Tech turns to austerity as the West encourages recession.

However, it is not only salary. As international travel restrictions ease, rising travel and visa costs are also squeezing margins.

“IT services companies are facing many headwinds—returning to the office, increased travel costs, higher-than-ever subcontracting costs, the threat of a U.S. recession, lower margins in recent quarters. And to top it all off, there’s the fact that they might have been over-hired in the last 12 months,” says Kamal Karanz, founder of Xpheno, a staffing solutions company whose clients are primarily IT companies.

Pandemic-era lockdowns have forced companies around the world to digitize processes and work remotely to reach customers, bringing a huge wave of jobs to Indian software companies, forcing them to hire hard to meet the demand. But with the easing of Covid-19 restrictions in much of the world and monetary policies pointing to a recession in the US and Europe, software companies are predicting that the orders recorded in the past two years may soon decline.

Companies are preparing for this outcome by reducing payroll costs, hiring new employees, and using their existing employees to develop new skills that are more in demand than hiring expensive employees on the side.

Recently, Tata Consultancy Services (TCS), the country’s largest IT services firm, ended its first-year anniversary hike, signaling the sector’s efforts to contain high staffing costs. While rivals like Infosys are charging 70% of variable pay, Wipro has delayed payments for certain categories of employees.

The workforce breaks come as the sector is expected to hire more than 150,000 new graduates. According to Karanth, the companies are using this opportunity to reduce the cost of lateral hiring.

“This allows them to streamline their workforce and cut costs. So we’re going to see tougher positions around going back to the office, cutting flexible pay or pushing future raises,” Karanth said.

Salaries account for 70 percent of costs in IT service firms. Tata Consultancy, Infosys, Wipro, HCL Tech and Tech Mahindra saw staff costs increase as they came under pressure in the June quarter. Average wage costs as a share of revenue rose from 54.3% in the March quarter to 55.2% in the following three months. Over the past four quarters, hiring discounts, extra raises, and non-standard promotions have been acceptable until now, but they’re falling out of fashion, making for a tougher approach.

According to Aditya Narayan Mishra, CEO of Ciel HR Services, tech companies are replacing junior management hires with fresh graduates. “They were paid. ₹8-10 lakh now most of the work is done by youth. Companies prefer to train highly skilled professionals rather than hire from the market, Mishra said.

In its July report on IT services, brokerage Kotak said institutional equity clients are prioritizing technology spending but are not struggling with digital initiatives. “There is an increased focus on cost efficiencies, which provide opportunities to offset shortfalls in discretionary spending,” he said.

With new hires and project cuts, tech companies’ bench strength increases. Both analysts and employers say this will be an opportunity for companies to increase their skills and reduce costs. Employees between projects are said to be on the ‘bench’.

“When employees are placed on projects and paid, utilization goes hand-in-hand with the best pyramid. Higher supply and churn reduces both lateral hiring costs and the use of subcontractors,” Kotak added.

The valuations for tech firms in the June-ended quarter were: 19.7% for TCS, 28.4% for Infosys, 23.8% for HCL, 23.3% for Wipro and 22% for Tech Mahindra. Only Wipro and Tech Mahindra saw a slight turnaround from the previous quarter.

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