Indian IT : Salary cost Vs Billing rate

Hindu Business Line, 31st May 2011, eWorld

Krishna Kumar

One factor that has perhaps not changed over the past 15 years is the excitement among fresh engineering graduates when they land a software job. And, why not? The Indian IT industry has had an unprecedented influence on Indian society, despite representing about 0.55 per cent of India's overall workforce and about 6 per cent of the organised sector.

The IT Industry has matured over three significant inflection points — the 1997/99 Y2K euphoria, followed by the dotcom bubble in 2001/02 and the global recession in 2008.

The sector being extremely people-dependent, industry salary cost accounts for over 50 per cent of the cost in any IT company. In spite of the fact that salaries were moderated post the dotcom era and the 2008 recession, salaries have gone up significantly over the past 15 years, but the billing rates have remained quite subdued in comparison.

Salary

From an employee perspective, the Indian IT/Software market has provided huge growth potential, both in terms of job opportunities as well as salary. The average salary of a fresh engineering graduate during 1996-98 was in the range of Rs 70,000-90,000 per annum. The fresh engineer salary jumped three-four times by 2005/06 and continues to remain at an average Rs 3-3.6 lakh per annum.

As one gains experience, the salary should ideally be linked to the “role” a person plays and just not to the years of experience. However, due to the lack of a credible alternative, years of experience (YOE) plays a critical role in deciding salaries.

The salary per year of experience was roughly Rs 50,000 to Rs 75,000 way back in 1996/97 and now this has jumped to anywhere between Rs 1.5 lakh and Rs 2.5 lakh depending on the individual's skill level, performance and company. For example, a mid-size IT services company will have to pay a premium of 10-20 per cent as against a well-branded large company.

In the Indian context, the salary leaps by five to eight times within 10 years of experience. Compare this with Europe, where the salary, at best, goes up by 50-60 per cent at the end of 10 years. Such a phenomenal increase in India is possible thanks to the ever expanding market place where the demand/supply is still heavily tilted towards demand. Due to the uncertainty involved in perks such as ESOPs, potential employees look at salary as the single most important parameter.

Due to this rising salary market, the average cost of compensation (ACC) or salary cost from an employer perspective has gone up 2.5-3.5 times over the last 15 years. The ACC was around $300-400 per month during 1996/97. Add to this the cost of recruitment, which has also gone up quite significantly. A recent report from Aon Hewitt indicates a 12 per cent salary increase for the IT industry in 2011. Maintaining the ACC at current levels will be a huge challenge for the IT companies.

Billing rates and Revenue

In the case of small and mid-size companies involved in niche areas such as Telecom R&D outsourcing, the average billing rates have more or less remained stagnant or have gone down over the past 15 years. The average billing rate continues to remain roughly around $15 to $25 per hour depending on complexity. However, among both the mid-size and large-scale generic IT services companies, the billing rates have gone up from about $12-14 during 1996-97 to about $18-20 during 2010-11.

While over 80 per cent of the projects were T&M (time and material)-based projects until the late nineties, over the past few years, the number of fixed-price projects has increased and is about 50 per cent in the large IT companies.

While fixed-price projects carry more delivery risk and penalty clauses, they provide a great opportunity to continuously improve productivity and manage profitability by creating the right resource pyramid (the mix of engineers in the lowest band and higher bands). For example, a 500-member software maintenance project would typically be staffed with over 50 per cent of the engineers in less than three-years-experience range. Fresh engineers with appropriate training would form a large chunk of the junior engineers. The large IT services companies are adding 15,000- 20,000 fresh engineers on an average in 2011.

Large IT companies have witnessed over 50 times growth in revenue over the past 14-15 years. Also, almost all large IT companies have achieved Net margin at over 15 per cent during the past 15 years. However, the mid-segment IT companies have seen decline in profitability and were most affected during the recession period. This is primarily because the mid-segment companies were unable to leverage the resource mix and larger IT companies maintained over 50 per cent offshoring.

What next?

With the increasing salary costs in India and billing rates certainly not going up proportionally, coupled with effective tax rate going up, uncertainty over currency fluctuation, strong competition from low-cost eastern European countries and China, IT companies will be under tremendous pressure to maintain profit margins. Indian IT companies need new and innovative approaches in order to sustain profitability.

The “high value” Consulting Business could be a potential growth opportunity. Consulting business contributes to 3-5 per cent revenue of the large Indian IT companies. For Accenture, a global leader in Consulting, over 60 per cent revenue comes from the consulting business with an average billing rate at least 4 to 5 times higher than the current average billing rates among large Indian IT companies. Although consulting is a high revenue generating business, the key challenge is to get the right skilled resources. The consultants are subject matter experts who possess deep domain expertise.

To sum up, over the past 15 years, the impact of salary cost increase vis-à-vis billing rate and thus on profitability has been quite significant among mid-size IT companies, while larger IT companies have been able to handle the impact through effective pyramid management.

India's IT revenue is expected to grow three-fold by 2020 and thus demand for Indian IT professionals would be high. However, it looks increasingly likely that the Indian IT Industry will move towards single-digit net margin levels over the next decade.

The author is Director, Engineering, Teleca Software Systems India. Views are personal.

Can we get an Indian Huawei?

Financial Express

G Krishna Kumar | Updated: May 26 2011, 03:03 IST

Eight of the world’s top 10 most innovative companies of 2011 are in the ICT domain, reports a US based magazine Fast Company. Not surprisingly, all of these are product companies. While India is the largest exporter of ICT services, generating revenue of $76 billion from the IT sector, but products contribute to less than 2%. India’s contribution to technology innovation is negligible.
The product companies witness non-linear growth (not proportionate to the head count)—the revenue per employee or profit per employee of Google or Microsoft is over 20 times that of India’s top services companies. Also, these technology giants serve as a beacon and are the undisputed trendsetters on the world technology road map.
Chinese companies such as Huawei and ZTE are the world’s leading telecom equipment providers. A report states that 45 of the world’s top 50 telecom companies use Huawei products. What more recognition is needed? These companies have full backing from the Chinese government and the government also supports R&D initiatives—for example, the TD-SCDMA technology that competes with the global wireless 3G standards. Is there an Indian company that can compete with Huawei/ZTE? India has lagged behind China and Taiwan in the capital-intensive electronics hardware manufacturing industry also. But the recent policy push from the department of IT to encourage semiconductor wafer fabrication, electronics and telecom product manufacturing is a welcome move. Also, Trai recently made a recommendation for promoting domestic manufacturing of telecom products.
The loss-making PSU Indian Telephone Industries, once the flagship telecom switch and telephone maker in the country, failed miserably during the telecom boom due to lack of vision from the government. But the case is different with ISRO, whose success could be attributed to the autonomy it enjoys. Another example of a tech-savvy initiative is the UID programme Aadhar, which, though far from fully implemented, has proved that India can implement large-scale technological projects.
Although the domestic demand for IT products is increasing, most Indian product companies are yet to penetrate the market. The only exception is the banking software industry where India has emerged as a leader in core banking solutions offered by Infosys and Oracle-India. Yet Infosys’s products business generates only about 5% of the overall revenue. In general, Indian companies are risk averse and prefer to enjoy the safety of services business, hence have not been able to succeed in creating product offerings.
But some Indian IT companies are successful in the outsourced product development (OPD) model, a pseudo ownership model, wherein the independent software vendors (ISVs) are involved in end-to-end product development for the customer but the ISV does not ‘own’ the product. Cloud computing can be a cost-effective and disruptive technology for further growth in OPD and pure-play product development companies. Nasscom indicates that delivery model innovations such as SaaS and innovative revenue models could fuel IT product adoption in future.
BERD (business expenditure on R&D) and patents/IP management are key indicators of a country’s technology innovation capability. An EU commission report on ICT 2011 indicates that India lags behind China and other emerging economies in terms of BERD/GDP. While China has seen a 10-fold increase in the number of patent applications over the past decade, India’s contribution is insignificant. Generating IPs and protecting them is just one part of the story. Realising value from the IP is a different ball game. Appropriateness of the solution is the key.
It must be said that Indian education system lacks an environment that fosters active partnerships between industry and universities. In the advanced countries, research in universities is given high priority and is supported by industry in the form of grants. As per the recent Anil Kakodkar Committee report, India lags way behind China in terms of university research in engineering and technology. The report also emphasises the need for improvement needed in research infrastructure. An OECD report indicates that India has less than one researcher per thousand employed, much below the global average.
Availability of risk capital is a key constraint for product companies to flourish but Nasscom sees an improving trend. Venture capital/angel investor ecosystem has improved significantly. There are 38 incubation centres across the country aimed at encouraging product development initiatives. India has seen 30% CAGR in start-ups over the past 10 years. The product market in India is expected to touch over $15 billion by 2015. The government’s plan to invest R25,000 crore for setting up semiconductor fabs will provide an impetus for hardware-oriented product development.
The government can play a key role in helping start-ups and other companies engaged in software or hardware product development. There are many examples of how government intervention has yielded good results. Tax benefits for software export revolutionised IT industry in India. Israel supported companies working on networking technologies that helped Israel take a leading position in security. Taiwan supported electronic hardware that resulted in the emergence of the original design manufacturer market.
India has been a ‘follower’ in the ICT space and its product development capability has been patchy. It needs to move towards full-fledged product development in order to be a dominant player in the ICT arena. India’s domestic market by itself will offer sizeable opportunities. However, for made-in-India to be a reality, it is imperative that the government aggressively drives a clear road map for technology innovation, encourages product initiatives, supports hardware and semiconductor industry and, most importantly, inculcates ‘product culture’ right at the universities.

The author is director, engineering,
Teleca Software Solutions India.
These are his personal views