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…
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…
*Calculated as per Lev & Schwartz model (Source: Annual Reports)
|Number of employees
|Value of human-resources (Rs bn)* (A)
|Software revenue (Rs bn)
|Employee cost (Rs bn)
|Total software revenue/human-resource value (%)
|Value of human-resources/employee (Rs m)
|Employee cost/human-resource value (%)
|Return on human-resources value (%)
|Per share value of human resources (Rs)**
**(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.
More Views on News
Aug 2, 2017
A better than expected turnaround in performance results in a change in view.
Jul 27, 2017
Digital services drive growth for Wipro in 1QFY18.
Jul 14, 2017
Infosys starts FY18 on an encouraging note with a stable performance.
Aug 5, 2017
How to get exclusive insider recommendations from Ankit Shah.
Jul 14, 2017
TCS starts FY18 decently despite an adverse currency impact.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407