients optimize their delivery costs is rationalizing their middle-heavy delivery pyramid, particularly in India. This is because mid-level resources add to the existing high cost of operations, aren’t particularly adept in emerging technologies, and have been slow to up-skill themselves on them. Thus, providers are increasingly targeting a healthy mix of resources spread across entry-level and experienced talent. This will result in substantial mid to more senior employee layoffs.

The double whammy of the economic downturn and technological transformation might lead service providers to cut more jobs in the coming quarters. This will not only help them streamline their costs, but also redirect their focus towards reskilling and restructuring the existing workforce. While the existing employees struggle to upskill themselves to retain their jobs, the fear of future uncertainties is comprehensible.

To learn more, please read our recently published report, “Market Vista: Q4 2019.” It’s designed to equip global sourcing professionals with incisive research and insights on the latest trends in the sourcing market, sourcing locations, and service provider developments. We develop the Market Vista reports based on deep-dive discussions with leading shared services centers, service providers, and other market participants.

Indian Service Providers Making Difficult Choices and Laying Off Workers | Sherpas in Blue Shirts

Service providers in India have issued several announcements around their intentions to let a fairly sizeable number of employees go. Six thousand at Cognizant, 1,000 at Infosys, more than 200 in the Mumbai office of Capgemini (a French company), and several hundred last month at Wipro with expectations of another 10 percent of the workforce this year if revenues don’t improve. This is unusual in this market and, understandably, it is creating angst among employees in the companies as well as interest outside the companies. However, it’s not just a case of “downsizing” and thousands of layoffs, as many media have reported. Let’s look closer at what’s really happening.

Digital is the New Reality

We at Everest Group have been tracing the trends in the traditional arbitrage-first based model, which constituted 78 percent of the services marketplace. The arbitrage-first business shrank in the last 12 months. The rotation into new digital models is another factor. Where it’s applied, the digital business cannibalizes the arbitrage business and compresses that revenue by 30-40 percent. Also, digital revenues at this point are small. Digital models are primarily in the implementation phase; therefore, most projects are small in nature and most are located onshore at customers’ locations.

Because of the arbitrage decline and the change to digital models, service providers now have an excess number of employees for the first time since the global economic crisis and recession in 2008. As market realities have changed, India’s service providers are taking steps to adjust their business models. As digital models often require 30-40 percent fewer people to do the work, I think it would be surprising if they didn’t thin their labor pools as a necessary part of adjusting to the new realities and new business models!

Talent Models are Out of Whack

But as I mentioned earlier, the providers are not just laying off workers. They’re also hiring. Their talent models are out of whack to be able to address digital work, which requires different skills and often needs to be done onshore where clients are located rather than offshore. Several are creating new jobs in onshore locations near their customers; Infosys, for instance, announced it is creating 10,000 jobs for US workers. Even in a digital world, the Indian providers need to maintain their pyramids (which rely on steady new hires of junior people) so they can keep their costs low.

Bottom Line for Indian Service Providers

India’s service providers are making difficult choices, including thinning their arbitrage-based talent pools. Thus, the layoffs are understandable and, indeed, necessary. It indicates organizations and an industry in transition and undergoing unaccustomed pain.

The service providers’ clients should view these developments as encouraging because the providers are taking the necessary steps to put digital talent in place. But the providers’ employees understandably experience trepidation as they face the new market realities with an increasingly uncertain future.

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