IT cos can earn by hiring more

NEW DELHI: The Indian IT industry’s business model is stuck in the linearity mode. Simply put, IT companies are stuck in a business model where they can earn more revenues only by employing more people. Though many IT companies have realised that it’s a big problem resulting in lower revenue per employee. Others think that linearity will continue as it’s in the nature of business.

Says Infosys HR head TV Mohandas Pai: “It’s in the nature of business where you make money by selling people’s time. The largest IT company in the world, IBM, has about 325,000 employees. The largest IT companies in India still have less than one lakh employees. Clearly there’s more headroom for growth.” However, IBM’s revenue with that headcount is around $90 billion and Indian companies do not come anywhere close in terms of revenues even if we extrapolate their headcount to IBM levels.

Infosys has about 76,000 employee strength as of June 30, 2007. It plans to hire about 26,000 employees this fiscal which may make it over one lakh plus employee company. TCS has about 95,000 employees, Wipro has 68,000 and Satyam’s headcount is about 40,000 employees.

Mid-cap industry players hold a different viewpoint. “Linearity between employees and revenues is an issue,” says 3i chief financial officer and executive director, Amar Chintopanth. “It’s clearly a challenge. One can break the linearity by moving towards more transaction based pricing. But this kind of model works better in software and BPO rather than IT maintenance services. One can build a combination of both transaction based and time and materials billing models. Innovative billing model will break the linearity.”

Very few Indian IT companies operate solely on product business which does not work on linear business models. Voice BPO commands a billing rate of $10-14 per hour. Programming commands rates close to $15-18 per hour which go up to $25 in some cases. Clearly, scaling headcount becomes the only way out for companies operating with such business models.

With increasing attrition and rising wage costs, smaller IT companies don’t want to follow business models of large players.

Birlasoft CFO K S Ananthanarayanan: “Run of the mill IT services is headcount dependent, and is getting commoditised. We don’t want to get into that rat race. Smaller companies should diversify into niche areas. As we move up the value chain, we command better billing rates and linearity starts to break away.”

Infosys’ Pai however says that his company has realised the issue. “We have consciously devised a strategy so that our revenue growth is much faster than employee growth. We also realigning our business by moving towards more valued added work like consulting and end-to-end enterprise solutions.”

Lower revenue per employee compared to global majors is another big complementary challenge. For instance, Accenture, earns almost thrice per employee compared to top Indian IT players. Accenture’s business model comes closest to Infosys and TCS.

The annual revenue earned per employee for Accenture stands at Rs 60 lakh, almost thrice what Infosys and TCS earned in FY ‘06. Now if we compare the king of search – Google’s revenue earned per employee, the figure comes to an astounding $10,82,746. Google has only 5,680 employees over revenues of $6.15 billion.

Wipro’s Sudip Nandy says that we can move from time and material contracts to fixed contracts which give better EBIT per employee. “We can also rejig our onsite employment. For instance, an onsite employee may be engaged only 70 per cent of the time working for a single customer. So, we can employ two onsite employees and make them work on three customers to generate more revenue per employee,” he adds.

Mastek’s founder Chairman Ashank Desai adds: “We have already started taking steps to achieve better revenue per employee. For instance, one of our Mastek’s traffic management IT deals (with city of London) commanded twice as much as the prevailing billing rates. We have to move towards either solutions or product based business models to achieve better revenue per employee.”

Employing more people in 1-3 years of experience is also an option before IT companies to earn more revenue per employee, though many companies rule that out due to loss in productivity. Clearly rupee appreciation is not the only challenge before IT exporters