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Thursday, March 23, 2023

Top-level changes come at a crucial time for IT firms

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The news that TCS chief executive and managing director Rajesh Gopinathan is moving on caused investors to ask anxious questions about his succession at India’s largest IT services firm. However, Gopinathan is being replaced by K Krithivasan, another TCS veteran, which should mean a nearly seamless transition.

Interestingly, TCS is not the only IT major undergoing a transition. TechM’s charismatic boss C. P. Gurnani is due to retire in December and will be replaced by Mohit Joshi, who comes to TechM after heading Infosys’s global services division with the designation of president, Infosys. Another Infosys president, S Ravi Kumar, left the company to join Cognizant as CEO in November 2022.

This means there have been or will soon be changes at the top of three major IT services firms. Cognizant, which is Nasdaq-listed, reported $19.4 billion of revenues in the fiscal that ended December 2022. It’s seen as an Indian IT outfit, with roughly two-thirds of its 350,000 employees located in India.

NSE-listed TCS had $27.2 billion in revenues in FY22 (year-ended March 2022). TechM’s FY22 revenues were $6.5 billion – it is smaller and more niche than the other three companies mentioned here. Infosys, which could be affected by the loss of two of its most senior executives, had FY22 revenues of $16.3 billion. Taken together, that’s a huge chunk of the IT services industry, with a combined employee strength of nearly 1.5 million.

Changes in personnel at the CXO level can result in key changes to corporate strategy. Indeed, that’s often why the boards of corporations look for new blood. Individual companies, particularly ones as large as these, have their own internal bureaucracies and set processes and look to their CEOs to drive strategic initiatives.

If the CEO is inducted from outside, there’s usually a significant shakeup. This may be a good thing of course, but it means disruption, creative or otherwise. In addition, there’s always a difference in the operating styles of individuals, even if the succession is drawn from within the company, as in the case of TCS. Individuals always have their own protégés, usually ones with differing opinions on strategic focus.

These transitions come at a challenging time for the IT industry. Three years of working from home has led to enforced changes in approach. Tighter US visa regulations have also meant changes in hiring patterns. Brexit has caused corporations headquartered in the UK to look at opening offices in Ireland or elsewhere to retain unfettered access to the EU. The Ukraine war and high inflation have put the brakes on global growth.

There have been large currency fluctuations as well. While the rupee has crashed against the US dollar, it has seen both ups and downs against the euro and the British pound, and strengthened against the yen. Thus, there have been periods when EU and UK revenues have translated to lower rupee returns.

Every IT company has complained about margin pressures and high employee churn over the past three years, with attrition rates above 25% per quarter. Most have also struggled to find a way to manage moonlighting.

Opinions differ sharply on moonlighting in an industry where employee costs, productivity and data confidentiality are all crucial variables. Gurnani, for example, is happy to live with moonlighting employees, provided they meet their deliverables for TechM. But Infosys and Wipro see it as a sacking offence. TCS tries to discourage it while “showing empathy”, according to senior executives.

There are signs now that attrition is easing and a related variable – subcontracting rates – is falling, mainly because there’s less work to go around. That’s at least partly because the startup ecosystem has slowed, as these firms were largely responsible for generating a host of opportunities for coders.

The industry’s overall estimates and company-specific guidance and projections suggest that IT services will struggle to generate more than moderate growth until the global economy starts to recover. What’s more, those projections will likely need to be downgraded, since they were mostly made before the recent turmoil in global banking. The banking and finance vertical is going to see cutbacks on IT spends, and other sectors have also postponed discretionary IT spending.

All this means that transitions in the C-suites are taking place at a critical moment, both for the companies in question and for the sector as a whole, given that these are big guns. This isn’t necessarily a bad thing. The new faces at the top may spark creative pivots in strategy that could help these companies to weather the tough times.

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