Tech firms tighten their belts to boost profitability
MY late friend Abheek Barman, a journalist, had come up with a new term in economic theory: mother-in-law industries. He used this neologism for sectors that have found approval with prospective mothers-in-law. That is because a job in such an industry is likely to be stable and lucrative over a long period of time.
In the 1980s, parents would urge their children to become doctors or engineers. Those were the ‘mother-in-law’ jobs. By the 1990s, the focus had shifted to finance, sales and management. In the late 90s and early 2000s, ‘tech’ emerged as a new star. As India’s technology outsourcing and software services companies boomed and became extremely valuable, computer courses gained massive popularity among Indian middle-class parents. Big Indian tech companies, such as TCS, Infosys and Wipro, became some of our biggest employers. They sent their employees abroad for ‘onshore’ projects, which opened doors for tech jobs in the US and Europe.
By the mid-2000s, tech companies began proliferating, often founded by senior-level employees of bigger entities. That led to the birth of Mindtree, IGATE and several others. These smaller companies paid higher salaries to attract talent, which in turn made the tech giants raise their pay scales. IT clearly provided some of the best ‘mother-in-law’ jobs.
Then came the 2008 global financial crisis, which caused a severe economic downturn in the developed capitalist world. Indian IT service companies had to cut costs. Some people were laid off, others took pay cuts, and new employees had to settle for less remunerative packages. Estimates suggest that an average fresher’s salary in the IT industry remained roughly the same between 2010 and 2020. Even the startup boom did not make a big difference for techies looking for jobs.
What changed things was the Covid-19 pandemic. Central banks and governments opened their purse strings, letting money flow like water. A large chunk of that went towards looking for new investment opportunities in tech, especially in startups. From the beginning of 2021 to the middle of 2022, tech startups received so much funding that they could afford to throw their cash around at people who could code. Salaries for IT professionals doubled in that single year. As tech companies poached talent, their employers tried to retain them.
But that sunny period for tech lasted just about a year. A funding winter set in in the second half of 2022, almost as suddenly as the boom had come. Venture capitalists and private equity, which had given money to startups, began pressuring them into cutting costs. And what is the easiest way to reduce expenses? It is to cut the wage bill. From the end of 2022 and throughout 2023, IT firms sacked employees and reduced their numbers. Obviously, that meant new jobs were hard to come by.
In 2021-22, India’s IT companies reportedly hired six lakh new techies. This was the highest intake ever. In 2023-24, that number is expected to end at just 70,000-80,000. That is more than an 85 per cent drop in recruitment in just two years. This, however, is not just an India story. It is happening across the world. The biggest tech companies in the world are also shedding employees. Amazon, Google and Microsoft have all cut jobs and announced their plans to lay off more people. Other marquee names in the tech and software as a service world, such as Salesforce and eBay, are also pruning their employee headcount.
One big reason for this is that AI has taken over most jobs that involve repetitive tasks that can easily be done by an algorithm. Even more complex word processing-based work can be done much faster by various large language model-based chatbots. Presentations can be made instantly on AI-powered software like Canva, among others. Secretarial jobs, such as maintaining calendars, arranging meetings and managing correspondence, can all be done by apps. Smartcards have made automated security systems more efficient, reducing the need for security personnel. If an office earlier needed 10 people to perform such tasks, it now needs no more than six.
It is understandable that tech companies that have a ringside view of how professional services are getting automated would be the first to implement such automation in their own businesses. One could argue that you need people to write the code to automate tasks for others. But, as has been repeatedly demonstrated, even the least tech-savvy person can now give a series of prompts to an AI chatbot and generate complex lines of code that can be used to build apps without any help from an IT engineer. Very soon, AI will create its own AI without needing any human intervention.
However, this is not the only reason why techies are in trouble. One key reason is that tech companies are spending much more on new innovations than they are earning in revenue by selling their products. All AI apps that we use are being subsidised by people who are funding tech companies. As I have argued in the past, software is not anywhere as profitable as traditional businesses like oil and gas. The most profitable company in the world, the oil giant Saudi Aramco, generates almost as much profit as Apple, Alphabet (Google) and Microsoft combined. And most of Apple’s earnings come from its phones, which is old-fashioned manufacturing. Yet Aramco’s value as a business is not even one-fourth of the combined market capitalisation of these three tech giants.
However, in the long run, real earnings or profits matter. Tech companies have already tasted what a lack of profits does to share prices when their stocks tanked in 2022. Since then, they have been tightening their belts to improve profitability while simultaneously investing in AI. The only way to do that is to cut wage costs. This is what is making parents think twice before pushing their children into IT courses. It is also why being employed in tech is fast losing its status as a mother-in-law job.
The author is a senior economic analyst
