You must invest in your existing enterprise talent to remain viable

The Situation: With inflation rates increasing (the US consumer price index (CPI), indicated inflation was 8.3% for April 2022) and the talent crisis raging on, enterprises find themselves with a dilemma: invest in upskilling and training existing talent or roll the dice with the open market.

Over the last two decades, the IT and business process services industry expanded globally due to the feasibility of hiring from more economical offshore locations. However, the gap between lower offshore costs vs. onshore costs is now gradually shrinking due to wage inflation. Coupled with soaring attrition, wage inflation is adding to the woes of enterprises now battling a double-edged sword.

The Great Resignation Debate, hosted by HFS Research, gave us a better perspective on managing the talent crunch with suggestions from enterprises to better understand employee experience, culture, and skillsets and explore avenues for sourcing talent.

As a part of our research, HFS is closely observing how wage inflation dynamics impact the services industry. We have been conversing with service providers and enterprises to get their views on wage inflation, the ongoing talent crunch, and increasing attrition rates. We can observe the effects of wage inflation from three angles: service providers, clients, and employees. Let’s look at each of these parties and how they are dealing with inflation.

Service providers have the dual role of managing employee expectations and client relations amid rising costs

Service providers employ various measures to address wage inflation. From cutting costs to digital initiatives, they are trying it all, including these remedial measures:

• Pushing digital solutions aggressively: Many service providers optimize costs by focusing more on digital initiatives. They scale productivity with process mining, workflow automation, and bots driving operational efficiency. They use the savings to fund compensation increments.
• Offsetting labor costs: Accenture is focusing on offsetting higher labor costs by bringing down costs in other areas of offering, as its Q3 2021 report indicates. Although operating profit may take a hit in the short term, Accenture expects it to revive in the long term and it is aiming to achieve cost efficiencies thereon.
• Using stock as a financial performance incentive: Some organizations give high performers access to performance stock units to create long-term financial incentives that don’t immediately hit wages.
• Balancing wages: Some service providers focus on wage balancing by giving retention bonuses to high performers and offering performance-based incentives.
• Broadening benefits to include financial and non-financial incentives: A business process outsourcing (BPO) service provider focuses on acquiring digitally fluent talent and training them well. It also uses a “job family” compensation architecture plus an incentive-based compensation model, allowing for some non-linear pay mixes.
• Renegotiating contracts: When all else fails, service providers are initiating cost discussions during contract renegotiations and renewals on a client-by-client basis.
• Reapportioning expenses to high-cost areas: EXL highlighted specific areas wage inflation had impacted significantly: analytics, artificial intelligence, and digital technologies. It readjusted its spending by apportioning higher expenses in these areas and balanced this increase across other functional areas. It slowed adding headcount, indirectly saving costs. As Rohit Kapoor, CEO of EXL, mentioned in the company’s quarterly results, “One, when we create an industry solution, our ability to leverage that across multiple clients becomes far more scalable, and it certainly delinks completely the revenue growth from the headcount growth. The other piece is the ability to apply and leverage solutions from one industry to another industry is also becoming more and more prevalent and something that our clients can take advantage of, and we can be a lot more helpful to them with.”

Enterprises seek any and all solutions for counteracting cost increases while recognizing the inevitability of wage inflation

Running costs for manual operations are losing their attractiveness, prompting many clients that struggled to find funding to expand automation and other digital initiatives to revisit their options. Some clients react to rising costs by working with service providers to adjust contracts. All parties are making doubly sure to back any cost adjustments with data on wage inflation and COLA (cost of living adjustments) to augment the total cost of ownership.

Forward-thinking enterprise leaders take a proactive approach to retention by partnering with service providers to retain good talent. The Senior Director of Financial Operations from a global consumer package company mentioned that the company is working with their providers to support bonuses in turn for service provider staff, “We’ve got retention bonuses to our service provider’s employees this year—a sizable amount per person dependent on level to supplement their take home as we don’t want people to leave because of outside offers.”

Employees are not willing to settle for anything less than what they feel they deserve

Employees are the gainers in this entire equation, and they are using the talent crisis as an opportunity to access better career prospects. They know they are the backbone of every enterprise, and without them, there will be operational difficulties. Hence, they are taking advantage of this situation to seek opportunities that suit them the best without compromising on benefits such as work-life balance, higher pay structures, flexibility, specific job roles, more learning opportunities, and titles. We see high attrition rates globally in the IT and business process services industry, reaching 23.7% in Q4 2021 vs. 13.5% in Q4 2020.

The Bottom Line: If there was ever a time to focus on talent development, it is now!

Wage inflation and the talent drain in the IT and business process services challenge the industry’s core value proposition. Providing cheap talent at scale is no longer tenable; rather, organizations must focus on operating flawlessly by enabling business agility and retaining talent supporting these objectives.

Enterprises on their part need to acknowledge wage increases where justifiable and use the opportunity to invest in their existing talent and consider digital and digitization use cases to push forward smarter ways of working.

Wage inflation is just one of the barriers in the path – Organizations need to focus on the holistic well-being of talent to be able to achieve their retention goals. This includes (but is not limited to) more attractive and fun work environments, less hierarchical structures, good training programs, and a focus on employees’ health and wellbeing needs.