IT: 'Non-linearity' is the way forward - Views on News from Equitymaster

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IT: 'Non-linearity' is the way forward

Dec 12, 2009

The Indian IT industry has been a place for the geeky software engineers writing thousands of lines of code for the clients sitting somewhere at an overseas location. Or it has been a place where cheerful looking youths sat and solved customer queries on phone. Most importantly, it ensured a pocketful of money. Basically, a good place to work! This kept the employees happy. Employers were happy as the clients were happy, bringing them more and more business. Result? Indian IT industry saw a stellar annual growth of over 25% for a decade now. But is this a sustainable growth? Let's figure out. In all this gung-ho the industry forgot a fact. In increasing the revenue base from Rs 36,400 in FY03 to 216,930 in FY09, Infosys had to increase its employee base from 15,356 to 104,859. In short

  • While the revenue base increased at an annual rate of 35% for Infosys in the last 7 years, its employee count increased at a higher rate of 38%.
  • For TCS the same figures stands at 31% and 33% respectively.

This is linearity. Veterans in Indian IT are op the opinion that non-linear business models are the need of the hour. Let's discuss what is non-linearity all about. When an IT company needs to hire more and more employees in order to increase its revenues, it is said to be growing linearly. Every increase in revenue mandates a proportional or higher increase in employee count.

On the other hand, things have been different at companies like Oracle Financial Services Software (OFSS or erstwhile IFlex), 3i Infotech and NIIT Technologies. While over the last 7 years OFSS grew its revenue by 30%, its employee base increased at a rate of 29%. For a smaller firm, NIIT Technologies, which grew at a rate of 15% over last 6 years, employee base grew at a mere 7% annually. This is called non-linearity in revenues. These companies managed to do more with less.

We agree that it makes common economic sense that in order to increase the scale of any business, one needs to put in more assets, more resources. In case of IT, it is the human resource. But we believe that Indian IT giants can no longer grow bigger just by deploying more headcount. This model is unsustainable. Like most of the other resources, quality manpower is also scarce and expensive. So how efficiently you use and reuse their effort is all that makes a difference.

At present only about 3 to 4% of the business that Indian IT companies is based on non-linear pricing. In the subsequent articles in this series we will discuss how Indian IT companies can move from linearity to non-linearity and what kind of impact the same can have on their businesses.

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1 Responses to "IT: 'Non-linearity' is the way forward"

Samant

Dec 13, 2009

While its true that the "in-fashion" thing for IT companies is do more with less.. however Infosys ,TCS etc are not able to do this not becoz they did not plan or try... merely becoz the "kind of software" that is being developed requires that kind of manpower...

NIIT might have achieved that on paper... HOW- see the quality of their software... see what happend with the CAT entrance exam project.. WHY.. becoz of the way this non-linearity is being tried to achieve.. Make employees SLOG for less..
result.. sub-standard quality of People and output..

Non-linearity can be achieved by providing specialised services like IT or business consulting , Result based revenues etc.. not by compromising on quality!


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