I was surprised to read this article on TCS planning to hike rates because of the rupee moving north. Why would a client want to pay more because of the exchange rate? When the rupee was depreciating for the good part of the last decade, did companies offer a discount to customers? I find this strange. It would be better to sell a rate hike by quoting an increase in wage costs at offshore. This is a fact and is something clients would be more willing to listen to. It is also strategically safer because wages rarely fall in India, but the rupee can depreciate again. This is one pill clients are unlikely to swallow easily!
Indian Business Pricing
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I came across this piece in the Times praising US tech companies. The article uses revenue per employee (RPE) as a yard stick and claims "US IT professionals more productive". Basically we have Wipro,Infosys,TCS etc on one side and IBM,Dell, HP etc on the other. The arguments are backed up by numbers but the logic is flawed. I find it hard to believe RPE can be linked to a professional's productivity. The revenue a services company makes is broadly (ignoring systemic factors like currency risk, credit risk etc) dependent on the following :
- Bill rate (significantly higher for 'Western' players)
- Utilization rate (More or less the same)
- Offshore onsite mix (Much better for Indian players).
The higher RPE that US companies make is largely on account of the following:
- Significantly higher bill rate
- Broader portfolio that includes software products and consulting which traditionally have a greater RPE than pure services
- Higher onsite/offshore ratios leading to a higher top line for the same number of FTE's billed.
None of these factors have anything to do with employee productivity. In fact for certain types of engagements staffing more productive employees could reduce RPE! A better caption for the article could have been "US companies turning people capital into cash more productively".
Account Management bill rate offshore onsite mix Pricing productivity revenue per employee Strategy utlization
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I stumbled on this interesting article on the TCS website. It says "commoditised or lower- value software development services will move to lower-cost locations such as Vietnam and Cambodia". I did a quick search on the Vietnamese Software Association and found some interesting salary data: | Direct Cost Comparison, Software Professionals |
| Wages for Software Professionals (Annual, USD) |
| USA | $63,000 |
| India | $5,000-8,000 |
| Vietnam | $1,400-6,000 |
That's a whopping 72% cost differential at the low end assuming these figures are correct. OK,OK, I know there are overheads. The website goes on to claim "Vietnamese programmers charge less than half of what their counterparts in India make. Including overhead charges, corporate customers pay approximately $20,000 per person per year in Vietnam, compared to $30,000 in Russia or Romania and $40,000 in India.". Phew! That's still a clear 50% cost differential including overheads if these figures are going to be believed. Clearly, the Vietnamese can play the cost game. Now, can they scale ? A little more digging revealed:
| Year | Number of companies | HR intake (annual) |
| 2000 | 229 | 6000 |
| 2001 | 304 | 9000 |
| 2002 | 400 | 13000 |
| | 74% growth rate over three years | 116% growth rate over three years |
Clearly nothing flaterring here. I next checked out one of the largest Vietnamese software companies FPT software. Here are some interesting facts:
- The company is CMM level 5 certified. Woa! Anything process centric and repeatable they can probably execute well.
- 6100 people on the roles and they claim to have $ 296 million in half yearly revenues in 2006. This means close to $100K USD revenue per employee in a year. I find these figures really really hard to rationalize with the cost structures they are claiming. Either I have misinterpreted the statement below or FPT needs to fire their accountants or somebody forgot a decimal point! From the website : The Corporation has achieved US$ 296 million in total revenue for 2006 H1…Also in the first half of 2006, the number of employees at FPT reached 6,120.
- Impressive client list though that reads : IBM US , HP, Honda UK, Hitachi Ltd. Bulk of the clients are Japanese though which is interesting since the cost advantage is maximum vis-a-vis US. So it's probably not just cost. But again this company got CMM level 5 only in 2006. So maybe all those US companies which would not talk to you unless you had CMM, will now open up.
-They have put up their representative skills as a bunch of programming languages. No talk to domain or bull shit. They are positioned as a coding shop. PERIOD.
Here's my take on all this:
- Vietnamese companies need to invest in training and HR development. Once the HR pool broadens, costs might fall further and make them real killers in the cost game.
- The really small code shops in India have a potentially serious issue on hand. They cannot reduce costs much further as their margins are already poor.
- Larger Indian cos will either set up operations in Vietnam to take advantage of the low cost, or will subcontract as the TCS website mentions.
- Marketing seems to be weak from what I can gather from the websites. The message is scattered and amateurish.
- The Indian BPO sector will probably feel the pinch more than the IT sector.
- A bloody price war will erupt among these newer entrants from SE Asia once they start adding scale and more join the fray.
Looking forward to hearing your views on 'NAM 2.0!
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