Companies might save on operating cost but spending significantly on WFH infrastructure and real estate as the model continues to evolve.
When TCS Chairman N Chandrasekaran said during a recent annual general meeting (AGM) that work from home (WFH) is not cost-effective but involves significant investments, it brought to the fore the actual expenses of WFH and the challenges in making it permanent.
TCS is one of the first companies to announce a permanent WFH system by 2025. Under the plan, only 25 percent employees will have to work in office.
According to experts, while WFH is beneficial in the long term, it entails significant investments in the short term.
Apart from investments in real estate and infrastructure, there are hidden costs that are difficult to gauge, given that the model is still evolving.
The IT sector in India employs about 50 lakh people.
The difference between enabling WFH right off the bat and changing your current model to WFH, which most IT firms have done, is huge. It is the difference between building from scratch and demolishing and re-constructing.
It involves cost, money and significant planning.
Pradeep Nair, Vice President and Managing Director, VMWare, a software firm, pointed out that currently, most major IT firms have long-term building leases and have made huge investments in real estate. “Just because you are not using them does not mean that you stop paying rent,” Nair said.
So even if companies have a significant number of employees working from home, firms will have to pay rent, and cannot exit the contract just because the working model has changed.
Typically, companies sign long-term contracts that might extend for a few years to decades. These rentals are expensive and could range between a few lakhs of rupees per month to crores, depending on the area.
TCS, for example, will not be exiting its real-estate contracts, even if only a fraction of its employees are currently working from office. “The leases that the Group has entered into for properties used as delivery centres /sales offices are long term in nature and no changes in terms are expected due to COVID-19,” the company said in its FY20 annual report. The lease agreements range from four years to a decade or more, the report said.
A real-estate developer in Chennai said that negotiations over rentals and leases are taking place between IT firms and realtors.
It is not just about leases, though. IT firms have been investing in their own campuses over the years.
Infosys' Global Education Centre in Mysuru is spread across 337 acres, with a build area of 12 million sq ft. The total investment in the centre was close to Rs 2,055 crore. Other IT firms such as TCS, Wipro and HCL Tech, too, have invested in their own campuses at a significant cost.
These investments might run into multiple crores. “If WFH becomes permanent, a single company might not even be able to lease the entire area since they are too huge,” said a realtor who did not want to be named.
“So firms will also have to decide about their huge campuses,” he added.
Nair of VMWare explained that it does not cost much to give remote access to employees as enabling access through VPN costs as low as Rs 5,000. But, it is a shallow way of looking at it. Companies that are serious about creating an infrastructure will look at it on a long-term basis, he said.
Creating infrastructure mainly means the right network architecture, security controls to ensure that the company’s network is not vulnerable and is safe from cyberattacks. Slips here could result in huge losses.
Cognizant, which was recently attacked by the Maze ransomware, estimates the impact of the cyber attack to be in the range of $50-70 million in the June quarter.
Are there no advantages?
Of course, there are. Companies will be able to cut down incremental real-estate costs. UB Pravin Rao, COO, Infosys, said during the recently concluded AGM that the company is putting on hold current real-estate expansion in the country.
Real-estate majors Moneycontrol spoke to pointed out that the coming months will see commercial real estate taking a hit as companies postpone their expansion plans or reduce real-estate consumption, with remote working likely to continue in the coming months.
Facility expenses, which account for about 3 percent of revenues on an average, and transport costs will also come down. For TCS, facility expenses account for about 3.1 percent of its revenue, on an average.However, in FY20, the expenses came down by 33 percent and accounted for only 1.4 percent of the overall revenue. A top executive from a major IT firm said that the biggest savings would be from transport.