Firstpost.com
Infosys Technologies' decision to acquire Panaya, a California-based technology company, for around USD 200 million in cash, signals two things: it is, first of all, a statement of CEO Vishal Sikka's determination to grow inorganically by using the company's enormous cash hoard; and, more importantly, it points to the future direction of the Indian IT services industry itself, where future profits will come not so much from a linear growth in headcount, but higher productivity driven by automation, technology, platforms, products and business solutions.
To be sure, USD 200 million is a fleabite in Infosys' USD 5.53 billion (Rs 34,800 crore) cash hoard at the end of December 2014. Since Sikka has promised to shrink the hoard through an " active inorganic strategy ", one can be sure that Panaya will be followed by many more, thus reversing the over-conservative acquisitions approach of Infosys' founders.
If integrated well, Panaya, will help Infosys automate many of its operations, making manpower more productive. As Sikka said in a statement made soon after the announcement yesterday (16 February), "The acquisition of Panaya…. will help amplify the potential of our people, freeing us from the drudgery of many repetitive tasks, so (that) we may focus more on the important, strategic challenges faced by our clients."
An� Economic Times�report �quoted Ray Wang, CEO of an IT research firm, to amplify this statement. Wang said Panaya will help Infosys shift from "a services-driven to software-driven player. Panaya's strength is utilising hardcore math to solve problems such as (software) upgrades, extensions, testing, etc. The acquisition means Infosys is serious about software-driven solutions".
If Infosys 3.0, the (not-so-successful) attempt by the previous management to move the company beyond mere labour cost arbitrage to higher value IT consulting, platforms, products and solutions, Sikka's strategy seems to be to start reducing the linear link between Infosys' growth and manpower growth through automation, among other things.
Currently, there is a positive correlation between manpower growth and revenues in almost all offshore IT services companies. This linear growth, built on the basis of cheaper manpower costs in India, has already bloated staff strengthens in the top IT services companies to enormous levels where size may be adding to costs rather than reducing them.
For example, Tata Consultancy Services (TCS), the big dad of Indian IT services, had 3,18,621 employees on its rolls as of last December. Cognizant had 2,11,500. Infosys and Wipro had 1,69,638 and 1,56,866 employees, while HCL Tech had 1,00,240. In short, five India-based IT services companies had over one lakh employees each on their rolls. Together, they will cross one million employees soon.
While, in theory, such staff expansion can keep happening as long as there is business to be had, the fact is there is a size beyond which scale adds to costs rather than reduces them.
Nine years ago, when asked by� Knowledge@Wharton �how much Wipro can grow in terms of numbers, chairman Azim Premji had indicated that upto 2,00,000 may be optimum. He had said: "I don't see growing to 1,50,000 to 2,00,000 people as an insurmountable challenge…. That is doable. After 2,00,000 people, you might have to think laterally about how to grow beyond that point. You have to think about partnership models - how do you manage partners and still have transparency with your customers? That is important, because you are still responsible for the deliverables in the end."
TCS, Infosys, Wipro and Cognizant are all in the range where large manpower strengths can start becoming a burden - in the form of high attrition and higher wage costs.
People need managing, and tech people may need more managing, as teams have to work together on projects. Linear expansion is not only getting costlier, but also leading to high attrition levels as bright engineers shrink from repetitive jobs.
Between March 2013 and December 2014, for example, Infosys' attrition rate has kept moving up from 16.3 percent to 20.4 percent now.
And this is only the apparent attrition rate. The real attrition rate may be higher, as indicated by these two figures: in the third quarter of this financial year (October-December 2014), Infosys' gross hiring hit 13,154, but net hiring was as low as 4,227. This means for every 100 people it hires, it sees 68 exiting. Not all of this is attrition, but a substantial part of it is. Real attrition is much higher than the stated figure of 20.4 percent.
In the case of TCS, gross and net hiring was at 16,561 and 4,868 – a net addition of less than 30 percent of gross intake.
Also, as basic IT services jobs get commoditised, adding costlier staff endlessly can come only lead to shrinking margins as competition is intense at this end of the market. Soon after he took over,� Sikka had to promote 5,000 employees� and offer increments and higher bonuses� to enthuse employees. These costs were unavoidable, given weakening morale in the company as senior managers left for greener pastures.
Sikka's purchase of Panaya, which will help automate some of the work now done by staff, sends a signal that the Indian IT industry is fast reaching the limits of growth through manpower additions alone.
The way forward is automation and lower staff additions.
The writer is editor-in-chief, digital and publishing, Network18 Group
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