Companies keep staff on the bench

About 1.80 lakh employees of top three Indian Information Technology (IT) companies (Infosys, Wipro and TCS) are benched. Bench is a term used for reserve employees that IT companies keep on their rolls so that they can be deployed on future projects without the companies going through the nitty-gritty of fresh recruitment of talents.

But benching of employees also means that they have no projects to be gainfully occupied. This consequently leads to reduced productivity of human resources. The large-scale benching or underutilisation of human resource capacities in recent times translates to partially negating the gains that IT companies made due to current rupee depreciation that is being eroded by the increase in cost to these companies in terms of salaries and re-training expenses on a large number of benched employees.
Companies keep staff on the bench-1The number of benched employees in these top three IT companies rose by a whopping 22 per cent (on an absolute number: 32,000) during the third quarter of current financial year of 2016, compared to the corresponding period of last financial year. Increase in employee benching generally stems from reduced discretionary technology spending by clients in US, cancellations and delays in ramping up projects in the banking financial services and insurance (BFSI) sectors from US and Europe. BFSI is the mainstay of revenues for the country’s top three IT firms. Not only BFSI, even energy clients have cut back on technology spending to conserve financial resources.

Under pressure

With BFSI and energy verticals under pressure, the recent increase in bench strength is obvious. Many employees working in these verticals might have to re-orient themselves to work in different verticals. The number of employees benched during a particular quarter is determined by the utilization rate that IT companies give out in their financial quarterly statements. A decrease utilization rate means an increase in benched employees for a company, and vice versa.

How this increase in benched strength is eating into the margins of IT firms can be gauged by the statement that Wipro’s chief financial officer, Jatin Dalal, made during an earnings call conference. He said, "The net gain from the currency was offset by the investment in additional capacity in form of reduced utilization that we made in third quarter.”

A fall in utilization rate also has an indirect and insidious fallout. It results in a decrease in “revenue per employee”. Infosys had earlier said it hopes to raise revenue per employee from $50,000 now to $80,000 by 2020. During an earnings call, Infosys chief executive officer, Vishal Sikka admitted that the revenue per employee is going down due to pricing pressure and high utilization rate.

''Big IT companies Infosys and Wipro are parking employees on the bench for want of new projects.''

Pennsylvania-based, Susquehanna International Group’s financial analyst, James E Friedman, who tracks Infy, said, revenue per employee decreased to $49,787 during the third quarter of financial year 2016. Revenue per employee at Infosys was at $ 50,900 and $ 50,267 during the second and first quarter of current financial year respectively.

Friedman added, “In third quarter of FY 2015, revenue per employee declined 1.5 per cent quarter over quarter which the company attributed to pricing pressure in application services coupled with lower utilization of employees which declined 150 basis points. We estimate every 100 basis points change in utilization translates to a 50 basis points change in gross margin.”

In opposite directions

James’ report also added, “Utilization and subcontractors are moving in opposite directions. Although the CEO is focused on improving utilization under the zero-bench initiative, utilization dipped in third quarter while subcontractor expenses – disclosed in the Indian GAAP - rose 50 per cent year over year to reach an all-time high of 6.3 per cent of revenues. Subcontractors generated 1/3 of the total year over year growth.”The dependence on subcontractor appears due to mismatched skills between its clients’ requirements and its own employees’ skills.

With such colossal numbers of benched employees on their roll, IT companies have of late reduced their net hiring. Abhishek Shindadkar, senior analyst at ICICI Securities, said, “Because of increase in benched employees, we are also witnessing a slump in recruitment in IT cos. With attrition rate on the higher side, and gross addition falling, we are seeing a decrease in net addition of employees in IT companies.”

He also added that with the advent of newer technologies and automation process, some employees are being benched and are retrained for other roles.

The impact of automation on benching was also reflected by Wipro’s chief executive officer, T K Kurien, who said, “Fundamentally what has happened is that the people who have come out of the automation projects have gone on to the bench. They are right now going through a retraining cycle. As they complete the retraining cycle you would find the utilization actually improving.”
While hiring has come down, attrition for major IT companies including Infosys, Wipro and TCS has decreased. Attrition for mid-tier Bengaluru based Mindtree has also fallen to 16 per cent during the December quarter of financial year 2016 as compared to 18.1 per cent during the December quarter of last financial year.

Better job prospects

This fall in attrition is despite lakhs of IT professionals looking out for better job prospects. Bengaluru-based HR consultancy firm, Bharat Head Hunters Pvt Ltd.’s managing director, Bharat, said, around 15 thousand applicants are either uploading or updating their CVs everyday across job portals. While many IT companies are not comfortable with the high cost of bearing with high benched employees, few IT companies are bringing down their costs by lowering their headcount. Bengaluru- based Mphasis Ltd has already brought down its headcount to 23,512 during the December quarter of financial year 2016 from 35,142 during the corresponding quarter of last financial year.

In its pursuit to achieve $80,000 revenue per employee, Infosys also plans to deploy fewer employees on projects that could be automated. This, Infosys believes, will help the company achieve a target of 30 per cent margin on $20 billion revenue by 2020.

To stem the fall in “revenue per employee”, IT companies retrain or up-skill their employees.

Bharat added: “Bench system is mainly managed in software services organisation and not in software product companies. Benched employees generally are put into internal projects or will be trained on skills based on demand (projects or proposals need). Of late, the skills in demand are SMAC technologies (social, mobile, analytical and cloud).

Bharat added that benched employees are asked to up-skill themselves with most recent technology. Skill development programs are generally based on gaps that are already identified and recommended by the clients or manager’s feedback. Normally the training expenses are paid by the employers and such costs are billed to clients as hidden costs.


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