Inside India’s great tech talent crunch

While attrition has always been high within the IT industry, the current level of churn is almost 30% higher than what it used to be. Multiple factors have contributed to this, with the abundance of opportunities all around being one of them. I am referring to the largely white-collar tech and managerial talent here. It is interesting to see how the great startup carnival in India has created a huge talent crunch. With more than 200 unicorns and ‘soonicorns’ (soon to be unicorns) thirsting for talent, and thousands of smaller startups too on a hiring spree, companies outside this hallowed ecosystem are gasping for breath. And since most of these startups are well funded and scaling rapidly, it has become extremely difficult for traditional companies to compete—both to hire as well as to retain talent. And, not surprisingly, industries that not so long ago were considered new-age disruptors have rapidly faded to become part of the traditional sector that is struggling to hire, and probably waiting to be disrupted.

As if this was not enough, the pandemic has completely altered a few paradigms that were taken as a given, making it even more difficult for companies that seek the same engagement model with their employees which they’ve gotten used to for so long.

A sense of déjà vu

For those who have witnessed similar cycles in the past, it’s a bit of a déjà vu. The Y2K bug, and the outsourcing wave it eventually resulted in, triggered the first massive wave of entrepreneurship in India that sucked out talent from every industry and college campus. Early signs of this phenomenon were visible even during the build-up to the Y2K. Companies with in-house IT functions were bleeding and struggling to backfill the talent they were losing to new-age IT services companies.

In the 1980s and even early 90s, companies in the manufacturing sector would command day 1 slots in premium engineering schools, and the likes of Hindustan Unilever Ltd and Procter & Gamble Co. would have the same privilege in premium B-schools; but all this changed rapidly at the turn of the century.

Upstarts from the outsourced services space were rapidly replacing these traditional biggies on campuses. Companies in the banking, healthcare, travel and other domains were also losing talent to IT/BPO companies, who were building domain capabilities in these industry sectors. Banks themselves had been predatory when regulations were liberalized to enable the creation of private banks. ICICI Bank, Axis Bank, HDFC Bank and many other new-age private banks grew gangbusters and emptied out talent from the public sector banks and other financial services companies at salaries that were then considered quite scandalous.

It wasn’t always a battle for talent between the new-age companies and their older counterparts, but also a battle between the different new-age companies themselves. Companies in these times toyed with ‘no-poach’ pacts. Sometimes they worked but mostly they failed. These were in principle not very different from companies in an oligopoly engaging in price fixing. While price fixing and other anti-competitive acts were a violation of law and had to be carried out in stealth, ‘no-poach’ pacts were more of moral violations and were openly discussed.

Companies also engaged in all kinds of innovative ways—some ethical and some not so ethical—of accessing and hiring talent from their competitors. Non-compete and non-solicit clauses became part of employment contracts but they were rarely enforceable, and the courts, quite rightly, took employee-friendly positions in case of disputes. They were therefore used more as deterrents. A legal notice from a law firm engaged by the company, and the risk of lengthy and expensive litigation, was sufficient to put fear into the minds of most employees.

The stock options boom

Large and mature companies entailed little or no risk for employees and job security was assured. The same wasn’t true for startups, and for long, they struggled to attract talent. However, startups had a secret weapon in their arsenal, namely stock options.

In the early 90s, employee stock options were novel and untested, but in 1993, when Infosys listed and unlocked value for thousands of employees—including, as the myths go, for a few early-stage blue-collar staff—this form of compensation drew attention. It demonstrated for the first time that if you were talented and took the risk of joining a startup in a key position at an early stage, you could probably make enough money that would make the traditionally wealthy look poor in comparison. Besides the opportunity to become rich, the cash salaries at all levels were way beyond what other industries could afford to pay. Winning wars in history has mostly been about superior weaponry—iron over bronze and guns over swords. This war for talent was no different. Companies like Infosys had brought a gun to a traditional knife fight and had leveraged this advantage to quickly grow into multi-billion-dollar enterprises. Over a period of time, there were a slew of strategic acquisitions and listings that created wealth for the employees who were part of these firms.

Many traditional firms complained that some of these new-age services firms didn’t do work that was intellectually challenging. In the Maslow’s hierarchy of needs, for most people, intellectual challenge tends to be at a higher level than material needs and hence, even if that argument were true, which it mostly wasn’t, it did not cut ice with their employees. The reality was that these new-age services companies were solving some real problems for their customers, and that was what mattered. No problem was big or small. If products and talents were paid for or compensated based on how useful they were, then clean water and healthy food would probably be the most expensive things in the world, and people producing these would be the best paid. But that’s not the way economics works. It was Brian Tracy who once said, “Your earning ability today is largely dependent upon your knowledge, skill and your ability to combine that knowledge and skill in such a way that you contribute value for which customers are willing to pay”.

In a free market, each free exchange creates unambiguous signals about which skills, talents, goods and services are valuable and relevant, or how difficult they are to create and bring to market, or just their scarcity. These signals are captured and communicated through the pricing mechanisms, with salaries and talent scarcity being indicators.

After a while, the excitement of working for startups and receiving a part of the compensation in the form of stock options soon faded away as the outsourced services industry scaled and consolidated. Infosys and Tata Consultancy Services are now both $100 billion plus in valuation. They had become big. Foreign clients quickly understood the rules of the game and pitted one service provider against the other in ruthless bidding wars. IT services firms were under serious cost pressure as competitive intensity in this space became hot, and cost cutting became the norm. Soon, these IT services companies were no longer employers of choice. Their cost advantage was kept sustained by keeping entry-level salaries nearly flat year over year and promoting people into roles they were not completely ready for. Using a strong process orientation, they were able to deliver above average outcomes with average talent.

Learning from them, many global firms quickly set up shop in India. Quite a few of them were product firms like Google that were not under any serious pricing pressure and could offer attractive compensation and create employee-friendly policies for their staff that made these companies truly great places to work.

The startup revolution

This was until 2008 when there were fresh tremors once again. Dean Kamen, an American engineer and inventor known for his invention of the Segway, said, “Every once in a while, a new technology, an old problem, and a big idea turn into an innovation”. That’s what precisely happened when two young engineers from the Indian Institute of Technology-Delhi, Sachin and Binny Bansal, set up Flipkart.

A new wave of entrepreneurship had hit the tipping point. For a variety of global economic reasons, the startup ecosystem in India had received an unimaginable boost, and the Flipkart story inspired hundreds, if not thousands, of young Indians to become entrepreneurs. Zomato’s recent listing marked a huge milestone in India’s startup landscape for obvious reasons, and the spate of initial public offerings (IPOs) expected in the months ahead have once again resulted in the great talent rush towards startups. This is a signal yet again to companies that are losing talent to ask themselves some hard questions about whether they really need this kind of talent and whether they should seriously draw upon their institutional knowledge and make do with stronger process orientation and average people.

One could make an argument that making steel or motor cars is even today far more difficult than home delivering groceries—whether in 4 hours or 40 minutes. But the market capitalization of companies in these businesses do not reflect this. Nor do wealth-creating opportunities for those employed by companies in these sectors. Why is this?

As an industry ages and matures, knowledge about the business gets institutionalized and innovation slows down to a crawl. It does not need a whole lot of problem solving or critical thinking skills to run the business any more. Until, of course, there is a breakthrough and a Tesla is created, whose market cap is bigger than the rest of the automobile industry put together. Could any of the existing global auto companies not have innovated and created a Tesla? Probably yes, but more likely no. Because your success makes you complacent and deeply in love with status quo.

Disruptors are, therefore, mostly from outside the industry. While it may not take a great deal of knowledge to deliver groceries at home, even at scale, the value of the model lies in shifting value from existing channels to a new channel. Investors, and therefore talent, tend to allocate a good part of the anticipated future value (both creation as well as erosion) upfront to firms, especially in the sunrise and sunset sectors. Therefore, for short periods of time, companies in the sunrise sector tend to be overvalued and companies in the sunset sector tend to be undervalued.

Those under the delusion that merit and hard work need to be rewarded over everything else would be disappointed to know that miners who work underground probably are the least paid. This has been a useful delusion to live with because it compels you to try harder, but awareness of the grim reality of ‘creative destruction’ is a good counter-balance that helps one adapt and learn rapidly.

In a blogpost titled Fortune 500 firms: 1955 versus 2017, Mark Sperry wrote that of the Fortune 500 companies in 1955, only 12% survived in 2017, and the half-life of public companies in the US is just 10 years. In other words, of all the companies that list in any year, 50% of them vanish in 10 years, either through acquisition or death. Some companies don’t actually die. They just fade into obscurity. Loss of access to talent and other resources ensures their eventual obsolescence.

Geoffrey West, in his seminal book Scale, points out that after growing rapidly in their youth, almost all companies end up floating on top of the ripples of the stock market with their metaphorical noses just above the surface.

I have seen this war for talent—all kinds of talent—from very close quarters over the last two decades, and the only firm conclusion I have come to is that despite the challenges that individual companies may go through, this war for talent is a very good indicator of macro-level innovation and a rebalancing that is an integral part of economic progress.

T.N. Hari is head of human resources (HR) at BigBasket