3 of India's top 5 IT firms saw revenue per employee decline in last five years

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The aggregate revenue per employee for Tata Consultancy Services (TCS), Wipro, and HCLTech, with the exception of Infosys and Tech Mahindra, experienced a decline of 3.8-11 percent on a five-year compound annual growth rate (CAGR) basis in FY23. This decline was driven by the increase in hiring across these companies in response to the Covid pandemic-driven demand, surpassing net revenue growth, which remained relatively slow paced due to lower margins in digital deals.

Revenue per employee is a metric that is used to roughly calculate the revenue generated by each employee in a firm, in a given time frame. Aggregate revenue per employee is calculated based on the total headcount of a company, while billable revenue per employee only includes the people who are billable on a project. This means that billable revenue per employee does not consider adjacent function staff, such as HR, finance, or sales.

HCLTech experienced the biggest dip in CAGR, with a decline of 11 percent. However, its aggregate revenue per employee, at $55,704, is the highest among its top 5 peers (Infosys and Tech Mahindra are the other two in that list). The significant decline can be attributed to a mismatch between its headcount growth and revenue growth, as evident in data from market intelligence firm UnearthInsight, accessed by Moneycontrol.

Over the last five years, HCLTech's headcount grew at a CAGR of 63.8 percent, while its revenue grew at the rate of 45.8 percent. Similarly, Wipro saw 40.5 percent CAGR in headcount for a 35.2 percent CAGR in revenue for the same period.

An HCLTech spokesperson told Moneycontrol, "Over the past several years, HCLTech has consistently delivered industry-leading organic revenue growth. In recent years, the proportion of work delivered by our India-based and nearshore employees has gone up, which yields lower revenue per employee compared to high-cost locations."

"Further larger induction of freshers with longer training cycles has contributed to the change in revenue per employee,” the spokesperson added.

Infosys was the only company in the services segment with revenue exceeding $10 billion to achieve a positive 2.6 percent CAGR in aggregate revenue per employee over the past five years. On the other hand, Tech Mahindra experienced approximately 5.6 percent growth in aggregate revenue per employee during the same period, driven by improved billing (both Tech/BPM) and operational efficiency, including reductions in non-billable and support headcount.

The overall billable revenue per employee for the remaining IT/tech services industry combined was $48,195 in FY23, in contrast to $53,550 for the top five players.

Low margins, slower revenue growth

According to Gaurav Vasu, founder and CEO of UnearthInsight, this trend in the revenue per employee metric was due to technology billing rates becoming a lot more commoditised, coupled with a sudden increase in overall headcount.

However, he added, “Linearity between revenue growth and headcount addition still exists in the sub-services and BPO services segments. There are some pockets of services and offerings that have started seeing a non-linear trend.”

Unlike the popular belief that a significant uptick in larger digital deals along with talent hiring will lead to higher revenue per employee, the margins for such deals have been lower. Today, most of the deals bagged by IT companies are digital transformation deals.

“Over the last few years, IT companies have been under tremendous cost pressures from clients and competition alike — margins have come down significantly. As a result, the revenue for the same number of people is much lower. That’s a secular trend across companies,” Ashutosh Sharma, head of research, Forrester Research India, said.

Mrinal Rai, principal analyst at technology research firm ISG, concurred. “Digital deals may not always be high-value deals. Initially revenue grew across IT companies and then they started hiring a lot more than they needed. Now, they have started cutting down the workforce. FY19 and FY23 are very different stories,” he said.

Emailed queries sent to TCS, Infosys, Wipro and Tech Mahindra didn't elicit any response at the time of publishing.

Headcount addition trends

This slowdown in aggregate revenue per employee for some companies on a five-year CAGR basis is also because the IT companies weren’t hiring much for three years pre-pandemic, according to HDFC Securities’ deputy vice-president Amit Chandra.

“A lot of capacity building happened during the post-Covid demand surge. The hiring trend between FY16-19 was negligible. That was the era when it was thought that automation will reduce human effort and legacy hiring will fall very sharply. But it did not happen, there was a sudden IT talent scarcity with the post-covid demand surge. Especially last year, there was pyramid broadening,” he said.

While most IT companies thought that automation and the shift to getting more digital deals will decrease higher employee dependency, creating a non-linear relation between revenue growth and headcount increase unlike in earlier times, that wasn’t the case for all.

Sharma said that it also depends on the organisation’s ability to move away from headcount-based revenue models. Infosys, for instance, has done a marginally better job than its peers in bringing platform-based solutions and services into deals, which delinks revenue from the headcount.

“TCS, HCLTech and Wipro could do better in this area. TCS has a big success in BaNCS, but they struggle replicating that in other verticals. HCLTech and Wipro have some capabilities in DRYiCE and Holmes respectively but not much to show beyond these,” he added.

The IT sector reported record hiring numbers in FY22, both in lateral hiring and fresher additions. The top five firms collectively added around 273,377 employees by the end of the fiscal year. This increase in hiring was driven by the growing demand for digital transformation deals and the shortage of tech talent in the market.

However, this trend reversed in FY23 due to various macroeconomic challenges, including the Russia-Ukraine war, an impending recession in key markets like the US, inflation, interest rate hikes, and most recently, a global banking crisis.

As a result, there was a significant year-on-year drop of over 69 percent in hiring across the top five firms in FY23. Together, these firms only added 83,906 employees as the focus shifted towards improving utilisation rates.

How TCS and Infosys fared

TCS, the largest IT services company in the country, witnessed the second-lowest aggregate revenue per employee, with a decline of 7.8 percent in a five-year CAGR. According to Vasu, a part of the reason for this was TCS having a significant chunk of its revenue from the domestic market as compared to its peers, which means the billing rates will be lower.

“TCS’ revenue per employee growth is also low because a significant chunk of their revenue comes from the domestic India market. It gets almost $2 billion or more of its revenue from India, and has the highest presence among its peers,” Vasu said.

Rightly so, in FY23, TCS reported the highest revenue contribution from India, at 5 percent, while Infosys earned 3.2 percent, and Wipro reported 4 percent, respectively. The IT sector, overall, earns less than 5 percent of its total revenue from India, as the US and Europe remain the key markets.

Meanwhile, Infosys, the second-largest IT services company in India, witnessed 2.6 percent growth in aggregate revenue per employee due to its ability to sustain billing rates. Additionally, the company successfully managed to add a lower headcount for the revenue it generated, according to Vasu.

Furthermore, Infosys continues to maintain lean project management structures as well as leaner internal IT, HR, and sales teams, Vasu added. He expects the revenue per employee metric for these IT companies to start improving in the coming fiscal years.

“The revenue per employee will start improving in FY24 and FY25 because the biggest dip came in FY21 when the companies expected higher growth and they hired a lot. Right now hiring is seeing a downtrend, so we expect a lot more focus on improving productivity and a lot of caution-based hiring to happen,” Vasu said.

“Aggregate revenue per employee at an industry level will start going down by 2-5 percent over the next 12-18 months,” he added.