For a long time, IT companies hadn’t enforced cost of living adjustments (COLA) because inflation rates remained relatively low. This situation changed when inflation rates surged, putting companies under considerable pressure. They found themselves grappling with higher salaries, especially in India, but were unable to pass on these extra costs to their clients.Sometimes clients believe that they are paying a fair price and would resist price increases.
For some time now, the inclusion of COLA clauses in contracts has become a common practice in the industry. These clauses allow companies to adjust their fees based on changes in the cost of living, ensuring that they can maintain their profitability and continue to provide quality services to their clients without bearing the full burden of inflation-driven expenses.
At Cognizant, for instance, a cost-of-living adjustment was applied to the compensation of each of their employees residing in a jurisdiction other than its CEO Ravi Kumar’s principal work location (the United States) to adjust the compensation of such employees to the jurisdiction of Mr Kumar’s principal work location. Each such cost-of-living index, including that for India, the location of the worldwide median employee, was used to adjust the applicable compensation of employees to the cost-of-living index for the United States. All cost-of-living indexes used were as published by cost-of-living databases provider Numbeo.com for 2023, Cognizant said in its proxy filing.
Peter Bendor-Samuel, CEO of IT research advisory Everest Group, said, “COLA is historically a significant source of profit for the IT firms. It is not shared with employees and is used to support earnings. As market conditions have tightened, it is harder for firms to get COLA into contracts, but where they can, they work hard to ensure that they are in place as they help profitability.”
Stanton Jones, distinguished analyst at ISG, said the cost-of-living adjustments were not added to IT services contracts for many years because inflation was low. “However, when inflation spiked, it put a lot of pressure on firms as salaries rose (especially in India) but they were unable to pass these costs on to clients. It’s now regular practice to include these clauses in contracts.”
Bendor-Samuel said wage increases for employees are driven by local market conditions and are not connected to COLA adjustments. “COLA is only indirectly linked to wage increases because wage inflation will allow for COLA adjustments. However, if a firm can make COLA adjustments but not increase wages, they will do that. But if there is significant wage inflation, then the COLA provisions will activate. Again, it is becoming harder to get COLA into new contracts as firms are looking for price decreases in the current market.”
Jones said in terms of COLA, it’s an index used in multi-year outsourcing relationships to make sure prices for managed services (or rate cards) are aligned with the impact of inflation on operating costs. “Wages are an important part of the operating cost for a provider, but not the only one. Also important to keep in mind that enterprises generally do not have visibility into the specific or even aggregate level of compensation of their provider teams,” he added.