Should the next 5 million software engineers be hired and trained like the first 5 million?
Neelkanth Mishra
Last Updated at October 11, 2021 23:56 IST
This appeared in the Business Standard on October 11, 2021 (link).
Software, they say, is eating the world: As business processes get automated, more and more software needs to be written, updated and maintained. Not surprisingly, then, as a dominant provider of software services, India is at the centre of the action.
Even as the value of India’s IT services exports grew an anaemic 2 per cent last year, the slowest in two decades, growth in effort (measured in person hours) accelerated. Revenue growth slowed not only because of business disruptions for customers, but also because onsite work (where engineers travel abroad to work in the offices of their customers) fell sharply, hurt by travel restrictions and visa quotas. Onsite work yields more than three times the revenue per hour of offshore work (software written in India for foreign customers), but also incurs higher costs (employees get paid in line with their much higher local cost of living), and has lower profit margins. Offshore work thus is a win-win: Customers pay less, and service providers see healthier margins. But all services cannot be delivered from offshore: After falling sharply till around a decade ago, the onsite/offshore mix had stabilised at one-third/two-thirds.
That limit seems to have been redefined by changes forced by the pandemic, as growth in offshore business last year was the strongest in many years, and for some firms more than three-fourths of work was done offshore. Some of this may not be sustained, but quite a bit is likely to remain. Higher offshore share of work brings down the average cost of the offering, making Indian IT services more competitive.
As their customers’ businesses stabilise, and digitisation accelerates, Indian IT Services firms’ revenues are expected to grow in double-digits for a few years, meaningfully stronger than the pre-pandemic levels.
Firms were unprepared for this acceleration in business, and many are having to let go of business as they do not have spare staff (“bench”) to handle the rush of new work. To address this shortage and to re-build the bench, they are ramping up hiring. Just the top five IT Services firms have announced 1,20,000 net hires, nearly 40 per cent more than the previous high.
Unfortunately for them, and fortunately for the engineers, several other types of firms are also expanding their hiring of IT staff at the same time.
Tech-focused Indian start-ups have raised more than $40 billion over the past year, of which 10-15 per cent may be spent on hiring developers to write software (the rest spent on advertising, discounts, acquisitions, technology capacity, or physical capacity like warehouses). Software-as-a-Service (SaaS) firms are also flush with funds, and will mostly use it to hire engineers. SaaS companies are also generally profitable, and are seeing strong growth in revenues, facilitating more hiring.
Global software and SaaS firms are also increasing their presence in India, with some of them now offering salaries that appear to be benchmarked to dollar-based compensation in the US.
Conventional Indian businesses too are spending more on technology, with spend on software growing more than 15 per cent last year despite the pandemic-related uncertainty. In fact, for the economy as a whole, nearly a third of investment is now on intangibles, which is mostly software. This is growing faster than conventional investments in machinery and buildings, and has accounted for more than 40 per cent of incremental investments in the economy over the past three years.
The 4.5-million strong community of software developers in India is thus likely to expand by nearly 10 per cent this year. After having added about 1,60,000 people on average over the past five years, the net hiring this year could be in excess of 4,00,000. Job openings on various portals are soaring, and human resources managers are as worried about retaining their staff as they are about hiring for growth.
Given that India still produces 3 million engineers a year (many of doubtful quality, but mostly ambitious, hard-working and smart youngsters who can be retrained), hiring 5,00,000 should not be a challenge. However, much of our estimated $12-13 billion increase in the industry’s wage bill is likely to be for experienced software engineers, particularly those in the 5-12-year experience cohort. As the size of this group cannot be expanded quickly, this means substantial wage hikes for these engineers.
As positive as this trend is for the Indian economy, adding substantially to India’s balance-of-payments and overall gross domestic product, this also throws up new challenges, both for companies and for policymakers.
Policymakers must not only help keep the industry’s costs low so that more work comes India’s way, but also work on the ability of cities to handle the influx. Nearly three-fourths of India’s software engineers are based in just four cities: Bengaluru, Chennai, Hyderabad and Pune. Most new openings are also in these cities. To avoid congestion and to tap into a larger talent pool that may not want to move to these cities, the industry has tried to develop alternative centres, but these have not succeeded. If the size of the industry was to double in the next 10 years, would these cities be able to cope with the increase in population (real-estate prices are already rising)? How must policy promote new centres?
The number of engineers with the right skillsets needs to grow, or else India can quickly become uncompetitive. The approach that brought us this far worked, but is it cost-effective and will it work going forward as well? Students shell out lakhs of rupees for an engineering degree, after which the hiring firms anyway put them into a 6-12 month retraining course. Similarly, need for skills like in the buzzwords of Artificial Intelligence or Machine Learning may be too dispersed across firms for them to solve the problem themselves — they may end up hiring abroad, like some are already doing. This becomes a public-good that the government can plan for and facilitate.
For the industry, in addition to the challenge of attracting/retaining talent, larger firms must also collaborate to enable an ecosystem that sustains inflow of quality manpower with cost-efficiency. For larger IT services firms, staff costs grew 16 per cent in the June quarter, and may rise further. As they compete with deep-pocketed firms for talent (MNCs, well-funded start-ups and SaaS firms which generate much more revenue per employee), they may need to innovate the software development process yet again like they did while scaling up in the years after Y2K.