JOIN USThough information technology (IT) companies in India have been at the forefront of hiring activity, top IT firms this year have deepened their focus on growing non-linear practices in an attempt to wean away the time-tested link between revenues and headcount.
The industry has been long dependent on human resources to ramp up revenues.
However, these companies are now going the non-linear way to grow revenues.
The term non-linearity refers to delinking a company's revenues from headcount and getting higher revenues with lesser dependence on raising employee strength.
The IT industry in India is at a point where it faces major difficulties like the end of the tax holiday, competition from MNCs like IBM and Accenture and the traditional labour arbitrage model wearing thin. Industry analysts believe that the industry needs to reinvent itself in order to survive tough competition and a volatile demand economy.
In a report titled ‘Non-linear models driving the next phase of growth for the Indian IT Industry’ KPMG and CII pointed out that while the industry has expanded from a mere $8 billion in 2000 to $88 billion in 2010, contributing significantly to India’s economic progress in the last decade, business leaders now agree that the next decade will be substantially different from the previous one, when new business models will emerge to deal with a rapidly changing marketplace and customer needs.
“The industry needs to reinvent itself. It needs to define a compelling new business model. The industry needs to dramatically change revenue per employee equation, thus bringing non-linearity,” KPMG India Partner & Head (IT-BPO Sector) Pradeep Udhas said.
Non-linear models include intellectual property, cloud computing, platform BPOs, non-linear pricing models, delivery accelerators, branding, mergers and acquisitions.
A few companies have already started diversifying into patent generation solutions.
Infosys, as part of its 3.0 strategy, plans to achieve a third of its revenue share out of products and platforms. In Q4 of FY '13, Infosys had 12 wins and added another seven clients in the products and platforms vertical.
Growing schism
The revenue and employee matrix of major IT companies in the last three years reveals a rate of revenue growth far higher than rate of employee growth. In fiscal 2011, Infosys had 1,30,820 employees on its rolls, registering revenues of Rs 27,501 crore; in 2012, it had 1,49,994 employees and Rs 33,734 crore in revenues (22 per cent increase in revenues and 14.65 per cent increase in employee strength); in fiscal 2013, Infosys revenues increased 19.61 per cent to Rs 40,352 crore and employees increased 4.46 per cent to 1,566,88).
Evidently, companies do not want the law of diminishing marginal returns kicking in. HCL Technologies, for instance, posted per employee revenues of $51,000 and net addition stood at 3,626 employees during the quarter ended June 30, 2011; in the January 2012 quarter, revenue per employee rose to $52,000 with a net addition of 1,855 employees; however, in the last quarter ended March 31, 2013, the Noida-based company's net addition was negative (-792) and revenue per employee soared to $56,000.
This indicates a clear disconnect between number of employees and revenue registered, according to analysts.
According to HCL Vice-President and Head (Strategic Marketing) Krishnan Chatterjee, as deals have started becoming transformational in nature, non-linearity is a necessity. “As the transformational deals have started being factored into our revenue stream we have started seeing better results,” Chatterjee added.
Even companies like TCS, Wipro and Cognizant are actively creating a portfolio of outcome-based outsourcing and non-linear models.
Cognizant Group Chief Executive (Technology and Operations) R Chandrasekaran said,“Customers are increasingly looking to engage with a service provider who can demonstrate value. Customer interest in outcome-based sourcing models is based on having real evidence that the service provider can deliver the services and value.”
Chandrasekaran added that variable pricing models are gaining a lot of traction, as they allow the company to maintain delivery excellence.
For instance, Cognizant is working with AstraZeneca’s Global Shared Services providing end-to-end application maintenance services. Through the agreement, Cognizant is using an “outcome” or “effect-based” model to provide these services.
This, according to Chandrasekaran, ensures a predictable service model, reduces the overall cost of IT ownership, and delivers year-over-year efficiency improvements.
“With successful adoption of the seven models of non-linear growth and incorporating them in their strategy, Indian IT majors can emerge as this decade’s leaders in technology, pioneering the next phase of exponential growth,” the KPMG-CII research paper added.
It added that the software industry is currently plagued with weak patent protection and high piracy rates.
“In order to foster R&D, there is a need for the government to put in place a strong IP protection law (and enforcement). As of today, the IP protection laws in India are tenuous at best.”
The innovation outcome
Late last month, Infosys partnered New York-based IPSoft to set up an autonomics centre of excellence and lab in Infosys Mysore campus.
The partnership suggests that Infosys staff would spend less time handling repetitive tasks and more time on fostering individual and team-oriented innovation inhouse. It also shows how IT companies are moving rapidly towards process automation to replace their conventional and headcount-intensive businesses.
To boost its products and platform business Infosys announced in April 2013, that it has set up a innovation fund of about $100 million and would use it to fund ideas within and outside the company.
This year, IT companies are not planning to hire as many people as they have done down the years.
Companies are busy with diversifying and consolidating their employee base, in the process focusing more on automation and outcome-focussed project delivery.
The products and platform-based model which Infosys articulates vocally is no less an intrinsic part of the development model of the industry as a whole.
For, their work is diversifying their business and technical handles into areas where the takeaways are higher margins balanced against optimum employee yields. And, replacing employee-intensiveness and headcount dependence with greater automation and core expertise.