The Covid-19 pandemic has put major IT companies in a dead end. It increased its employee utilization rate. While a high utilization rate leads to higher margins due to better efficiency, companies are working with a small workforce and existing employees are under pressure.
In the third quarter, Infosys and Wipro reported usage of 86.3%. It was a record level for Infosys. Tata Consultancy Services and HCL Technologies do not report such figures, but experts have confirmed that the two are performing at the same level as their peers. Three years ago, IT companies were running at around 70% usage, but that number has gradually grown to over 80% now.
The high utilization rate was one of the reasons why companies posted record net hires in the third quarter to improve the strength of their bench.
Pravin Rao, Chief Operating Officer of Infosys, told analysts, “Usage is at an all time high. This is not where we want to be. Over the past few quarters, we’ve felt comfortable operating between 83% and 85%, and that’s where we want to be. We will be looking at much more aggressive hires over the next few quarters and attempt to bring usage down to manageable levels. “
Jatin Dalal, chief financial officer of Wipro, told analysts, “We were able to manage our usage within a very narrow range, particularly in the third quarter.”
Higher utilization exhausts employees and also reflects the decrease in bench staff. IT service providers with very high existing utilization will find it difficult to serve new engagements as they would not have staff to deploy. It also impacts clients’ confidence in their ability to provide services to them, said Yugal Joshi, vice president, Everest Group, a research firm.
The use on land can be very high considering that most of the people there are billable and cost a lot of money so cannot be benched. It is not uncommon to have 90-95% land use as most of those resources are spent on a client project, he said.
“A continuously operating industry with a high utilization rate is like an engine running at high speed for long distances. The potential for burnout is high and outages are imminent. High utilization rates translate into stressful operation resulting in reduced efficiency, ”said Kamal Karanth, co-founder of Xpheno, a company specializing in staffing solutions.
The bench is a reserve that companies use to increase resources on current projects and undertake new projects. In the absence of sufficient reserves, the burden on active resources is higher, he said.
The ability of IT companies to afford lower utilization rates is a key factor in attracting global businesses. Less usage means greater agility to manage surges and ensure continuity to delivery, but higher usage hurts the industry’s long-term competitive advantage. With decent bench strength, the delivery of new projects is off to a good start, he said.