Software products: The next step? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Software products: The next step?

Jun 22, 2004

Raising salary levels has been one of the foremost initiatives taken by Indian software companies to ward-off rising competition for talent from MNC technology companies. Be it the second-largest software and services company, Infosys, or the largest provider of software products to the banking industry, i-flex, all have faced tremendous degree of pressure on their bottomlines due to the rise in employee costs during the past few years.

As indicated in the graphs above, cost per employee for software services firms, Infosys and Satyam have risen incessantly for the period FY00-FY03, only to fall marginally during FY04. However, not much should be read into this fall in cost per employee in FY04, as this was more a result of a substantial rise in the employee base (the denominator) than a fall in total employee costs (the numerator). For instance, in FY04, the number of employees for Infosys and Satyam grew YoY by 67% and 44% respectively. On the other hand, employee costs for the same period have increased at lower rates of 47% and 37% respectively. This slower rise in employee costs can be attributed to the fact that both these companies have hired a lot many freshers (with marginal or no experience) who come at lower incremental costs.

Now, when we compare these figures to that of i-flex, which is largely involved into software products (61% of FY04 revenues), cost per employee has risen in FY04 mainly due to the fact that the company saw a 67% rise in its employee costs, while growth in its employee base was relatively sedate at 28% YoY. This is indicative of the fact that, i-flex, being a relatively small company, will have to bear a greater pressure on its profitability than, say Infosys. Coming out of a regulation that barred its penetration into the US markets, i-flex is now spending heavily on setting up selling and marketing teams in that region, and this is putting a great deal of pressure on its bottomline. Employee costs as percent of revenues, which are although lower for i-flex, are rising faster than the software services majors (see above graphs).

That was on the cost front. Coming to the revenue per employee comparison, the above graph indicates that this figure for Infosys and Satyam have fallen during FY04, again due to a rapid expansion to the employee base. On the contrary, the figure for i-flex has been on a rise since FY02. The very fact that i-flex generates a majority of revenues from Flexcube, its core-banking product, has helped the company to earn higher incremental revenues per employee added. More simply, since product is not a linear business (where you earn more by putting more people to work, like in case of Infosys and Satyam), the revenue per employee for i-flex has risen as compared to the software services majors.

What needs to be done?
In the software services business, Indian companies historically have had a cost advantage over their Western competitors in markets like the US and Europe. However, the downturn in the US economy has forced these companies to trim billing rates to compete with Indian software companies. Since reducing billing rates became the foremost imperative, MNC tech companies started setting up bases in India in order to reduce costs. This has not only threatened Indian IT industry’s cost leadership, Indian software companies have also been made to face intense competition for talent. All these pressures mean lower or stagnant billing rates and higher employee costs going forward. This is likely to have a serious impact on the operating margins of software services companies like Infosys and Satyam and, consequently, their profitability.

Now, to pare the pressure arising due to the abovementioned factors, what Indian software companies are doing is moving rapidly up the value chain and providing high-end services. Apart from this, Indian companies have embarked on a rapid expansion of employee base, in order to garner higher volumes. However, initiatives on the products front seem to be lacking pace. It must be noted that, apart from being at the higher end of the value chain, products help in paring margin pressure as revenues from them flow straight to the bottomline after the recovery of costs incurred to produce them, brand them and sell them.

Except i-flex, there is no other Indian software company that has made a mark in the global arena through its product offerings. Aggressiveness on the products front may be the need of the hour for Indian software companies, as it will help them reduce pressure on the margins front and also help them in improving employee productivity.

Equitymaster requests your view! Post a comment on "Software products: The next step?". Click here!


More Views on News

If You had Invested Rs 1 Lakh in TCS in 2011, this is how Much You Would have Today (Views On News)

Nov 30, 2021

Did TCS perform better than the market and its peers?

India's Top 4 IT Companies are Struggling. Here's Why... (Views On News)

Oct 22, 2021

As attrition rates are unbelievably high, top Indian IT companies are going for big-ticket raises, and much more hiring this year.

Infosys had an Exceptional Quarter Buoyed by Huge Deal Wins. Revenue Guidance Boosts Stock (Views On News)

Oct 14, 2021

Infosys raised its forecast for annual revenue growth to 16.5-17.5% from the earlier 14-16%, predicted in July 2021.

Info Edge: The Anatomy of an Indian Internet Behemoth (Views On News)

Oct 2, 2021

Info Edge is very popular in the Indian startup ecosystem due to its active participation in funding events.

This Indian Company is Tapping into the Huge Autonomous Driving Opportunity (Views On News)

Sep 14, 2021

Despite many challenges, Indian companies and startups have not shied away from entering this space.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 3, 2021 (Close)