RoI on Human Capital: Howre Indian IT Services firms faring?

In this globalized world, where knowledge is the hot currency,
human capital seems to be its printing press. Therefore, like never before, a
nations wealth and future progress hinges primarily on how efficiently it
develops and utilizes its human capital. In the last few decades, many emerging
nations like India and the Philippines have cleverly used the immense power of
their human capital to leapfrog into the league of technologically advanced
nations, leaving behind other developing nations that have relied on their
natural resources or physical labor. A shining example of this achievement has
been the global IT and BPO industry.

The availability of low cost, highly skilled labor and the role
it played in shaping the global offshore IT Services industry in its initial
stages is very well documented, but the ability of Indian IT services firms to
transform and constantly align the skills of their workforce to meet the needs
of a dynamic global market has been a crucial factor which requires a deeper
examination.

For a long time corporate managers have used financial metrics
like net present value of cash flows, economic value added, return on investment
(RoI), etc for decision-making and resource allocation for value creation. But,
in recent times, the application of these has encompassed human resource
management. And so it would be interesting to see how quantification of the
value of human capital of global and offshore IT Services firms appear in the
companys value creation proposition.

Understanding Offshore IT Services

Global IT-ITeS offshore revenues have already crossed $70 bn and India
commands a lions share. Revenues of Indian IT-ITeS industry exploded from a
mere $1 bn in 1997 to approximately $40 bn in 2007. Interestingly, this growth
in financial numbers can be linked directly with the employee growth witnessed
by these firms.

The business model of IT services firms indicates a high degree
of dependence on employee numbers to fuel growth. Unlike in manufacturing where
capacity is built and grown by capital expenditure on tangible fixed assets,
services firms have invested in intangible assets, ie people, and their capacity
buildup has been in terms of number of employees. Though services firms globally
have been trying hard for quite sometime to decouple this strong relationship
between revenue growth and employee count, but it seems there is no escaping
from this reality soon.

How the HC Metrics Stack Up

Revenue/Employee is a highly overused human capital productivity measure.
The latest Infosys Revenue/Employee figure stands at $43,000, about one-third of
Accentures figure of $132,000, and so, Indian IT firms have faced criticism
time and again for scoring low. But its important to link the genesis of the
Indian and global IT services firms to these figures.

Source: Tholons Analysis

Indian IT services firms started out about two decades ago by
providing low-end application development and maintenance work, essentially to
save cost for their clients, and have steadily progressed from there. In
contrast, global IT majors like Accenture, IBM Global Services, and EDS, etc
have been providing consulting services for decades across multiple geographical
borders. Therefore, the existence of this wide gap for revenue/employee should
not be seen as a surprise. But tie together Revenue/Employee, and EBITDA/Employee,
and the tables turn upside down.

CSC scores highest in both Revenue/Employee and EBITDA/Employee
with figures of $185,012 and $26,012, respectively. For most offshore IT
services firms, EBITDA/Employee figures lie in the range of $9,000-$13,000 which
is comparable with Accentures figure of $13,150. This is despite having a
considerable low score on Revenue/Employee. So it clearly demonstrates Indian IT
Service firms capability to generate higher income through efficient use of
its human capital.

Employees working in IT Services companies are two-dimensional
investors. They invest their human capital expecting adequate return and growth
in salary and career. Also, frequently, they have financial ownership interests
in the company. So a measure of Market Cap/Employee would indicate how much of
the companys value can be attributed to each employee.

Human Capital RoI (%) = ((Revenue (Total Operating Expenses Personnel Cost))/Personnel Cost) 1)*100

In this measure, Indian IT Services firms command two times
premium in the market as compared to MNC IT Services firms. Infosys scores the
highest with $385,000 firm value for each employee.

In the capital market perspective, the "first-order"
drivers of shareholder value are return and growth. Adding a human capital lens
to it, these drivers become human capital RoI (HC RoI) and employee growth.
Firms typically experience a trade-off between these two measures. So viewing
these two components together would indicate how credible the investment in
human capital has been and what has been the human capital efficiency and value
creation for the firms.

Global IT majors like Accenture, Capgemini, and CSC scored low
both on HC RoI as well as employee growth. So even in a low employee growth
scenario, these companies werent able to obtain higher return on their human
capital. In contrast, large Indian IT Services firms scored high on both counts,
indicating their ability to scale up HR dramatically while maintaining high
human capital efficiency figures. This has been possible through heavy
investment in world class training infrastructure for talent development,
excellence in recruitment process thus attracting best talent, ensuring highest
standard of corporate governance, and honesty and transparency of operations
leading to talent retention.

Future Outlook

Scoring high on most human capital measures, the Indian IT Services industry
has shown how the potential of human capital can be maximised to achieve global
leadership. But there are significant challenges ahead. One of them being
becoming multi-national companies themselves with global footprint and thus
having a larger foreign national employee base. It is then that the human
capital management efficiency will be put to the real test. Also, going forward,
Indian companies have to attempt to leapfrog into the big league through major
acquisitions. That will bring along another set of human resource integration
challenges which Indian companies would be experiencing for the first time in a
situation where the supporting environment which is available in India will be
missing. Also moving up from being a vendor to partner or a consultant for
clients would require significant investment in human capital, and calls for
developing an ecosystem of innovation and constant learning.

A beginning has been made by some companies in this direction.
Infosys set up Infosys Consulting in 2004, and the good news is that its latest
Revenue/Employee figure is $226,794 which is more than five times the Infosys
average Revenue/Employee number. But its revenue contribution to overall
business is a miniscule 1.5%. Similarly for TCS, 3% of its revenue comes from
consulting work which is insignificant compared to global peers.

So the story of using human capital for global leadership by
Indian IT services firms isnt over yet. Indian companies have done remarkably
well so far, and if the human capital aspect of business continues to get its
share of importance in these companies, there is no reason why this story cannot
see a happy ending.

Avinash Vashistha, CEO,
Tholons

maildqindia@cybermedia.co.in