Margin pressures and outdated skills behind TCS job cuts, say industry analysts

According to Ashutosh Sharma, VP & Research Director at Forrester, this move “lowers the threshold” for other IT companies to adopt a similar practice.

“If TCS is doing it, then it becomes more acceptable across the board. But every IT organisation has been taking over some programme for margin improvement in recent times. Margins have constantly been declining as the managed services business is offering a fairly low margin,” he said.

Industry analysts believe even though TCS CEO and MD K Krithivasan has maintained that the job cuts are “not driven by margins” or “AI productivity gains”, it is still a significant factor to take such a step as IT firms are also facing pricing pressures and demand uncertainty amid the US government's imposition of tariffs across industries and geographies.

“The impact of AI is eating into the people-heavy services model and forcing the large service providers such as TCS to rebalance their workforces to maintain their profit margins and stay price competitive in a cut throat market, where clients are demanding 20-30% price reductions on deals,” said Phil Fersht, CEO, HFS Research told Moneycontrol.

He added, “The fact that TCS has taken this step is a major indicator of this trend, considering its culture of being a very stable place to work.”

Following Moneycontrol’s newsbreak on the layoffs, analysts at Citi Research said that this is likely happening due to multiple factors including “productivity asks (AI & otherwise) at a time when clients are diverting significant incremental tech investment into AI related spends; certain skills becoming less relevant and fewer opportunities for deployment of employees in those areas; reskilling has been a focus but not easy for all skills/employees; and pressure on margins given slowing growth, technology changes & need for investments.”

Skill gaps, changing operating models

During the interview, Krithivasan had said, “We have been calling out new technologies, particularly AI and operating model changes. The ways of working are changing. We need to be future-ready and agile. We have been deploying AI at scale and evaluating skills we will be requiring for the future. We have invested a lot in associates in terms of how we can provide them with career growth and deployment opportunities. Still, we find that there are roles where redeployment has not been effective.”

“This will impact roughly 2 percent of our global workforce, primarily at middle and senior levels. It has not been an easy decision and one of the toughest decisions I have had to take as CEO,” he added.

This comes a few weeks after the company updated its HR policy by mandating employees to have 225 days of billability in a year and limiting bench time to up to 35 days.

“The leadership of Tata Sons and TCS is very margin-focused. Their target margins are also significantly higher than the industry average. Consequently, they decided to do these layoffs,” said Forrester’s Sharma.

Sharma emphasised that TCS had projected huge growth prospects and forecasts that led to over-hiring, causing a deployment mismatch.

His thoughts were echoed by TCS CHRO Milind Lakkad too at the company’s earnings conference on July 10, where Lakkad said that “hiring shouldn’t be connected to quarterly growth. It’s planned on a yearly basis.”

“We had earlier hired during the initial quarters, then we faced some business challenges. That had caused some imbalance, but we are not that bothered as we will leverage this going forward,” he said.

Interestingly, not just TCS, even HCLTech had announced a similar talent ramp down over the next three to four quarters as it plans an organisational restructuring globally to achieve operational agility and protect margins amid a shifting technology landscape dominated by AI.

“There will be some talent ramp down that has happened, especially in some of the geographies outside India. So that will also be part of the restructuring plan. More details we will share once we have a concrete timeline and plan agreed,” HCLTech CEO and MD C Vijayakumar had said at the company’s Q1 earnings conference earlier this month.

Fersht believes that this trend will last for about a year as the leading providers focus on training junior talent to work with AI solutions, and are forced to move on people who will struggle to align with the new AI model that he would call “services-as-software”.

“The new emerging services industry of services-as-software will be based on those same principles, the only difference being the skills are changing and they will be tied to common AI platforms,” Fersht said.

According to market intelligence firm UnearthInsight, the IT industry is facing a double whammy of demand slowdown (historically, the industry was accustomed to growing at 7-10%, which is now down to 3-5%) plus AI-led transformation, which is altering the demand versus supply situation within these companies.

“Skill mismatch clearly indicates the inability of experienced talent to upskill or cross-skill themselves. So either TCS is selling something unique or the existing workforce doesn't have skills in demand in the market,” said Gaurav Vasu, founder and CEO at UnearthInsight.