Arvind Singhal: Personnel Cost Spiral!

MARKETMIND

Even as some of the new economy sectors such as IT and ITES, telecommunications, knowledge management and research, and organised retailing begin to show their promise of becoming the engine of growth for India in the coming decades, a disturbing phenomenon has begun to take roots.

If the top management of companies that are currently on the forefront of these sectors do not put their heads together to give this phenomenon a closer look and take corrective steps in time, the trailblazing growth they have been used to seeing in the last 10 years will come to a sputtering halt.

The phenomenon I am referring to is the unabated spiral in the personnel costs (not in absolute terms but in terms of the cost to the company of each employee) their own growth has (perhaps unintentionally) unleashed. IT/ITES and telecom companies have unwittingly become the worst examples of this disturbing trend.

In their quest to increase "body count" by hundreds or thousands (or even tens of thousands) every year now, it seems that these companies' HR managers are probably having a single performance metric: achieved increase in head-count against the target.

The problem is further exacerbated by the desire of many of the IT/ITES companies to move up the value chain by positioning themselves as "experts" in various verticals such as banking, insurance, retail, pharmaceuticals, and transportation. To achieve this, many such companies have apparently given a carte blanche to their HR managers/recruitment firms to pick up the so-called "domain" experts at almost any cost from organisations purported to have "domain" expertise.

In my own firm, many of my erstwhile colleagues (some with no more than 18 to 24 months of essentially trainee-level work experience with us) have been enticed to some of the best known IT/ITES/telecom companies at 100 per cent or higher compensation levels than what we have been offering and some are now heading or managing verticals such as retail, textiles/fashion, and FMCG in their new environs.

In almost any service business, one of the most significant top management challenges is to control personnel cost (and quality). It is India's good fortune that the pioneering work done by some leading IT companies, especially in the past 15 years, has finally given an enviable sheen to India and Indian talent as seen from the eyes of the developed countries.

However, this sheen is spurring competitors to emulate the "Bangalore" success and it is quite likely that in the next five years, we would see formidable competition from China, the erstwhile Eastern Europe (from where 10 countries joined the European Union in May), Russia, Argentina, and Brazil.

Most of these countries do have the capability to deliver what India can (and perhaps some more). If we continue to fritter away our cost advantage so recklessly, it is a matter of time before India will have serious competition.

I may also add it is quite likely (and reasonable) to see the imposition of the income tax on the corporate income of our IT sector. In many ways, a prolonged continuance of income tax exemption on such a large sector is not equitable because this exemption is only making a limited few exceptionally wealthy, while the cost of nation-building is being forced on a limited base of other tax-paying sectors. Within five years or less, Indian IT companies will have to face the reality of having to pay full taxes on all income, and thereby get their internal operating costs aligned accordingly.

India is now entering a phase where all businesses would be facing intense domestic as well as global competition. Indian companies would do well to learn from the changes the US underwent in the 1980s and 1990s on account of competition, first from Japan, then from Mexico for a while, and finally from China, wherein complete layers of middle management had to be moved out to retain cost competitiveness. Today, in almost all successful US companies, the top management ends up performing jobs that till 10 years ago were done by a legion of mid-rung executives and secretaries.

Indian companies need not go through the same phase and pain and therefore must firmly put a brake on the rapidly escalating personnel costs; otherwise, the very (financial) viability of many of these businesses (and perhaps entire sectors) may soon be threatened!

Arvind@ksa-technopak.com