Last year there was a paper presentation competition at my previous organization to generate ideas to drive organization to the strategic goal - of becoming a billion dollar organization in 2012! (from 500 million in 2010)
I had submitted a write-up and argued that such a growth was not possible by the usual linear-growth model of IT services companies i.e. by adding more and more heads in the organization who are billed at a constant rate. The organization had to either adopt non-linear revenue model (mix of IT services and consultancy and products) to grow exponentially – or acquire a company. (Incidentally iGate had set similar target - of becoming a billion dollar organization, and they finally acquired Patni recently to achieve the goal - i.e through acquisition and not linear growth)
Now this paper was written more than 1 year ago, and since then I have been reading and following how typical businesses fair in terms of non-linear growth.
Infosys - already a 5 billion dollar company with over 100,000 employees - has already hit the block and is now experimenting with New Engagement Model (NEM - consisting of outcome-based pricing rather than per person billing), their so-called non-linear growth model consisting of mix of Services/ Consulting/ Products.
But where does such tweaked business model stand in comparison with the Consulting or Product business?
A good benchmark is Revenue per Employee (since all of them are people-intensive businesses, unlike – say manufacturing or retail). And you get some knowledge about how the respective business/ industry work when you look at the numbers:
Here are some observations:
Infosys’ Global Delivery Model or New Engagement Model, Cognizant’s Two-In-A-Box Model, other Indian IT services’ such models etc. are merely Operational or Pricing models. They help in achieving better profitability to some extent, but don’t transform the basic characteristics, the DNA of the type of industry.
If you compare the companies within the same industry, their Revenue per Employee falls in a certain band only. Some organizations do better than peers, because of operational efficiency, branding, or strategy etc. e.g. Accenture surpasses its peers by large margin, however Accenture falls well short of even E&Y – an organization with lowest Revenue per Employee in its category.
Same is the case with other categories. It’s interesting, there could be some overlap between the two and probably handful exceptions/ deviations too. But in general, this would hold true.
This also gives you some idea about how far an organization could go. If you look at Product based companies, their Revenue per Employee is significantly higher compared to the IT Services companies – mainly because they spend huge effort on R&D, launch best-selling products and then mint money for years! So there is no limit to the upside. On the other hand, an IT company operating with a particular Revenue per Employee trend would require umpteen people to achieve a Product-based company like revenue. E.g. for Infosys to achieve Microsoft’s revenue it would have to employ 1.24 million people!!! J
Indian IT services often talk about increasing profit margins and revenue by ‘moving up the value chain’, doing more of high-margin consultancy work rather than usual maintenance and support work (the bread and butter of IT business). I think this is a myth. The array of IT services that these companies talk about can at best be described as ‘economies of scale’ – offering application development, maintenance, BPO, KPO, limited technology consultancy, Infrastructure management etc. I don’t know what ‘value’ addition to the client they mean when they just move from IT services to so-called consulting.
Who devised this concept of ‘value chain’ and it becoming more lucrative as you ‘move up’?
Price is what you pay and Value is what you get (in terms of benefits). If the perceived benefits by customer exceed the price he pays, he would find ‘value’ in it. The reason businesses turned to outsourcing/ off-shoring is, they could get reasonably good quality of service at a fractional cost, by moving the non-core IT work to offshore. So that’s the value for them – customer used to get ‘value’ even with usual IT services word. So where does this notion of ‘moving up the value chain’ come from?
I guess it became popular because of companies attempt to differentiate from their peers in their branding, show that they do not provide just basic services but do some ‘high-quality’ work. Earlier the companies wanted to be ‘preferred vendors’, then the ‘strategic partners’ and now they want to be someone who ‘understand-customer’s-business-better-than-they-do-and-create-value-for-them’. It doesn’t make sense. If they were really able to move up the value chain, they would cross-over to and be at par with the Management Consulting industry-like Revenue per Employee. These are specialized firms that are very much centered around customers; and can thus charge price-premium. If you observe, these companies have very limited revenue range (less than $5-6 billion), but they achieve it with very less people i.e. high revenue per employee.
No matter how hard IT services companies try, they would never be able to replicate this model – because the basic DNA of the industry is different.
Does it mean that, an IT services company can never be a $100 billion dollar company?
Maybe it could – if it employs more than a million people! But it would never achieve the Revenue-per-employee like a Product-based company.
