Increasing Revenues with Workforce

Most offshore IT services companies are increasing their employee base by thousands each year. The simple logic for most have been that as revenues increase, the need for people to deliver services also increases. So, as the revenue has increased, so has the number of employees. Essentially they are growing the same way as they grew when they were a fifth of their respective current size in terms of revenue.


Two simple rules can spoil the party:

• What works when you are small does not necessarily work when you are big ( or even doesn't necessarily work when you are small but at a different time)
• What goes up, comes down

So, while these companies are pushing their employee base in pursuit for more revenues, what will happen when the inevitable slow down happens?

These companies run the exposure of being left with a sea of workforce which is not required and not longer productive on a "bench" for future business. This will result in high cost of retaining these people which will just not be sustainable and result in large scale laying off of employees. This phenomenon of large scale layoffs has hardly been seen in these offshored countries like India. While there have been those occassional companies that went bust resulting in loss of employment but there are just so few that chances are that most techies will have to think hard to think of a company they knew which went bust.

In comparison, software product companies have a fantatistic model when it comes to such co-relation of revenue and employee base. The productivity (dollars/employee) for software product companies is very very high. Once the software is developed and released, there is hardly any incremental cost for selling that same software to any number of customers. They can scale revenues literally overnight by just handling their production (of cutting CDs and license management) while for any technology services company, this is just not attainable as they will need to overnight hire hoards of people which is not possible without compromising on quality of resources.

To delink employee base growth with revenues, most technology services companies are moving towards services which are of higher value. This may include services around their own products (which is not easy as there are hardly any product successes to make it the part of the story) or those related to activities like consulting. The third option is to use strategic innovation driven improvements in delivery IT services. This could be through improved automation and tools or other technology levers which will help drive higher revenues with the same base of FTE count in a project.

Clearly, the industry will belong to those who move from the current cost based revenue model to value based revenue model.

This is already happening and bound to be the gameplan of most Tier 1 and 2 offshore based IT services companies. Since the rules of the game are changing, it agains throws an opportunity for a new player to move in the top league and for some laggards to potentially drop if they don't read the future and act fast enough.