The Indian IT industry has a simple revenue model: People x Rate = Revenue. As models go, its nothing to write home about, but it has served us well over the years. The big problem with the model, however, is that revenue growth is linear with respect to employee count. In other words if you want more revenues employ more people.
For fiscal 2006-07, Infosys did about 13,240 crores in revenues with about 60,000 employees (DQ/IDC survey). About 4% of Infosys overall employee-base is non-Indian. In its consulting business however, 80% of Infosys’ employees are non-Indian. Infosys failed to make its consulting business profitable, and also fell short of its targeted manpower growth. Infosys has a RPE (revenue per employee) of approximately INR 22 lakhs or US$ 55,000. The large Indian IT firms do not have a very good track record as far as their RPE goes, so the jury is still out on whether we will be able to retain profit margins after moving up the value chain. In fact over the last few years, the RPE of the large IT firms has declined:
In an article at indiatimes.com Wipro’s Sudip Nandy says that “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”. Mastek says: “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.”
The problem with these solutions is that they do not address the crux of the problem, which is that our IT business model is predicated on headcount. People x Rate = Revenue. To address RPE at the strategic level, companies need to predicate their business models on productivity. Then they need to hire the most talented people, train extensively and pay better. To see how this works, look at a company in one of the most commoditized business we have: the retail industry
The Container Store, a privately held retailer headquartered in Texas, USA has been named one of the top places to work in the U.S. for five consecutive years ending 2006. It has a simple formula: one great employee replaces three good; pay them twice as much ($18 per hour vs. the standard $9 a typical retailed pays) while having a lower total wage cost; and provide each employee with 160 hours of training.
In essence, less higher paid smart people rather than a bunch of low paid coolies! And if you’re finding it tough recruiting employees, consider that The Container Store had 4000 people apply for the 40 positions they needed when they opened a retail store in New York City in 2006.
For The Container Store all the principles reinforce each other. By building their business model from the very start to focus on getting three times the productivity from sales associates, they can afford to pay them much higher than the industry average. The extensive training, in turn, helps to drive the productivity necessary to make the economics work. And the higher wages help to attract a better initial employee and retain the highly productive employees they create through their educational programs.
