Friday, January 19, 2007

infy and its growth

I always had a gut feeling that Infosys's growth in revenues and income has only come by adding more employees.  I had a brief discussion about this with one of my close friends and an Infosys employee, Raghu.  After the discussion, I went back and pulled off a few numbers.  I present them here.  The numbers represent year-on-year growth as a fraction for each of the three columns.  For example, rwo1-column1 should be read as revenues increased by 77% in 1998 compared to 1997.



Revenues

Employees

















 Income



1998
0.77016
0.445681
















0.52038


1999
0.674118
0.430961
















2.47148


2000
1.003378
0.824272
















0.987837


2001
0.314356
0.092259
















0.604141


2002
0.413755
0.434159
















0.398577


2003
0.409625
0.668831
















0.597255


2004
0.498233
0.431907
















0.213617


2005
0.351759
0.432473
















0.460251





As you can see Infosys was only able to sustain consistent growth by continuously increasing its workforce size.  Well, it might not be too troubling to everyone.  However, an almost linear relationship between growth in revenues ans employees is troubling given that Infosys is already 50,000 big with 2.1 Billion USD in revenues - that roughly translates to 42,000 USD in revenues per employee.  Firms like EDS that Infy compares itself with are close to 171,000 USD in revenues per employee at a scale of 20 Billion USD in sales and 117,000 in work force size. 

Let us do a small calculation.  Even if Infy were to become half the size of EDS at an average growth rate of 55% it will be 2010 and its work force would be 246,000 in number (at an average growth rate of 47%).

To reach 20 billion in revenues Infy will have to employ around 360,000 employees.

Well, all this after assuming a consistent growth rate for the next five years.

Can Infy manage 360,000 employees the same way it did 50,000 ?  Are there limits to organization?  Given the rate of growth in India, there is bound to be inflation and rising incomes. How will Infy cope with rising costs of hiring, training and sustaining talent.

Given its current strategy of adding more people to achieve growth, Infy seems to be going towards a inevitable doom.  It is bound to hit a limit in terms of organizing workforce.  It needs more managerial talent and really good quality levels and my bet is that this is not there in the foreseeable future.

There has to be a change in the current strategy.  I don't know how it will come - maybe products, maybe more value-adding consulting.  What I do know is that managing 360,000 employees and bringing in 20 billion in revenues is not going to be the future for Infy.

4 comments:

Jayarama said...

Interesting data, Girish. This kind of supports what I have believed too - that the Indian IT industry has risen on the back on cost advantage, but cost advantage will not remain a differentiating factor forever.
Your calculations show the average revenue/employee to be USD 42k/yr. The average mid-level executive in India today earns atleast half this.
Infy is probably ok with this 42k today, because the bulk of its employees are freshers with salaries sub USD 10k/yr.

But what this indicates is that Infy is betting on mid-level guys quitting! (Else, when the freshers reach mid-level, Infy is going to be paying half it's revenue in wages!!!)
On the other hand, the ESOPs are a lock in...now is this another problem brewing - that on one hand the company is trying to retain people, while on the other hand, it can't afford to retain them?!!!!

Jayarama said...

And given that cost cannot forever be a differentiating factor, what will the next one be? Quality? The Indian IT cos are trying to move up the value chain...but
(a)This is already a crowded market where they are late entrants
(b)They will have to wash off their earlier image of a 'low-cost provider', and be able to charge higher margins for value added consulting engagements.
Necessary change, but possible? Or is there some other differentiating factor not seen yet?!

Girish Mallapragada said...

I guess Infy is betting that somehow it can make more money per employee as it adapts new consulting/product oriented strategies. Otherwise, I see what you are saying .. there is bound to be a conflict in HR management practices.

Raghuram said...

Good observations, Girish. How about opening offshore development centers in Mauritius? Or Phillipines?
Also, it is a fact that Infosys has been trying to move up the value chain for some time. It will take time to shed off its 'low cost' image... and obtain a new 'quality', 'innovative' image. But that is the plan going forward.
Infosys Consulting is one such venture where the billing rates go beyond $300/hr.
Jayarama... Infosys does not provide ESOPs anymore, just FYI. Also, almost the entire middle management is non-billable :-) Probably that explains why Infosys (which has the best profit margins among other Indian companies) has a gross margin of about 60% and net margin of only 30%.
Interesting....