How Do India's Rising Wages Affect Its IT Outsourcing Companies?

In recent years, the wages of IT professionals in India has skyrocketed. When I started my career in December 1997, working for Patni Computer Systems (PTI), I started with a sum of Rs 6,000 / month ($150 / month). It was quite decent during those days. Nowadays, an average fresher is earning three times that amount and the ones with around two years of experience are commanding around Rs30,000 / month.

With all these salary hikes, one would wonder if the margins of IT companies have gone down in the last last five years. Here is a look at the revenues and gross profits for the major IT consulting companies.

After looking at the above figures it gets more interesting:

1. For Infosys and Cognizant, the gross margin has been varying from 44 to 42% and 46% to 44% respectively. For Satyam, it has decreased from 40% to 34.5%.

2. But the revenue / employee has been going down for all three companies and has gone down drastically from $48K to $42K for Infosys and $46K to $36K for Satyam. This figure has just gone down by 1% for Cognizant.

3. The cost / employee has also gone down for Infosys and Satyam from $27,000 / employee to $24,000 . Whereas for Cognizant, it has remained somewhat constant.

From the above figures one would feel that it must be a myth that the salaries are rising in India. Well that’s not true because the news is everywhere; if you can't believe it then the next time you are in an Indian restaurant and come across any Indian IT guy, then you can casually ask this question and get the first hand information. So where is the catch? If the salaries are increasing then why is that not being shown in the gross margins for INFY and Cognizant? (It does show somewhat for Satyam though).

Onshore / offshore: One of the key strategies of IT outsourcing is the mix of onshore (resources working at client side in USA, Europe, Australia etc) and offshore resources. Nearly half the revenues for the IT consulting companies comes from the resources working onsite. Their pay is not skyrocketing, but it is known that their billing rates have increased. So the extra gross profit of the onshore resources have been compensating for the increase in offshore salaries. Revenues / employee have not increased because the onshore employees usually comprise around 25% of the total workforce.

My next article will clarify further how Infosys and Cognizant are able to keep their gross margins intact even though the salaries of employees in India are rising.

Comments

[AbhinavSharma]

If you see another trend, the average experience of the employee would be coming down as well. So while the average salary per employee for Infy would have gone frm 27k to 24k USD, the average experience drop would have been much more severe. Come to think of it, Infy had around 35k employees around this time in 2004 and now they are more than 70k. Most of the additions have happened in the fresher segment and therefore, the case for wage inflation still holds true.

[Dayanand]

The avg experience has come down, but the company is also becoming more mature in terms of processes , what this means is that the value added by employees to clients is lot more.In other words.

Let us say five years back for a project of $1mn/year (4 onsite resources and 10 offshore resources) the avg experience of offshore team lead was 5 years.Now I am sure it has gone down to 3 years.This means the work done by a five years experienced guy in 2002 is sames as the work done by a 3 years experience guy today. So the wage inflation is justified with the increase in value addition.

Let us take a non IT example : You have hired a fresh typist who can work on 10 documents per day and you pay him $100/day. Let us say in 1 year your office has improved its processes and the fresh typist can work on 12 documents / day. So if you pay him $120/day then even though the wages have increased, but the cost of creating one document has not increased.

This is what I am trying to explain in my article that even though the offshore wages are spiralling but the cost / employee is infact decreasing.

[dcappe10]

All in all, investing in India still seems to be efficient and cost reducing method. I would recommend this article to all those who are beginning to invest themselves in India.

www.pennysleuth.com/rp...

-Cheers!