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| Techies at work:
Worryingly, productivity per employee is declining. But baby
steps to reinvention has begun |
It's a rather
windy January morning in Bangalore, with a slight nip in the air.
But inside the glass-and-chrome Corporate Block's J.R.D. Tata Auditorium,
on Infosys Technologies' manicured campus on the city's outskirts,
it's all smiles and sunshine as Nandan Mohan Nilekani, the company's
51-year-old CEO & MD, takes centrestage to enact what has become
the most awaited quarterly spectacle in the it industry: Announcement
of the tech giant's quarterly results. Once again-as for almost
16 quarters since the tech winter of 2002-Nilekani is wearing a
broad smile. It has been yet another stellar quarter. Infosys has
clocked 45 per cent growth in revenue in the October-December quarter
compared to the same period the previous year. The bottom line has
performed even better; it has surged a staggering 51.5 per cent
to Rs 983 crore. And things look so good, Nilekani says, that the
company is revising full-year guidance upwards-it will hit the $3-billion
(Rs 13,500-crore) mark in revenues come end of March this year,
and if it continues at the same pace of growth by April 2009, it
will be $6-billion (Rs 27,000-crore) big.
 |
| HCL Tech: It believes
that the top IT companies offer more or less the same proposition.
Hence, a differentiated strategy is vital. Shiv Nadar/ Chairman
& CEO |
A couple of days later in Mumbai, the usually phlegmatic
CEO and MD of India's largest it company, Tata Consultancy Services
(TCS), Subramanian Ramadorai, 62, is all smiles too, as he announces
his company's quarterly numbers. TCS becomes the first Indian
it company to hit the billion-dollar revenue mark in a single
quarter. Its revenues for the third quarter are up 41 per cent
and net profit by 45 per cent. Back in Bangalore, the third company
that completes the ruling triumvirate of Indian it, Wipro, announces
equally spectacular results: Revenues are up 45 per cent and the
bottom line, 41 per cent.
As is evident, things couldn't be better with Indian
it. According to Nasscom, the industry lobby, Indian it exports
(including it-enabled services, ITEs) will touch $29.4 billion
(Rs 1,32,300 crore)-a 26 per cent growth over 2005-06. And if
this trend continues, the industry may well rake in $60 billion
(Rs 2,70,000 crore) by 2010-a number considered very ambitious
when a Nasscom-McKinsey report first talked about it in 2005.
"Barring a geo-political seismic shock or totally unforeseen
event, the Indian it industry will coast comfortably at close
to 30 per cent growth rates for the next three years at least,"
declares Sudip Nandy, Chief Strategy Office, Wipro.
THE VALUE BOOSTERS
10 things Indian IT vendors need
to do to improve revenues and profits per employee.
|
| Focus on Consulting: Derive
greater portion of income from Consulting, which generates
higher margins. At present Tier-I Indian companies derive
anywhere between 5-8 per cent of their revenues from consulting.
Target Specific Verticals: Grow verticals
like IMS, SI and Retail which are not just revenue but margin
accretive as opposed to verticals like testing and ADM.
Offer Productised Services: Offer productised
services in the areas of say web security or hosting. Doing
so spreads development costs over a number of customers.
Build Frameworks: These could be easily
customisable off- the-shelf packages, which ensure that
one need not reinvent the wheel again and again.
Develop Layered Applications: Piggyback
on enterprise software sellers like a SAP, Oracle, Microsoft
to develop add-ons and value-added applications.
Think Service-oriented Architecture: Wherever
possible opt for SoA as opposed to object oriented architecture,
as this enables one not to be tied to a particular technology.
However, customers must agree to it.
Invest in Innovation: Move away from
commodity play. Create IP. Generate licensing revenues that
will add to the top line year after year.
Move from offshore to 'bestshore': Recognise
that India does not have a monopoly on talent. Explore other
low-cost destinations like China, Vietnam, and East Europe.
Go ToS: Win more of the Total Outsourcing
Solutions contracts, where margins can be better controlled.
Invest in Training: It is a people's
business at the end of the day. So upgrade the skillsets
of your employees and also invest in enlarging the talent
pool itself. |
So, why is Business Today hell-bent on playing spoilsport by
talking about a need to reinvent Indian it? Because, impressive
as the numbers are (the industry's compounded annual growth rate
for the last five years works out to 26 per cent), they don't
tell the whole story. Look at the bar charts on the previous spread
and this one. They tell you a story: Of how the Tier-I players
have been unable to delink revenue from headcount-revenues go
up in proportion to the number of software engineers added. More
worryingly, productivity, as measured by revenue and net profit
per employee, has been declining-yes, declining-over the last
five years for all the Tier-I companies. For instance, Wipro's
revenue per employee has dropped from Rs 36.28 lakh to Rs 19.95
lakh and net profit from Rs 9.20 lakh to Rs 3.88 lakh in that
period. In the case of Infosys, per-employee revenues have dropped
from Rs 24.25 lakh to Rs 18.06 lakh, and earnings from Rs 7.52
lakh to Rs 4.66 lakh (See Revenues and Headcount...).
 |
| WIPRO: The tech
giant has developed frameworks for verticals that are easily
customisable, off-the-shelf packages. Azim Premji/ Chairman
& CEO |
 |
| INFOSYS: It has
invested more than Rs 90 crore to jump-start its consulting
arm, which will give it access to senior client executives.
Nandan Nilekani/CEO & MD |
Sure, the surge in headcount is partly due to an
aggressive ramp up of BPO business at most Tier-I companies, but,
still, the problem with this sort of growth is obvious: One, it
is inefficient and, two, should a downturn occur, the impact will
be worse, since not only will it mean loss of productivity due
to 'benching' but actually a loss, since the salaries would still
need to be paid. There's a third problem with this model: It assumes
that the supply of cheap and skilled labour is endless. But as
the IT companies are already discovering, that is far from the
case. A country of a billion-plus people does not translate into
annual supply of 500,000, 200,000 or even 100,000 highly-skilled
software engineers.
A Risky Game
Alarm bells in the industry have been ringing for
about two years now, starting with a Nasscom-McKinsey study projecting
a shortfall of 500,000 knowledge workers by 2010. With the industry
growing at a pace faster than originally predicted, the shortfall-in
view of the new demand projections-has widened. Says T. V. Mohandas
Pai, Director and Head (HR) of Infosys: "Getting business
is not the biggest challenge. Attracting and retaining talent
is." Also, unlike in the past, Indian it industry for the
first time has had to compete for the best talent with other sectors
like telecom and retail, which have been experiencing explosive
growth.
Siddharth 'Sid' Pai, a partner and head of the
Indian operations at TPI, a sourcing advisory solutions company,
echoes Pai's concerns. Being a consultant who plays the matchmaker
between global companies wanting to outsource it and Indian vendors,
Pai gets to keep a finger on the industry pulse. And he believes
that India's it majors should start worrying. "Indian it
companies started life as body shoppers (literally, hiring out
'techno coolies'), evolved into the much celebrated Global Delivery
Model, but will now have to reinvent themselves," he says.
To support his argument, Pai points to one practical problem the
IT biggies are likely to run into: of having to manage a workforce
of more than 100,000 in the near future. "There will come
a tipping point-though nobody knows when exactly-when handling
scale itself will become an issue," notes Pai. "The
time for Indian it companies to reinvent is now, when everything
is going well."
How do the global it giants such as IBM and Accenture
manage their vast workforce (IBM Global Services employs 190,000
people and Accenture 133,000)? Presumably, with great difficulty
and skill. But there's an important difference between them and
their Indian competitors. Their workforce is far more productive
and profitable. Wipro's Nandy points out that the earnings before
interest and tax (EBIT) per employee is in the low-to-mid $20,000
(Rs 9 lakh). "In contrast, the EBIT per employee for TCS,
Wipro and Infosys ranges from $10,000 to $12,000 (Rs 4.5-5.4 lakh).
We need to get this right," he says.
Vineet Nayar, President of HCL Technolgies, agrees
that things need to be improved. He says that there is very little
to differentiate the top 10-20 Indian it companies, since every
one has some sort of CMM level 5 certification and thousands of
employees doing the same cost-based work. While that may have
been a source of advantage some years ago, it is no longer the
case. Why? Because the global it giants-IBM, Accenture, EDs, CapGemini,
and Perot Systems-themselves have set up back offices in India.
As a result, a large chunk of the outsourced it market has become
commoditised, especially after the advent of concepts such as
service-oriented architecture and software as a service. In fact,
the process of application development itself has become highly
automated. "Indian companies will have to evolve a differentiated
strategy to stay competitive in this market," says Nayar.
THE KILLER COST: TRAINING
Vendors spend a fortune every
year on skilling and re-skilling their techies. |
 |
| Infosys' Mysore Institute:
A monument to its people |
Infosys spends a whopping $145 million (Rs 652.5 crore) a year
on training its fresh recruits and upgrading the skills of
existing employees, according to Mohan Das Pai, HR head of
the company. Satyam's CFO Srinivas Vadlamani says his company
will be spending $80 million (Rs 360 crore) in the current
year on employee training. Ditto TCS, Wipro, Tech Mahindra
and HCL.
Why does training need such eye-popping budgets? One reason
is the ever-changing technology environment, which means
companies need to keep making on-going investments in upgrading
the skills of their employees and keeping them up to date.
More important is the second reason, which Infosys Chairman
N.R. Narayana Murthy pointed to recently when he said that
"about 75 per cent of India's 4 lakh-plus engineers
are unemployable."
Such is the crisis that companies are being forced to
look beyond engineers to meet their manpower requirements.
TCS, for instance, has hired science graduates, who will
be put through an eight-month intensive training before
they are put to work. Pai of Infosys says that because of
inadequacies in the education system companies are being
forced to foot the bill of manpower training.
A Nasscom-McKinsey report has indicated that the country
would suffer from a shortage of 5 lakh knowledge workers
by 2010. With the IT industry hiring more than a lakh of
people this year alone, companies will be faced with ever
mounting training bills, unless flaws in the education system
are addressed. While most of the IT companies are working
with universities and colleges to rectify this, they are
scared of the bureaucratic maze within the education system,
not to mention the various lobbies within it.
Some of them are, therefore, looking at alternate models
to mitigate the manpower shortage. Says Sudip Nandy, Chief
Strategy Officer of Wipro: "As global proponents of
outsourcing, we have to examine whether Indian IT companies
can look at outsourcing their own training." NIIT already
offers a customised training package in association with
ICICI Bank for entry-level jobs in the financial services
industry. This is how it works: Anyone who meets certain
criterion can sign up for the training and upon completion,
apply for a job in the industry (currently, only ICICI Bank).
"What this also does," says Nandy, "is to
transfer the burden of training cost from the company to
the prospective employee. This is a good model and I think
all of us will have to seriously examine it."
|
The Game Changes
 |
TCS: India's biggest,
this vendor has productised some of its service offerings,
allowing it to customise them at no great extra effort or
cost
S. Ramadorai/ CEO & MD |
It is evident that Indian players recognise the
need to change and, in fact, have taken some steps towards moving
to, what could be called, Ver. 3.0 (if body shopping can be considered
Ver. 1.0 and the global delivery model, Ver. 2.0). At the Tier-I
companies, this reinvention goes under different names. Infosys
calls it GDM Plus, TCS has named it GNDM (where N stands for Network),
while Wipro's Nandy calls it GDM II. In a research paper to be
published shortly, Senior Analyst and Country Head of Forrester
Research (India), Sudin Apte, argues that Tier-I players have
already recognised this need and are embracing innovative concepts
such as solution accelerators and agile development to grow without
adding pro rata bodies and costs (See Indian IT is Fast Polarising).
One way to reduce the linearity between revenue
and employee numbers as well as to increase revenue and profit
per employee will be to grow high-margin areas of the business
like consulting. Kris Goplakrishnan, President and coo of Infosys
says, "This is precisely why we invested $20 million (Rs
90 crore) to jump-start our consulting arm; we needed to get the
ear of CXO-level executives." Deepak Khosla, Senior VP of
Patni, says that the CXO relationships are important because Indian
players will have to transform themselves from being good low-cost
executors of projects to business advisors, and this role requires
access to the C-Suite. This requires a change in both skill-set
and mindset of employees, err..., consultants. That would also
enable them to bill clients on outcomes rather than cost savings.
Three years after devoting serious attention to growing their
consulting practices, the Tier-I vendors have tasted some success-5-8
per cent of their revenues now come from consulting.
Srinivas Vadlamani, CFO of Hyderabad-based Satyam
Computer Services, says that Indian players will have to additionally
look at growing key verticals such as IMS (Infrastructure Management
Services), SI (System Integration), extended engineering solutions
or outsourced R&D. "Areas like testing and ADM (Application
Development and Maintenance) will remain fast growing verticals,
but most of those are commodity play with little room to dramatically
improve margins," he says.
GUEST COLUMN/SUDIN APTE
Indian IT Is Fast Polarising |
| By now it has become a routine:
come quarterly results season and the IT bellwethers-Tata
Consultancy Services, Infosys and Wipro-wow the industry
watchers with superlative numbers in terms of revenue growth
and profitability. All's well, happy investors say, with
the Indian offshore model. If only they cared to look closely
enough, they would find a different story. Let me delineate
the important threads of the changing story, as I see it:
Indian IT industry is polarising fast: The
large Indian IT firms-especially the top three firms with
revenues hovering around $3-4 billion each-continue to grow
profitably amidst rising MNC competition, ever increasing
attrition and complexity of deals. They have been growing
at over 35 per cent, consistently performing better than
the industry average. In contrast, an analysis of the next
15-18 players (firms with around a billion dollars in revenue
and smaller) reveals a different picture. These players-unable
to differentiate, and beaten by scalability and volume pricing
of big Indian players-are struggling to match the pace of
large players. The gap between the top three and the rest
is widening with every passing quarter. In addition, entrenched
MNCs such as IBM and Accenture make 'India advantage' a
commodity that is no longer the prerogative of Indian firms.
A majority of firms in this size range recorded, on an average,
20 per cent revenue increase. Further, comparison of their
growth and their inability to add enough new clients show
that not only they got fewer orders, but got less profitable
business as well. Average profitability of these 15-18 firms
is half that of the top three, and some of them have a very
thin line dividing profit and loss.
What is accelerating this polarisation? The common answer
is scale, but that's not the only reason. I believe it's
their strategic initiatives that separate the top three
from the rest.
Scale allows investments to build sophistication:
Top firms such as TCS and Infosys have emerged
as multi-line, multi-domain firms. Many of the service lines
of Tier-I are bigger than the overall size of most Tier-II
and 3 firms. Size offers the top players advantages such
as low-cost, tiering of skills, bench affordability, and
ability to handle large projects vis-à-vis Tier-II
and Tier-III. They are also able to invest enough in building
excellence and domain expertise. Also, when deals get bigger
and clients consolidate vendor base, mid-size firms are
the ones that get dropped.
Cost and Quality are a given. What's next? Offshore companies
today are facing a fundamental challenge with their business
model as their traditional and unique differentiator-low
costs and quality-is getting eroded with multinational services
firms establishing themselves in India. An already-squeezed
human resource market is falling short of growth demands,
increasing staffing costs and attrition. The challenge is
to remain competitive. The top Indian firms have begun taking
some steps in that direction.
Can you grow without adding pro rata bodies and costs? The
most significant initiative is about non-linear growth.
The Tier-Is are building and embracing innovative concepts
such as solution accelerators and agile development, helping
them de-link revenue growth from sheer addition to the workforce.
Infosys, which leads the pack on this front, generates around
7-8 per cent of its revenue from such initiatives. Wipro
is working on improving productivity-per-resource and deploying
low-cost, non-engineering resources.
Other important initiatives include investments in account
management and sales force refurbishing. As services lines
get broader, deals become bigger and geographically spread,
things such as age-old sales models, body shop mentality
of lower ranks, programmers-turned-marketers are falling
short of client demands and new competition. Superior process
and quality back-end need an equally strong front-end-like
Infosys' sales force efforts and TCS' training and revamped
sales processes to improve its field face. Besides, the
Tier-I players are investing in internal management tools-tools
dealing with building skill management, dashboards, and
client visibility, to name a few. One rarely sees any substantial
efforts once you go beyond the top few.
So don't be surprised if you soon find small and mid-sized
players, barring those that have already carved a niche
for themselves, either selling out or turning into niche,
specialised players for survival.
Sudin Apte is Sr. Analyst & Country Head (India),
Forrester Research
|
Automating Low End
How do you beat the billing pressure in low-end
commodity work? By letting software, and not your valuable software
engineer, do most of the work. It's called productising your service
offerings, but does not necessarily mean a shrink-wrapped product
like the Microsoft Vista. Explains N. Chandrasekaran, Executive
Vice President and Head of Global Sales & Operations, TCS:
"There are three layers: technology, functional and customisable
layers. Some of our offerings in the financial services space
have been productised, where only the customisable layer is tweaked
and the rest is in the form of a product." Wipro also has
similar productised services in several areas, including web security
and hosting (See The Value Boosters).
In fact, some consultants would have the Tier-I
players take greater risk-invest in creating intellectual property
(IP). "If you look at IBM, Accenture and hp, a significant
portion of their revenues comes from licensing and royalty. Indian
it firms have to create their own intellectual property so they
can get recurring income from a one-time investment," says
S. Sabyasachi, Research Director of NeoIT, a strategic advisory
firm. Interestingly enough, that's already happening. Gopalakrishnan
of Infosys points out that his company has already made 100 patent
filings of which 20 have received preliminary approvals. Wipro,
too, has created extensive IP, especially in VLSI design and outsourced
R&D, which are its areas of strength.
Finally, Indian vendors may have to look outside
of India for talent. So far, offshore has largely meant India,
but, as Wipro's Nandy points out, no one country has a monopoly
on software talent. "We have to move from offshore to 'bestshore'.
Explore talent in countries like China, the Philippines, Malaysia
and East Europe," he says. It seems Indian IT's Ver. 3.0
may not be too long in coming. Satyam Computer, for instance,
already has a new mantra that sums up the industry challenge:
'Beyond Engineers, Beyond India'.
additional reporting by Rahul Sachitanand |
