Indian IT's biggest headache

Can Indian IT firms get more productive? This is an issue that Indian IT firms, or their bosses, are increasingly obsessive about. Words like automation and innovation keep surfacing in articles on the industry with the kind of regularity that would suggest that either change is in the air -- or that the industry is desperately seeking one.

If these excellent charts put out by Mint newspaper are anything to go by, the smart bet would be on the latter. These astonishing statistics are the equivalent of an ice-cold bucket bath for the IT sector, revealing the magnitude of the challenge confronting the sector, one that seems to compound itself daily.

The key metric that governs all of the other ones in the industry is linearity in growth -- how much more revenue can a firm's employees generate without adding more bodies? It is here that Indian IT services firms have struggled the most.

In 2008, the average revenue per employee was $44,775. Today, it has actually gone down to $41,619, while revenues have more than doubled from $67.7 billion to $146.5 billion.

The implications of this -- that you cannot eke out more from less, or even the same number of bodies -- have human resources departments in a tizzy, as they essentially need to hire armies to continue to keep the engine going. If TCS, Infosys, and Wipro continue to grow around 12 percent a year, and if the revenue per employee figure remains the same, Mint said that the collective headcount of the three will be a mammoth 1.25 million people -- more than the 1.24 million hired by the entire IT sector way back in 2007.

This problem is compounded by the fact that all of these IT firms have anywhere from 25 percent to 30 percent of their workforce sitting on the bench waiting for new projects to pop up, which is obviously an enormous waste of resources, much like a company with very high working capital. According to Mint, just the number of people on the bench will far outstrip the number of people employed by the firm in 2007.

Aside from the headache of managing what is close to the number of people in the Chinese Red Army, this situation raises an even more pernicious problem: Where to find new hires to keep revenues bubbling along? Apparently, even after factoring in average attrition rates for Infosys, TCS, and Wipro over the past seven years, the Big Three alone would have to collectively hire around 1 million bodies, which by itself is a staggering task. What compounds the matter is the increasing impossibility of finding suitable candidates according to all of the Skills Reports that proliferate in India.

Ultimately, most public companies live and die by their stock prices, since they are so inextricably linked to stock option-fuelled compensation across the management hierarchy. The problem for Indian IT firms is that the market is obviously aware of the linear growth conundrum -- the PE ratios for the NSE IT index fell from 30.8 in 2004 to 20.1 today.

I recently wrote about people like Rohan Murty, son of Infosys founder Narayana Murthy, who are trying to crack this problem by attacking it from a different angle -- measuring productivity, which will allow firms to make the best manpower-related decisions for projects. But barring a revolution in automation that will allow bots to do much of the grunt, back-end programming that takes place today, the productivity problems for the Indian IT sector seem to be here to stay.