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Peter Drucker might have recommended layoffs as the last resort for businesses, but for todays CEOs, who follow the Wall Street analysts more religiously than they do the worlds greatest management thinkermassive layoffs are, more often than not, the first resort.

In a tough economic condition like this, it is not surprising that we see all corporate result announcements (most of them with massive losses) accompanied by announcement of job cuts, some time to the tune of tens of thousands. When Dataquest tried to compile a list of large (1000-plus) job cuts publicly announced by global companies between November 2008 to February 2009, the figure we arrived at was 568,950. The actual figure would be far more. That is because we have not taken into account announcements that were less than 1000 in one go; we have not taken into account job cuts that were before November; and finally, since this is compiled from company announcements, we may have missed a few, that is it may not have been comprehensive.

So, what do these massive layoffs mean? Of course, on the face of it, they mean what lies ahead. Most of these announcements are about layoffs that may happen in 2009 end or even 2010. While financial performance gives a good idea of the past and guidance may give an idea of the immediate future, they do provide a clue to the future over a relatively longer period. And that future seems really gloomy, going by both the depth (the numbers) and breadth of the job cuts (few industries are spared)!

But there are questions that are unanswered. Are these job cuts for real? Are they really meant to salvage the company or are they targeted at the analysts who have a proven track record of giving thumbs up to all massive layoffs? If we assume that they are real, are these jobs going out of only the company payrolls (that becomes a little exciting to many in India) or will they just vanish into thin air?

While we do not know the answer to them yet, a simple analysis of job cut data gives some idea about the impact.

The Impact on Indian IT
What does that mean for Indian IT/BPO services industry? The opinion is divided. While conventional wisdom is that the need for cost-cutting boosts offshoring, a sustained downturn means many companies would go out of business and that will impact everyone.

With lack of a clearer answer, most IT services firms have stopped asking: When is the recovery? Instead, the questions are now on how to live with the downturn. And that is exactly where the job cut data may help, as it gives an indication of how affected are the specific industries. Comparing that with the vertical revenue break-up of the Indian IT industry would give an idea of how much the industry would be affected, and how it can fine-tune its portfolio.

According to Nasscom, in FY 08, the top verticals for the Indian IT/BPO services industry were BFSI which contributed 41% of the overall revenue; high-tech/telecom which contributed 20%, manufacturing accounting for 17% and retail which accounted for 8%. All other verticals contributed 3% or less.

A quick analysis of the job cuts data shows that the manufacturing industry (automotive and other manufacturing) accounted for 31% job cuts; while high-tech and the financial services industry accounted for 20% each. The financial services industry data may be a little misleading though as massive restructuring is on and we still do not know the full proportion of the job loss.

These three sectors are different in terms of what the IT industry makes money on and the implications, hence, are different. Most of the money that Indian IT makes from the manufacturing segment is by developing applications or implementing packages such as SAP or Oracle. These are clearly discretionary spending and would be minimized as companies do massive restructuring and downsizing. On the other hand, most of the job cuts are in the blue collar category and India can hardly make any gains from those job cuts. In short, exposure to the manufacturing industry in the medium run is going to be tough.

The news from the other two top segmentshigh-tech and financial servicesmay not be as bad. While the losses and massive layoffs do indicate the future of the companies, the Indian IT firms have reasons to be hopeful. The engagement that most Indian IT firms have with these two sectors are deeper and wider. For example, many of these companies source BPO service from Indian firms. So, any major cost-cutting exercise would entail announcing job cuts in the US (that also doubles up as a tool to impress analysts) but moving those jobs to a low-cost destination. And unlike in manufacturing, the job cuts include large number of services jobs which could easily be offshored. In high-tech, that could even result in some of the high-value positions moving to India.

Last but not the least, this is the time to hire senior and middle level people from target verticalssomething that has been a wish-list item for many IT/BPO firms. A few BPO companies are already doing that.

Shyamanuja Das
shyamanujad@cybermedia.co.in

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