Why Indian tech CEOs are worried about productivity

This piece originally appeared on Livemint.com

 

Infosys chief executive officer (CEO) Vishal Sikka wants to use automation and innovation to increase revenue per employee by 50% to $80,000 by 2020. Wipro CEO T.K. Kurien has reportedly said he wants to reduce headcount by 30% in the next three years. Tata Consultancy Services (TCS) CEO N. Chandrasekaran has long been saying that his firm wants 10% of its incremental revenues to come from non-linear initiatives, which are less dependent on people for revenues. All of these boil down to productivity in the information technology (IT) sector. Here are five charts that explain why they want to do something about it.

1) Revenue per employee

While IT services revenue (export and domestic) has grown consistently over the last few years, revenue per employee has remained stagnant.

 

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2) Linearity of growth

If the industry continues to grow at about 12% a year (as it did in the last few years), if TCS, Infosys and Wipro can match that growth (as they aim to), and if their revenue per employee remain at the same level (the average of last seven years), then the combined headcount of TCS, Infosys and Wipro in 2020, of 1.25 million, will exceed the 1.24 million employed by the entire IT sector in 2007.

 

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3) Bench management

Managing such a large number of people is likely to put enormous stress on management, and would demand a different talent management strategy. Take employee utilization rates. IT companies tend to keep a percentage of their employees on the bench to cater to projects in the pipeline. If TCS, Infosys and Wipro maintain their present utilization rates (average of the last 25 quarters), each will have bench strength greater than their headcount in 2007. Put another way, the nominal revenue loss would be greater than their annual revenues in 2007.

 

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4) Hiring

While one can argue that the utilization problem can be solved by shifting to an absolute number, rather than a percentage of employees, the scale of hiring will be a challenge. Assuming the attrition rate will be around the average of the last seven years, Infosys, TCS and Wipro would have to collectively hire close to a million. If the percentage of “unemployable” candidates is to be believed, it would be difficult, if not impossible, to get those numbers.

5) Valuations

There is an increasing awareness that investors know this. They are valuing IT companies less than they did a few years ago.

 

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Automatic is not yet the manual for Indian IT industry

This piece originally appeared on Livemint.com

 

Tech executives have increased their decibel levels on automation in information technology (IT) services and industry observers are wondering how much will it reduce hiring in a sector that accounts for about a quarter of employment in the organized private sector in India.

However, the absolute revenue and employee numbers of Indian IT services offer a sobering counter-balance to the automation euphoria. Revenue and employee numbers continue to be in line, their growth mirroring each other (graph 1).

Further, even with a nine-fold increase in IT exports in the last 11 years, revenue per employee has, more or less, remained flat (graph 2).

The numbers for 2013-14 show revenue growth outpacing employee growth, but it’s difficult to attribute it all to automation. There’s another factor at play: employee utilization rate, or the percentage of an IT company’s workforce that worked on projects during the period.

 

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As the demand for IT services became unpredictable following the 2008 economic crisis, IT companies started tweaking their utilization rates to cut costs and maintain operating margins. When demand increased, rather than hire more and add costs, they used more of their bench strength, as reflected in the higher utilization rates (graph 3).

IT hiring continues to be more a function of demand for IT services and utilization rates. That doesn’t mean automation will have no impact on hiring. It will. But the IT sector is not there as yet.

 

 

 

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