Indian IT: Cushion of non-linear growth - Views on News from Equitymaster

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Indian IT: Cushion of non-linear growth

Dec 17, 2009

Mr. Narayana Murthy, the founder and chief mentor of Infosys, India's largest IT company (by market capitalisation) has to say the following about his employees - "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 pm, no matter what it was during the day." Who else can sum up the importance of human capital for IT industry better than this?

Human asset is indeed the most critical resource here. It is abundant in India. But is it utilised in the most efficient way? We doubt. The revenue per employee (RPE) for Indian IT firms stands at around Rs 2 m per annum. It is far less as compared to global players like Microsoft, IBM and HP which have average RPE of over Rs 15 m.

In the previous article of this series, we had discussed how IT companies can go non-linear through product innovations. Mergers and acquisitions is also a smart way of achieving non-linearity. This article explores some more ways of going non-linear.

Another adjustment in the business model is to shift focus towards higher-end value added services. This includes IT consulting, infrastructure management, and business intelligence. These premium services are great recipes for non-linear growth. It appears that companies like TCS, Infosys and Wipro have realised this fact.

For instance, Infosys recently declared that it will be focusing on high-end design for the auto engineering segment rather than mundane application development work. Reason? Premium services earn companies better margins. Moreover, this also ensures lower client churning. The client begins to see IT vendors as strategic partners and not just IT back-offices. This results in an ensured stream of huge revenues follows. The huge size and brand-name achieved by global high-end IT service providers like Accenture, Deloitte and HP is a testimony to this fact. It is high time Indian IT companies also try to replicate their success stories in this space.

Even the demand environment is changing. Today, most customers prefer on-demand service delivery. They want to cut cost and no longer demand dedicated teams. So now IT vendors can follow a shared services business model. Here the fungible resources can be simultaneously used across multiple industry verticals and clients. This can bring the total employee count requirement down by 20 to 30% in some cases.

Another way to achieve non-linear growth is on-demand hiring. IT companies are habitual of keeping a lot of employees 'on-bench'. These employees are the ones who are not working on any project. They are available to be deployed if any new project crops up suddenly. Is this the best way of managing one's supply chain? We doubt! Employee base looks inflated, and money is spent on training the employees who are not involved in any revenue generating activity.

Instead of having large benches, companies can consider on-demand hiring i.e., hiring as and when the need arises. They should retain their existing good employees by ensuring good salaries and bonuses or even profit sharing. This can boost employee morale and curve attrition.

In this series of articles, we discussed various ways in which Indian IT companies can grow without becoming obese with headcount. However, we reiterate that it is not an easy nut to crack. It will take a lot of time and effort and most importantly a lot of thinking on part of these companies. We know that currently only about 3 to 4% of the business that Indian IT companies do is based on non-linear pricing. So a big change is required in the mindset.

We also want to highlight that evidences show that it might be easier for mid- and small size companies to shift to non-linearity faster. IT biggies like TCS, Infosys and Wipro can do this only gradually. However, at their stature they are well placed to take small steps towards the same.

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