Summary
Employee attrition rate is a key metric for any company considering doing business with Indian-based providers of IT outsourcing. HCL Technologies has brought this core metric down by putting the employee first, not the customer.

Analysis
Many Indian-based providers of IT outsourcing have an employee attrition rate of over 25 percent. Even best-in-class companies have a rate between 10 and 14 percent. This should not be surprising. A gold rush is going on and many of these companies are growing at over 25 percent per year. They are hiring thousands of new workers per year, creating a serious shortage of experienced workers. This is putting upward pressure on wages, as well as leading many employees to jump ship when more attractive offers come along. Indian companies do use ‘bonds,” similar to US non-compete contracts. But, these are frequently non-enforceable.

The higher the attrition rate, the more likely that a customer of an off-shore services provider will experience poor service. Poor service is more likely to occur when green recruits replace more experienced personnel, but it can occur even when the replacement is an experienced IT worker. Part of serving a customer is understanding the customer’s culture and way of doing business, and this always takes time.

Put the Employee First!
HCL Technologies had an event for industry analysts in Boston last week. HCL’s president talked about the ongoing corporate transformation that began in 2005. One core piece of the transformation was to put employees first, not customers. Offshore IT providers are part of a service industry. Other companies operating in service industries, like Southwest Airlines in the airline industry, have discovered that if you want to treat customers better, you have to treat your employees better. If the employee is un-happy, he or she is less likely to treat the customer well.

HCL instituted a series of things to become an “employee first” company. One idea is that employees who are unhappy about something, for example, the air conditioner is not working, my bonus was not paid, and so forth, can open a service ticket. The employee writes comments on a shared portal. The ticket is routed to a manager for resolution. The tickets are only closed when the employee says they are closed.

The company has other employee feedback mechanisms including internal blogs and the ability for employees to post questions for the President. The President answers 150 questions per week, and the answers are posted on a portal. Similarly, before completing a policy change, employees are polled.

Getting employee feedback from these various mechanisms does not mean that all employee wishes and desires are fulfilled. But a core concept is that even if a manager decides that they cannot fulfill a request, the reason must be clearly explained. One example of this is that some employees posted questions on why HCL did not provide free bus transportation for employees, like other Indian Outsource Providers. The company’s answer was that the policy would not change. Top management did not feel that it was fair to subsidize some employees and not others who would not use the buses. In another instance, top management proposed not giving employees gifts at Divali (India’s version of Christmas and New Year rolled into one holiday) but instead giving the money to the employee’s charity of choice. A blizzard of employee feedback against the idea caused the company to back off that idea fairly quickly.

Wages and bonuses can also be a source of dissatisfaction. The company has moved away from a variable pay structure, where a fairly substantial portion of total compensation is performance-based bonuses. They have moved to a flat salary for 85 percent of the employees. HCL felt that many of the bonus parameters were outside of the control of employees and were thus unfair. The company will eventually move back to variable pay in about two years time, but only after they can measure the value employees create for customers in a better way.

An employee’s relationship with their boss is probably the core source of dissatisfaction for many. HCL has tackled this in two primary ways. First, you can’t become a manager until you have passed a series of courses in areas, like presentation skills, negotiation skills, and “expectation management”, which involve dealing with the expectations of both employees and customers. Secondly, and far bolder, the company employs 360 degree job evaluation reviews for all managers, including the President. Every employee rates their boss, their bosses boss, and any three other company managers they choose, on 18 questions using a 1 to 5 scale. All results are posted online for every employee to see.

Employees are also likely to feel better about their job if they are better at the job. All the Indian IT outsourcing companies devote a lot of time and effort to training new employees, as well as expecting training and education to be something that continues to occur over an employee’s whole career. In fact, some of these company’s have work environments that resemble a plush college campus more than a place of business. Companies, like Infosys, arguably do this as well as any company in the world. HCL, though, is also pursuing a very interesting tactic. They are hiring employees in their third year of engineering school and training them in their fourth year of college. Thus, the new employees will be better at coming up to speed when they actually join the company.

This all sounds great, but has all this touchy feely stuff really worked? The attrition rate was 26 percent a year and a half ago. It has dropped to 16 percent. This is still not in the best-in-class range for Indian IT outsourcing companies, but it is getting close.

When you drill into these numbers the results show that new employees, those that have been with the company less than three years, are staying at higher rates, and employees that have been at the company for five plus years have an attrition rate of less than 5 percent per year. It is the group of employees that have been at the company for 3 to 5 years that are still leaving at higher than acceptable levels. Those employees are finding the new HCL is not the same company they joined, or they would have joined. The attrition rate should continue to drop as this segment of workers self selects out, and the new hires who come on board have selected HCL because the culture (both employee first and the company’s stated intention of providing higher margin value added services) fits their needs.

In summary, on one core metric of great interest to potential clients, the company has improved its competitiveness by moving to an employee first strategy. This is likely to be a hard strategy for their competitors to match. How many companies will have the guts to do 360 degree publicly posted reviews of all managers?