After over one and a half years of Work From Home (WFH), Indian IT services firms are readying to bring back their employees to offices. The first signs of the move are visible.
Large IT firms are getting their senior employees in a leadership role to operate from offices. For instance, Wipro Chairman Rishad Premji tweeted recently that its leaders would start returning to the office from Monday (September 13) after 18 months of work from home amid the Covid-19 pandemic.
“After 18 long months, our leaders @Wipro are coming back to the office starting tomorrow (twice a week),’’ he said.
This move is aimed at instilling confidence among junior employees who have been working from remote locations since March last year. The rapid pace of vaccination, less Covid caseload, and safe working conditions are the factors driving this return trip.
Hybrid model
However, the hybrid operating model- a few days at home & the rest from the office- seems to be the future than operating offices at full capacity. And there is a raging debate within the management of Indian IT services firms whether employees should be given a permanent WFH option.
“The companies have already informed employees that they need to come back. It is just a matter of timing. Confidence is slowly coming back because of rising vaccination. However, most companies are likely to opt for a hybrid working model than opting for a large-scale WFH model,” said Pareekh Jain, Founder of Pareekh Consulting, who advises enterprises on technology outsourcing.
Mid-tier and small IT services companies are also keen on a hybrid working model.
“Adoption of work from home (WFH) operating model during the pandemic without any operational disruption shows the resilience of Indian IT industry. However, future work models should be hybrid. It will satisfy both the security concerns of clients and the work-life balance needs of IT professionals. The work from home option has its own set of risks, and Indian IT firms with a huge workforce may not be able to maintain productivity over some time,” said Sanjeev Dahiwadkar, CEO of Pune-headquartered IT firm, ITShastra.
Sources in the know said IT services firms are reluctant to provide permanent WFH options, unlike global corporations, which are running ‘Global Capability Centres’ or captives in India. Global corporations like Microsoft, Google, Facebook are providing their staffers with an option to work from remote locations permanently.
Experts believe that while it is easier for captives operated by the global corporations to provide permanent WFH options as compared to the IT firms given their large employee base.
At present, about 1,600 global firms have captive units in India, with several having more than one centre. Captives as a whole employ over 1.3 million people out of the 4.6 million technology workforce in India.
Profit centres
Behind the reluctance of IT firms to provide widespread permanent work from home (WFH) lies a business logic. While captives in India act as cost centres for global corporations, the Indian offices of IT firms operate as profit centres.
“ODC (Offshore Development Centre) is a paid business, and IT firms charge the client for ODC. When the pandemic started and employees started working from home, clients said we wouldn’t pay for ODC. It was the first charge which got slashed.”
“So, ODC as a business line (for IT firms) will take a huge hit if work from home continues,” said Supaul Chanda, vice-president at Experis of Manpower Group.
“Captive (in India) is a cost centre for a global corporation, while ODC is a profit centre for an IT firm. So, companies with ODCs will like to have work from the office because they charge for it. But for captives, work from home will save costs. However, the situation is evolving, and there is no finality as to which model will be followed by technology firms going ahead,” Chanda added.
Meanwhile, the cost savings coming from continued WFH, restriction on travel, and less usage of utilities like office buildings & other relevant aspects are likely to go away in coming quarters. However, higher offshoring is expected to offset the rising pressure on margins.
“Key tailwinds to margins comprise continued offshore traction, higher utilisation level above pre-pandemic levels, pyramid rationalisation (through higher fresher intake), continued cost savings, and operating leverage,” brokerage firm Motilal Oswal said in a report.
It, however, highlighted that rising wage costs and increased SG&A (sales, general & administrative expenses) could cut into the margin profile.
During the first quarter, most of the large and mid-tier IT services companies witnessed a dip in their margins, owing to rising wage costs and an uptick in utility expenses. If employees come back to the office in large numbers during the third quarter of this fiscal, then margin pressure is likely to increase. In that case, justifying the sky-high valuation of IT firms in Indian exchanges will be a difficult one.
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