Most of the IT companies in India focus on low end consulting or the bottom of the pyramid. If a designed architecture is provided, these companies are very good in implementing high level designed applications that fits to the architecture using the standard and existing processes. The business models adopted by the IT majors enables them to cut cost for its customers and at the same time provides a bit of value. Also, the difference in productivity by employees of Indian companies are generally more than that of their customers. This allows customers to save money on routine tasks such as maintenance of code and support of critical applications. This market is so huge that most IT companies in India fight for it at cut throat price.
Some companies are trying to break away from the bottom of the pyramid strategy. IT global majors such as IBM and Accenture are well established at the top of the pyramid as they provide high end consulting services to its customers. Although the revenue from high end consulting for TCS is only around 2.5% of its overall revenue, it is growing at around 50% per annum. As the growth was enormous at the bottom, most companies settle down comfortably there. It requires a cultural and attitude shift to move upwards in the pyramid. The cultural shift should start right at the top and proliferate till the bottom of the organisation.
The non existence of this cultural shift can be explained in terms of productivity achieved per person in an organisation. There is more money to be made as one moves up the pyramid. I have taken previous four years of financial data from TCS and Infosys (listed in BSE) and Cognizant technology solutions (listed in NASDAQ but operates from India) for the analysis. After analysing the revenue per person per financial year, it was found that TCS scores the lowest whereas Infosys was able to earn more revenue per person for the same period. As companies recruit in thousands every year, i have only counted half the new additions for the years for the productivity per person calculation to consider induction time for the employee into the company.
From the graph above, two points for discussion emerge. First, for all three companies, the productivity per person stays almost stagnant which confirms that the earnings from every employee on average remained stagnant. Secondly, how does infosys manage to extract more out of its employees than its competitors? This is an important question as the business model, employee utilization and most other parameters fairly remain the same as its competitors over a five year period.
For any company, if the productivity of an employee increases, it is equivalent to adding new employee at little or no additional cost and it in turn means earning more revenue with existing resources. In most of the big offshore development centers of IT majors in India, employees work extended hours to meet the deadline. However, the difference between touching in and touching out is not an ideal parameter for measuring the productivity of an employee. If an employee is capable of writing 100 lines of code or solving 5 tickets per day in a production system on average, then if the same employee can write 120 lines of code or solve 7 tickets on average in a day on average in the next year, that is the real definition of getting more out of an employee.
Some of the big problems with big offshore development centers are its distance from the city (which means longer hours of travel everyday), crowded atmosphere and some admin policies that eat productivity. For example, if an employee takes a tea break, say at 11 AM in the morning, one has to share the crowded infrastructure to take a meaningful break and get back to work. This takes around 30 to 45 minutes of the morning time. Most of this time can be avoided if coffee machines are installed as close as possible to the work desk and allowing employees to take coffee and snacks to the desk. Also, at least 30% of the employees smoke 3 cigarettes a day on average. In big development centers, the smokers have to get out of the building for a smoke. This again takes an hour on average from an employee's productivity. The same applies for the overcrowded canteens during lunch. If the infrastructure and admin rules are employee friendly, then it allows the employee to stay at the desk for a longer period of time thereby increasing the chance of producing more in the same amount of time as before. In a typical offshore development center where around 10,000 employees work, these simple measures could save at least 8000 person hours worth lost productivity every day. This is only a conservative estimate. It is true that these 8000 person hours are performed after working hours. But, that is an additional cost to the company in terms of additional electricity, security, transportation and mental fatigue if this persists every day.
Employees should be given more choice on how they want to work and still can completely follow the code of conduct and all security rules and guidelines. It can even go to an extent of using the time in the office bus in the morning for performing some activities that do not require network connectivity. This ensures human capital empowerment, which is the most important assets of these organisations.
The problem with productivity is not even talked about in the industry till now. This is because Indian IT majors are able to grow at mouth watering rates with an enviable operating margin. But, this operating margin is achieved due to the large addition from the elastic pool of college graduates every year, who work for less money. But, the simple fact is inflation is India is around 10% over the last few years whereas inflation in the western developed nations from where Indian IT companies get business is around 2%. There is an 8% gap in the value of what we earn every year. The productivity has to increase by 8% every year to stay where we are in real terms. This gap in real terms is adjusted partly due to the addition of low wage collage graduates in thousands every year.
At the moment, Indian IT companies are just a blip in the radar for companies like IBM and Accenture in premium consulting services market. IBM and accenture are aggressive in entering into non premium services while the Indian majors are trying to move up the ladder. When they meet, the IBMs and the Accentures will be in a better position. So, if the top line growth for Indian IT company stalls, which might happen sooner than we think due to the debt crisis in Europe which threatens to take the work economy into a double dip recession, then there will be enormous pressure on operating margin. This could lead to the organisation getting middle heavy and in worst cases, this could lead to job losses as well. To stop this from happening, the IT majors have to think about increasing productivity both by entering into premium services and by finding ways to get more out of existing resources.
Productivity increase could be the difference between sustained growth and a "Mid-life crisis" for Indian IT companies.
