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

Includes: CTSH, INFY, SAY
by: Dayanand Menashi

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 (NYSE: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.

infy margins
say margins
CTSH margins

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.