Why IT services companies to continue with cost-cutting measures

Since mid-April, companies significantly began to reduce their discretionary spend

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IT services companies are expected to continue with cost cutting measures in the near future as enterprises across the globe are embarking on such cost reducing techniques. These cost cutting measures by organisations are expected to extend well into CY (Calendar Year) 2024. Though the intent to invest in technology remains, with a focus on digitalisation, automation, back-end systems and AI initiatives, catch-up is possible once macro improves. As per a report by Kotak Institutional Equities no significant deals have materialised in the December quarter, leading to a focus shift to 1HCY24.

The report points out that tough environment for discretionary spending is likely to continue in the first half of the CY 2024. There has been a higher focus on digitalisation, automation, back-end systems and AI initiatives. Therefore, enterprises are looking to invest in technology initiatives that can drive better productivity, with an emphasis on digitalisation and automation.

Since mid-April, companies began significantly reducing their discretionary spend and delaying or canceling initiatives that had been budgeted. There is slowdown in client spending – especially in the all-important banking, financial services, and insurance (BFSI) sector which might also force the outsourcing giants to curb their fresher hiring and find new ways to cut costs in a bid to protect profit margins. Last month, Accenture Plc, which is the world’s largest technology services company, revealed plans to cut 19,000 jobs- about 2.5 percent of its workforce over the next 18 months. Many big tech companies such as Alphabet, Amazon, Meta, and Microsoft have also cut down on new hirings.

“India’s top 5 IT services firms have reduced R&D expenses as a percentage of their revenue in the past five years. Today, much smaller firms are looking at building their own captive centres. Over the last few years, the barriers to entry into this have dropped dramatically. Mature leadership teams and legal help are now available to do the incorporation and provide effective recruiting vehicles to quickly start off these vehicles. This trend of smaller companies looking to build their own offshore capability will accelerate. There are still modernisation projects going on. They were typically planned and funded last year. But new ones starting up seem to be greatly curtailed,” observed Sathya Pramod, CEO, Kayess Square Consulting Private Limited.

The expert further said in the future IT services companies will need to embrace modernisation whereby cost saving measures for clients can happen. “If there is cost optimisation, any client would sign up. Secondly, look at generative AI and mature digital. There are green shoots available for these things. Thirdly, look at Build-Operate-Transfer models for captives,” added Pramod.

As far as the hiring by the IT services companies is concerned due to cost cutting measures the IT sector's hiring landscape has shifted from the aggressive trend observed in 2021.

“This change stems from the current global market's sluggishness and an abundance of available talent resulting from prior extensive recruitment phases. Nevertheless, with the emergence of new technologies and increased investments in AI and Automation, there is a growing demand for specific skill sets within companies. Tech roles such as cyber security, full-stack development, and analytics are still in demand. We anticipate a strategic approach by these firms, prioritising the acquisition of only essential, specialised resources. The slowdown in hiring may continue for another two quarters,” said Aditya Mishra, MD and CEO of CIEL HR.

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