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How do IT cos. treat their assets?

Sep 2, 2009

"Our core corporate assets walk out every evening. It is our duty to make sure that these assets return the next morning, mentally and physically enthusiastic and energetic." This is what Mr Narayan Murthy, Chairman and Chief mentor of Infosys Technologies, once said about his company's employees. We can't agree more with him, as employees are indeed the most important assets for any human-intensive business, like IT products and services. No doubt, companies in the IT sector spend a lot of money in form of employee costs to keep their core assets coming back to them!

As a general trend, as the business grows, so do the revenues and employee headcount and associated costs. This is no rocket science. Over the years, Indian IT companies have also seen significant rise in employee count, in pay-scales and employee costs. Employee cost, which includes basic salary, other benefits, and employment taxes, forms the most important component of cost for the IT industry.

If employees are considered assets, a metric like revenue per employee (RPE) is as good as analysing human asset turnover for an IT company. It may be noted that asset turnover is one of the criteria to measure firm's efficiency at using its assets in generating sales or revenue. The higher the number the better.

Given the fact, we analysed the trend in RPE and cost per employee for India's biggest IT companies, TCS and Infosys for the past 7 years. The results look quite interesting.

  • RPE for TCS is higher than Infosys. Revenues or sales for an IT service provider depends on billing rates, utilisation rates and onsite-offshore effort mix. Employee count for TCS has been historically higher than that for Infosys. While the billing rates and employee utilisation figures for the two companies are more or less similar for same kind of service-offerings, TCS has a larger chunk of onsite services (over 51%, as compared to Infosys' 48%), and since billing rates are higher at onsite as compared to offshore, TCS scores higher on the RPE parameter.

  • Total Cost per employee (TCPE) for TCS is higher than Infosys. Despite a higher percentage of employee cost to sales, the overall cost structure for Infosys is lower than that for TCS. This is on account of the former's higher overall operational efficiency which reflects from its lower sales and marketing cost and other general expenses.

    Infosys's onsite-offshore effort mix also allows it to enjoy better margins. Moreover, TCS draws about 44% of its revenues from 'fixed price' projects and rest from 'time and material' types. During the past five years, Infosys generated on an average around 32% of its revenues from fixed-price projects. Fixed price projects which bear the risk of cost overruns, time overruns and wage inflation, have an impact on the cost structure of the company.

  • Employee Cost per employee (ECPE) is higher for Infosys. Though in absolute terms, TCS spends more on employee cost every year, given its larger employee base it has a lower ECPE. For over past seven years, Infosys has been spending on an average 71% of its total cost or 46% of its revenues as employee cost. The same for TCS has stood at around 58% and 43% respectively. It can be thereby be inferred that, on an average, Infosys pays higher compensations to its employees than TCS.

    Source: Company reports, Equitymaster Research

  • Net profit per employee (NPPE) is higher for Infosys. Over years, Infosys has been the most profitable Indian IT company in terms of net profit margins (average 26% over the past seven years) on account of better operational efficiencies. TCS has an average net profit margin of around 21% during this period, which can be attributed to its higher onsite presence where overall costs are higher.

Mr. Narayana Murthy goes on to say that "Our respect for our professionals can be summed up from our belief that the market capitalisation of Infosys becomes zero after working hours end at 5 p.m., no matter what it was during the day."

The above trend confirm the fact that Indian IT majors are investing a decent sum of money on their core asset i.e., human capital. A productive, dedicated and skilled employee base results in better products and services and thereby more revenues. The numbers look decent for Indian players. But there is a lot to catch up, as the revenue per employee for Indian firms (around Rs 2 m) is far less as compared to global players like Microsoft, IBM and HP which have average RPE of about Rs 30 m, Rs 17 m and Rs 12 m respectively.

Understandably, the business model for the US giants is significantly different from our domestic MNCs, but still Indian numbers are far from impressive. There is plenty of scope to improve productivity.

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2 Responses to "How do IT cos. treat their assets?"

Vikram Amaranath

Sep 8, 2009

I am unable to understand as to how the RPE figures of IBM globally denote productivity per se. This is driven more by the high cost economy in the west than value driven.

Pl. remember that it is because of such high costs that offshoring has gained so much of an impetus. Why are companies such as IBM and Accenture moving such large chunks of work overseas if their productivity of local offices in the US is so high as their RPE suggests?

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Harish Prabhu

Sep 3, 2009

Are the NPPE numbers for IBM,etc. adjusted for the revenue of those companies from products and royalties from patents,etc.?

If they are not, then this comparison is not correct.

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