Tuesday, June 30, 2009

IT / ITES Companies: Margins Management - A personal view

During these recessionary times, every small or big business / company is looking to save their margins. When their top line is coming down at a high speed, it is becoming difficult for them to maintain their margins with the expenditure still rising or at best being stagnant. With this at the back of their mind, each company is looking forward to cost cutting and IT budgets are the prime targets. In such a scenario, with every Jack in the market looking to slash their IT budgets, then how do IT / ITES Companies maintain their margins or bottom line?

Let’s start with the major cost heads at an IT company. I would say it to be manpower, infrastructure and operational. Manpower costs include salaries, training and knowledge management and other allied activities. Infrastructure can be both the IT and immovable like Land, building etc. Operational would include travel expenses, facilities at office, electricity, water, etc. Out of these, I believe if we can target manpower and operational expenditure, we should be able to bring handsome reduction in the net expenditure in the profit and loss account.

Salaries demand more than 40% and manpower costs around 60% of the net expenditure pie of a typical IT company. If we can somehow target this segment, we can achieve some justice in our endeavours. Some major areas that constitute manpower costs as a whole are: Employee Salaries, Employee benefits like paid holidays, ESOPS, other perks, etc, Training Costs, Knowledge Management Costs, etc

I will target each of these heads separately and give suggestions as how these can be targeted. Salaries are a major cost head in the profit and loss account of a service based industry like IT. We can look to rationalise the constitution of a project with respect to its resources in the manner of their seniority and their cost and earning capacity. Senior members in the team should be moved to high revenue earning roles, so that margins improve. This will give double benefits: seniors would enjoy and cherish a new and challenging role which warrants people high on experience and worth and this will allow us to bring parity to the margins as well.

Another most common way this is being tackled with this year at most of the major IT companies in India is: NO SALARY HIKES. This is working well in the short term for the company as the employees are looking to tide the bad economy and even the management wants to tide the bad phase and get a fresh start with a better economy. However, I feel this approach is fraught with a lot of problems in the longer run. Once the economy turns for good, the employees who are feeling betrayed at no salary hikes (in the times of inflation and high prices), will look for greener pastures and change loyalties. This way, the companies may loose good employees whom they have trained over a period of time and were well attuned to the company and its ways and the ways of the clients they were dealing with. Starting a fresh with new employees would be tough when we are reeling under pressure from all the sides.

Optimising employee benefits would be another important area to touch, because I believe due to high margin cushion in the olden days, companies and their managements were able to maintain such lucrative and tempting employee benefits like ESOPS and other perks. However, during these bad times, which will allow bad processes to die their natural death and lead to optimization in every area possible, I think, rationalising such benefits would be a good thing. The companies should not stop these benefits at one go, because again it may lead to bad tastes with the employees. I would suggest taking these steps gradually and optimising them step by step.

Managing onsite – offshore composition would be important. Keeping a high number of onsite employees is very costly and can turn the balance against you. Hence, managing this ratio carefully on the basis of complete cost-benefit analysis is important. One can look to reduce the senior management of the project form onsite client locations and have only the actual ground workers working from such locations. Even the number of dormant executives like those from sales, marketing and other such allied functions can be recommended to go back home and work from there. Even having common heads based on common locations instead of having one for each project can be important. The idea of having common technology experts as common heads for projects can also be looked into. The client may not allow this kind of restructuring, however, this can be discussed with him and taken up.

Training and knowledge management is very important in an IT organisation. Proper team wise gap analysis can lead to significant improvements in this field. Trainings should be dealt in house, where company employees proficient in a particular are of expertise can come and do knowledge transition and give hands on experience to those in need. More and more web based webinars, knowledge repositories, white papers, articles, etc should be made available to enable on demand knowledge management. Certifications – technical, process, management, etc should be made mandatory. Article, knowledge document, etc submission should also be made mandatory as part of the performance review.

Reducing bench strength can be an important factor in improving margins. I agree, as a part of CMMI, companies have to maintain a particular level of bench strength; however, they should look to maintain only that particular level and not exceed it in anyway. They can also look to hire project wise, or requirement wise, which will reduce bench strength significantly.

Rationalising employee usage should also gain importance. Companies should check over employment in teams and projects. Wherever possible, the number of employees should be reduced and moved to other revenue generating activities.

Managing and optimising operational costs is also very important. We can see huge amounts of electricity costs with 24X 7 electricity usage. Instead of this, companies should take proper care of handling electricity misuse. They can look to go for smart lighting, where as soon as the last person is out of the room, the lights are automatically switched off. Better handling and management of other common resources like coffee vending machines, water can lead to significant expenditure reduction.

Better managing the recruitment and HR practices can also return good results. Instead of going to each college and hiring, companies should look to arrange for a common hiring at a common place. They can arrange their recruitment teams and give them specific colleges, if need be, though at a common place at a common time. Or else do common hiring for a group of colleges located at a place.

Managing travel policies can help improve margins too. Only selective travel plans, that too prior approved ones should be paid by the company. And travel plans should be left to the discretion of the project management team.

Managing infrastructure well can also add some percentage points to the margins. Proper software licence policy and management should be in place. Improper use of computer infrastructure should be brought to light and remedial actions should be taken immediately. Other infrastructure needs like office space and land can be managed well. Large business complexes can be taken on long term lease and lease rates should be negotiated till the very last.

I think, there could be specific areas of improvement for teams or projects which can be looked into from their individual perspective. It is the collective effort of the management and other employees to see the company margins improve and sail through these tough times. The best approach would be to make those changes which affect the employees directly, gradual and arrange for open discussions and spread the word on the impending changes. The management has to look forward to first changing the attitude of the employees towards the changes and make them understand the importance of such changes. There are other areas of improvement as well, which I may not have dealt with here. However, I am open to suggestions and recommendations and would love to make amendments wherever necessary.

All the Best!!

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