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Why higher notice period is a threat for the Indian IT Industry

Why higher notice period is a threat for the Indian IT Industry
August 19, 2021

Many IT firms are becoming more stringent with departing employees, requiring them to complete the whole notice period to ensure that a sudden staff shortfall does not disrupt business operations. When an employee joins one of these companies, they commit to offering 90 days' notice period but sometimes, they will be relieved of all tasks if their boss agrees to dismiss them early.

IT companies face severe risks to their businesses if skilled employees leave abruptly. According to HR experts, IT companies whose revenues are primarily based on projects  and resource billing from clients with a time-bound delivery face severe risks to their businesses if skilled employees leave abruptly.


Why was the 90 day notice period introduced?

It all started in early 2000 for some companies for people in charge of people and projects ( project manager, program manager, delivery manager etc.). Why? We believe it is because they are all critical components of the system that ensures the project is completed on time and to the satisfaction of the consumers.

There is typically a slowdown when such important members leave. Many firms have implemented a 90-day notice term for critical roles and a 60-day notice period for non-critical ones. This aided them in various ways, including allowing them to hire and onboard within 90 days.


Is the extended notice period effective?

The extended notice period scheme fails to perform at many levels. Some of them are the following:


Drop in employee productivity:

An employee who is leaving has little desire to contribute to the company. Even the most conscientious employees will only contribute productively for a month or so before losing interest. Employees might be a source of distraction for other current employees during their notice periods.


Influences peer departure:

Most departing employees will divulge their new remuneration package (typically a 25-50 per cent hike). As a result, the departing employee's new 'hiked' salary range serves as a new salary benchmark for the others. More extended notice periods unwittingly provide outgoing employees more time to influence other colleagues as more employees become inclined to seek greener pastures.


Psychological impact:

Most employees on notice try to persuade others that their decision to quit is the right one and that the current firm or role is not the perfect fit for them. In doing so, they unwittingly or purposefully draw attention to the shortcomings of the current organisation. Furthermore, if any retention attempts are made, they tend to exaggerate to other employees, which lowers morale and allows them to use resignation as a strategy. The psychological repercussions are a greater risk to the company and are not worth taking.


Imbalance in hiring cost:

Last-minute back-outs, by the way, cause the recruiter to prioritise prospects who are currently on notice and can start within the next 3-4 weeks. This means a position that could have been filled by offering a candidate a 25-30% raise over his existing wage is instead filled by providing an extra 20-30% raise on top of his current offer.


What is the financial threat of the extended notice period to the IT industry?

 ●    We'll take the example of a 3-month notice time for an IT services company, such as TCS, Accenture, IBM etc, instead of the standard 2-week notice period for IT services in the matured economies like United States, EU, and Singapore etc.

●    Cost of unproductive time on average: During the notice period, the average time spent unproductively is ten weeks out of a total of 12 weeks.

●    Assuming a salary of Rs 12 lakh, the cost of unproductive time is Rs 12,00,000 X 10/52 (number of weeks in a year) = Rs 2.3 lakhs/employee for the company. Imagine if 100 employee resigns in an year it cost a loss of  around Rs 23 Million  to a company


Job changes set off a chain reaction, and market figures for all employers tend to rise. This sets a striking example for other employees, especially since the departing employee has three months to guarantee that their good fortune is widely publicised.


Hike in Bench Cost

Business choices are made much more quickly now than they were a decade ago. All players are now required to carry a considerable bench strength to compete, win, and deliver projects, as a three-month hiring wait is no longer acceptable and they are forced to keep bench resources which is another loss and reduces profitability. 5% bench resources will cost another loss of 5% of profitability. For a 500 employee company it may cost a loss of upto Rs 30 Million  in an year.


Increased notice periods are responsible for 50% of this bench strength. TCS's outlay increased by 25000 x 12 lakh = Rs 3 Billion, assuming an average wage of Rs 12 lakh. Every IT services provider can apply the same calculations. India's IT services sector alone employs around 5  million workers, resulting in a $4 billion rise in costs.


Typically, such a bench would consist of 5-10% of the company's workforce. India's IT services sector alone employs  around 5 million people, resulting in massive indirect expenditures (indirect costs such as payroll, engagement, training, management, and seat costs would be over and above this).


Other business and economic losses include:

●    Given that just 1 out of every 2/3 candidates who accept the offer joins, the recruitment effort should be multiplied many times.

●    Loss of regularity in project staffing eventually leads to a loss of reputation for the organisation and the country (contrast this with a two-week notice in the US, UK or Singapore).


In short, the outmoded concept of an extended notice period costs large IT services organisations at least $400-600 million each year in hidden costs. Similarly, India's IT services business is expected to lose $5-6 billion every year.


Final thoughts

In an ideal world, there is no reason for Indian enterprises to require a 90-day notice period. The same companies with a 90-day notice period expect candidates to start in a few weeks, which doesn't add up. It is crucial for industry organisations and individual players to go back to the drawing board and rethink the current notice period laws.


All companies in developed economies such as the United States, the United Kingdom, Europe, and Singapore have relatively reasonable 2 to 4 week notice periods and are nevertheless competitive and efficient. In reality, the short notice time has allowed them to plan the transition, recruitment, training, and onboarding more efficiently. The hike in the cost of resources has resulted in inflation and ultimately degraded the supremacy of the Indian IT Industry. We must evolve, Let's make the notice time shorter!



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