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Software: It’s all about people! - Views on News from Equitymaster
 
 
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  • Jul 7, 2003

    Software: It’s all about people!

    ‘To be successful in business, you need to do people management. And then if you have time, you do business management,’ goes the saying. This saying gains much importance when it comes to the Information Technology (IT) industry. People are the most vital source for the IT industry. In fact, the success or failure of the organization is directly linked to the talent that it is able to attract, retain and engage. In this article, we bring to light the importance of people in the IT industry and the value they help create.

    Indian software companies have increasingly begun to realize that leveraging the power of knowledge (read human capital) is critical to achieving competitive differentiation. And with these companies moving fast high up the software value chain, the need to attract and retain talent gains greater importance. Investment in quality human resource is far more critical for a software services company than its investments in its marketing and distribution channel. While we are not denouncing the importance of the latter, it is just a relative differentiation.

    Growing employee strength…
      FY00 FY01 Change FY02 Change FY03 Change
    Infosys 5,389 9,831 82.4% 10,738 9.2% 15,356 43.0%
    Satyam 5,067 8,370 65.2% 8,634 3.2% 9,759 13.0%

    While it is true that more employees mean more revenues, it is not all that easy. Consider the growth in number of employees for both Infosys and Satyam from the table above. Few companies, like Infosys, manage to grow with sustenance in line with the growth in the number of their employees. After a particular level, an increase in employees requires corresponding growth in infrastructure and systems that companies need to put in place.

    Despite of human resource holding such great importance to the success or failure in knowledge-driven companies like those in the IT sector, assessing the real value of human-assets is not given that much importance. However, few companies like Infosys and Satyam have realized this fact and are accounting for the value of their human resource.

    These two companies use the Lev and Schwartz model to compute the value of their human resource. As per this model, value of human resource is the present value of future earnings of the employees. As per this model, employee compensation includes all direct and indirect benefits earned by employees both in India and abroad. Also, the incremental earnings based on the age of employees are considered. For the purpose of calculating the present value, the discounting factor used is the company’s weighted average cost of capital (weighted average of cost of equity plus cost of debt)

    Valuing human resource…
    Parameter Infosys Satyam
    Number of employees 15,356 9,759
    Value of human-resources (Rs bn)* (A) 104 82
    Software revenue (Rs bn) 36 20
    Employee cost (Rs bn) 17 10
    Total software revenue/human-resource value (%) 34.8% 24.6%
    Value of human-resources/employee (Rs m) 7 8
    Employee cost/human-resource value (%) 16.1% 11.9%
    Return on human-resources value (%) 9.2% 3.7%
    Per share value of human resources (Rs)** 1,574 262
    *Calculated as per Lev & Schwartz model (Source: Annual Reports)
    **(A) upon number of shares

    A look at the table above highlights the importance of valuing human resource. Just the one parameter, the ‘Return on human-resource value’ differentiates the contribution that people make for Infosys than for Satyam. Again, this is not denouncing the value that people create at Satyam. The analysis done above is just a way to project how companies like Infosys are able to garner returns on its investments in human resource and what major role people can play in the growth of such companies going forward.

    Investors in Indian IT companies, thus, need to consider the quality of talent that these companies possess and the ways and means used by them (the IT companies) to attract, retain and engage their source of sustainable competitive advantage – the human resource.

     

     

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