I have been concerned lately about the unsustainable business model followed by most Indian software companies; excuse my language, but I call the model Software Coolies model. [1]
There are two major issues with the coolies model, first the growth is unsustainable, see the blog [2]. Second, other low cost destinations are emerging. The hourly rates are under pressure, the Indian software talents are demanding more salaries and the rupees is appreciating.
So, we have two options, one to keep running the rat race of labor rate arbitrage, by moving to class B and C cities, opening development centers in Eastern Europe and Jakarta and so on. Train more people to increase the manpower supply and other such mundane no brainers.
But that's a losers' game, at worst when played with your customers or at best, a win-loose kind of a game, that you play with your employees.
So what the win-win strategy? The idea is to increase the Intellectual Capital [3].
However, unlike Thomas Stewart, I would like to define Intellectual Capital more narrowly.
Intellectual capital is about real money. I shall in my later posts muse more about the details of my Intellectual Capital framework. But for the purpose of this blog posting I shall define it in through a simple metrics. Since, what good is an elaborate theory, which can't be put to practice?
In a nutshell, its the leverage that knowledge provides to your employees.
The Intellectual Capital for an IT company can be measured by simply diving the turnover by the number of employees.
To repeat myself, I see a generally unsustainable trend in the explosive growth of the Indian Software Industry in general. Most of the revenue comes from T&M (Time and Material) model.
For example if one studies the balance sheet of the India's most successful and admired company, InfoSys, the 40% growth comes from 40% increase in manpower. Thus there is NO real terms of growth when seen from Revenue per Employee. Now look at the Revenue per employee of Uncle Gates' company or even Larry Ellison's company. If you multiply this figure with the number of InfoSys employees, the subtract this figure with the current InfoSys turnover, you will arrive at the potential for growth of InfoSys' Intellectual Capital !
So if we look at Apple, it has 18,200 employees and $1 million revenue per employee! that is, its Intellectual Capital is $1 Million.[4]
Compare this with InfoSys. It had 52,700 employees and $2.1 Billion in turnover, for the year 06-07 as per [2]. That is $2.1B/52.7K = 39,848 $/emp. Thus the Intellectual Capital is just $39K!
Now if InfoSys had the Intellectual Capital of Apple, then it would have had a turnover of $52.7 Billions!
If it paid back just 10% of its Intellectual Capital to its employee, then an average salary of an InfoSys employee would be $100K or nearly INR 40 lakhs per annum!!!
But how to achieve that fabulous figure?
The solution I propose is productizing the service. It comes in two flavors (or business models if you please).
The first one is the IBM model. whereby, IBM takes over the end-to-end delivery responsibility and takes a percentage of top-line revenue or a fixed cost based on a performance metrics. For example it charges Galileo GDS US$ 2 Billion for a guarantee of maintaining a sustained performance capability of 20,000 transactions per second (this was circa 1998). It takes 5 to 6% of Airtel's topline revenue for maintaining its IT infrastructure, including billing system.
This model is not confined to big ticket companies.
I knew a small company that was being paid by a Wall street banker, five years ago, US$100,000 per month, for maintaining a computational platform capable of calculating Black Shoal's Option pricing for NYSE selected derivatives to under 10 seconds. The startup had two programmers in India, and 1 person in US. Now the metrics have come down to sub-millisecond performance, and I am sure so has the price!
The second model is the Open Source model. Here a company or a group of people, develops an Open source product that is widely used and gets revenue in terms for providing alternate license, consulting (for example Redhat charges $150 /hour for JBOSS consulting, Alfresco charges in excess of $50,000 / pa for certified stack and scalability guarantee for its open source product.
You may say that's not an easy thing to achieve in practice! True, but then, is anything is easy in real life?
As Richard Branson says : "Screw it, let's do it" [5]
References:
[1] My previous post:
[2] Infosys employees strength : http://india.seekingalpha.com/article/37850
[3] Intellectual Capital, Thomas A Stewart ISBN: 0-385-48381-3
[4] Outsourcing... ET (Economic Times) Pg 22, Friday 15 June 2007.
[5] Srew It, Just do it. Lessons in Life, Sir Richard Branson. ISBN: 0-7535-1099-5
