IT - Desperate for a Brexit Bonus


Well-Known Member
The IT services sector hasn't been doing well for some time now. And there's a whole host of reasons for this.

Customers aren't blind to the 30% plus margins reported by these companies over the years. And these companies got huge tax breaks, concessional allocations of land, and a favorable exchange rate environment for decades - which they took advantage off, without investing to protect themselves for the future.

Till recently, these companies had high attrition rates, and kept talking as if the attrition was a big problem. But the reality was that the attrition was a god send for these companies - helping them replace high cost workers with low cost workers! With the entire industry in the grip of a slowdown, there aren't too many jobs to be had, and with even startups no longer having the luxury to hire, these IT giants have found their attrition rates falling!

And now they are seeing all the flaws of their business model till date. When people kept quitting, and when companies could hire freshers in the tens of thousands, their costs kept going low. Now despite lower wage hikes, they are seeing costs go up! And this is beginning to hurt them.

Very soon we will see the ugly side of the situation, with pink slips handed out to many more employees. And the more the pink slips, the worse the problem gets, because natural attrition slows down even more! And companies simply cannot fire as many workers as they would really like to, without dramatically affecting morale.

At a time when companies are moving towards more automation, and more efficient coding practices, this is not helping them at all.

But as they say, every cloud has a silver lining, and IT services companies could see a windfall very shortly, from an unforeseen source. Till date, Brexit has been viewed as a negative for IT companies - but the reality is that every single bank and every single trading company will need significant alterations in their systems to handle Brexit. It increasingly looks like Brexit will be handled as a special case, with Britain and the EU agreeing to create a structure that is neither like the past, nor like any other country. Because of this, there may be big changes needed in systems. However, the specifics of this will only be known when the contours of the deal between Britain and the EU become clear.

If this fails to materialize as a source of revenue, IT services companies in India will feel the pinch big time. They will regret not focussing more on products and other revenues that have non-linear relationship to the number of employees.

Tamil Nadu has already allowed IT company employees to form unions - and this sort of thing typically happens as a wave - with others expected to follow suit shortly. This will make the situation even worse for IT.

This could be one sector that could be a drag on the markets. Thankfully, valuations are not too high, so they may not really fall too sharply.

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