The Russia-Ukraine conflict could force IT companies to pause on their investments in Eastern Europe, and bring more work instead to India in the near term, according to experts. The raging tensions in the region may also affect business delivery in the short term, resulting in pricing pressure and a slowdown in new deals, these experts added.
After the US, Europe and the UK are one of the largest markets for the IT service providers. This move also comes at a crucial time when the IT services business is booming even as they face a huge challenge of shortage of talent to cater to the growing business needs.
Expansion to Eastern Europe
Over the last few years, Indian IT companies have been steadily expanding their presence in the region, using it as a near shore hub to service clients in Europe. The availability of affordable tech talent was a bonus, amid the unprecedented demand for technology services. But companies may now have to pause these plans, amidst the geopolitical tensions in the region.
An IT executive from a mid-tier IT firm said that there were a couple of reasons why the IT companies were strengthening their presence in the region.
Since the pandemic, the work from home option created more flexibility in the talent market. “Talent is going to be more fluid thanks to the pandemic, and customers are less particular about where the talent, at least certain skills, are placed,” he said.
The second reason is the need for geographical diversity of talent, to service customers and also offset the war for talent situation in India. The talent availability in the region, in addition to the proximity to the client time zones, made them even more attractive. Peter Bendor-Samuel, CEO, Everest Group, in a note said that senior and experienced digital engineering talent that was especially hard to find during the global talent shortage was exactly the type of resources that were prominent in Ukraine.
As a result, companies expanded their Eastern European footprint. The regions where Indian IT has a presence include Poland, Hungary, Romania, Bulgaria, Lithuania, Bulgaria, and Croatia. For instance, in January 2022 HCL Tech acquired a Hungarian data engineering firm, Starschema for $42.5 million, which will also offer near-shore access to its clients.
Coming amid the global supply side constraint for IT, Bendor-Samuel said in the note, the conflict creates widespread uncertainty and significant concerns for companies with service operations in the region.
Impact of the crisis
Companies are already raising concerns around this, according to experts. Phil Fersht, CEO, HFS Research said that the global enterprises that have support resources in Central and Eastern Europe are expressing concern regarding their business continuity and security of data.
According to the data from Everest Group, there are close to 70,000 to 100,000 highly qualified workers in digital engineering and IT skills, who will be disrupted. Of this, close to 30,000 are working for the third party service providers across banking and financial services, retail, automobile, and healthcare. About 20,000 are employed in global business service (GBS) centres in Ukraine, and another 30,000 in Belarus and Russia for third party services providers and GBS.
Services providers by these workers will be impacted. While the market will be able to absorb the disruption, this will impact pricing. The note from the Everest Group noted that given that this disruption is coming at the same time as the global talent shortage, this will impact pricing.Top IT firms, during the earnings call, shared that they were witnessing increased pricing for select projects. C Vijayakumar, CEO, in a recent interaction said that pricing has increased for modernisation, digital engineering, and cloud transformation projects. “We have increased rates and customers are also considering paying higher rates for some skills since everybody knows the current talent and supply situation,” he said.
While further increase in pricing might be a positive for the IT firms, for multinationals this adds to the pressure. “Even though the length of the impact will be a temporary (three to six months) period, I believe the disruption will fuel inflationary pressure, which is already building, and these effects will be felt long after the dust settles in Ukraine,” Bendor-Samuel said in the note.
Pareekh Jain, founder, Pareekh Consulting, said that as a result this might also slow down the new deals from the clients in the regions in the near-term.
Emails sent to TCS, Infosys, Wipro and Cognizant on the impact of the crisis on operations did not elicit a response.
A HCL Tech spokesperson said, “The safety of our employees is of utmost importance to HCL. We are also focused on maintaining the highest service delivery levels for our clients. We have therefore been closely monitoring the situation and have already activated the required business continuity measures. There has been no impact on our client operations to date and we remain fully committed to ensure continued safety of our employees and to maintain the highest service delivery levels for our clients. We hope for an early resolution to the issue and safety of everyone in the region.”
Will it impact expansion in Eastern Europe?
The conflict, according to experts, will dampen the expansion to these regions.
Aditya Narayan Mishra, CEO, CIEL HR Services pointed out that many of the IT companies will be in the wait and watch mode now as safety of employees will be priority.This will slow down the expansion in the region, which could be a net positive for the Indian IT firms since this would bring more work to India. “There is a very high likelihood of many IT and business process support services being shifted to India as this crisis plays out. The Philippines will also benefit with its language and customer support depth,”Fersht added.