What Indian IT industry should be doing to remove the direct linearity between their revenues and employee numbers?
Indian IT Industry is currently at crossroads. While Industry’s top line is growing upwards of 30% year-on-year, there is a growing concern about sustainability of current business models. The main reason is the linearity between revenue growth and employee growth.
What is the way out? Remove the linearity between revenue and employee numbers. While there are talks about increasing productivity and moving up the value chain by Indian IT industry, there is very little realization that this is a huge paradigm shift. The thinking has to shift from incremental improvements to radical changes leading to multiplier growth and higher productivity.
So can a project currently executed with 100 person month effort be executed with 50 person month effort? For this to happen, Service Providers will need to get out of their comfort zone of resource based top line growth and think of innovative ways. Some of these are described below
1. Move Away from Time & Material to Fixed Price, Transaction Pricing and Managed Service Contracts – In Time & Material pricing , the price is paid on the units of effort ( person month in IT industry). To reap any real benefits of productivity Service Providers need to change the way they enter into contract with clients. In fixed price, transaction price or managed services contracts, the focus shifts from effort to time and outcome. Service Providers can significantly reduce the efforts by employing productivity tools. Since the client is concerned only about timelines and outcome this becomes a win-win scenario. But the Service Providers need to take risks here, commit to these contracts and then design innovative ways to delivering it with less manpower.
2. Improve and Automate Internal IT Processes – IT companies can also look to their internal operation and evaluate how many of these processes can be automated and how many tools can be developed to reduce the effort. Some of the examples can be automated testing, used case generator, code generator and zero defect approach.
3. Use Domain Specific Platform Approach to Software Development – Borrowing analogy from manufacturing industry, IT companies can develop platforms on which new application can be developed with little customization and minimal effort. Platform approach, if employed effectively can reduce the development and maintenance time for new applications. Progressive Service Providers can go a step further and build domain specific platforms in partnership with user organizations like banks, telcos etc. and leverage them across industry.
4. Embrace Lean Thinking - Move to Service Oriented Architecture, Software & Application Reuse - IT companies can start converting their existing software inventory into reusable block and leverage them in new development across organization. While this is happening in pockets right now at individual and project level, it need greater proliferation at organization level. The investments associated with this will far outweigh the cost of developing and maintaining it. Progressive Service Providers can go a step further and implement Service Oriented Architecture (SOA) in true spirit where entire set of applications can be reused if they are architectured using SOA standards.
5. Leverage Experience Curve to Reduce Per Unit Cost – Similar to manufacturing companies, IT companies can leverage their three decade experience to reduce per unit cost of software development. Apart from developing tools, techniques and quicker means Service Providers should leverage effective knowledge management which is beyond the current practice of document management. Learning from organization wide experience in reducing per unit cost should be the approach for progressive companies.
6. Bundling IT and BPO Services to Derive Higher Value – Bundling different services in one contract can increase average price per employee than individual contracts in different service line like IT and BPO separately.
7. Move to High Value Time & Material Services – Leading Companies can diversify to IT Consulting, Architecture Consulting, higher end Analytics which have higher billing rates compared to usual IT Development. Still at time & material contracts, this move can fetch higher revenue per employee comparing to current levels.
8. Improve Onsite/Nearshore Employee Ratio - In Time & Material, Service Providers can leverage Geographies arbitrage to increase revenue per employee. Apart from higher onsite ratio companies can diversify their workforce and develop global delivery capability including high cost locations. This can increase average billing rate and increase revenue per employee.
9. Skim the Market with New Technologies - Companies can skim the market for new technologies and skills at early stage as a regular strategy. Till the market is commoditized new skills will not be readily available in market and companies though still on time and material can command higher billing rates. Examples of this are ERP and eCommmerce skills in late 1990’s. Currently, Service Providers can leverage portfolio of new skills like RFID, Nanotechnology among others.
10. Reduce the Cost and Time to Develop New Skills by Partnering with Academics and Research Institutes - Developing skill sets in new areas can be expensive and time consuming process and can wipeout potential befefits generated by its higher billing rates. Here IT companies can partner with academic and research institutes to develop competencies in new areas on a regular basis in a cost effective way.
11. Diversify into Products – Progressive Companies can take risk and invest in developing products. Though diversification into products can be risky and would require upfront investment, this can completely delink revenue from effort and consequently from employee numbers. Coming out with new blockbuster products is not easy and in this some risk takers can think of acquiring established product companies as well.
12. Develop Productized or IP Led Services – Going forward, Service Providers can also think of leveraging services based on products or IP developed by them. The IP can be licensed and development services can be delivered on top of it. This will fetch higher revenue per employee than traditional software development work.
While some of the strategies are obvious there is interdependence across them. For example in time and material contract the benefits of code reuse will be negated. So instead of employing strategies in isolation, companies need to employee a well crafted multiplier growth strategy.
Apart from developing new competencies and employing new processes this multiplier growth strategy will require Service Providers to recruit, develop and retain different levels of talent. Proper formulation and execution of this multiplier growth strategy will separate winners from the rest of the crowd.