IT companies may take time for non-linear growth

Indian information technology services providers may have seen a dip in net hiring this financial year. However, the drop is more due to the slowdown in the business enviroment rather than a shift towards non-linear growth. Experts believe it will take another three to five years for Indian IT firms to move to a non-linear business model.

Non-linear growth does not measure improvement on the basis of headcount growth, which most stock market analysts do. Instead, organisations measure growth by the number of value-added services they offer to customers, by introducing non-linear or non-headcount related services like platform-based solutions or invest in creating intellectual property (IP) rather than focus on just pure application development and maintenance (ADM) work.

Sudin Apte, senior analyst, Forrester, believes the move towards non-linear business growth was initiated by top IT firms even before the slowdown began. “Currently, just about 3 to 4 per cent of business that Indian IT firms get are on non-linear pricing. It will take at least three to five years for Indian IT firms to get on to the non-linear business model,” added Apte. He said a change in client mindset is also important.

Agrees Sidharth Pai of TPI: “Achieving non-linear growth is a long process. This reduction in headcount is a direct impact of the softness in the market. on subdued price realisationOf course, outcome-based pricing and platform-based service offerings are some of the components of non-linear growth. But these are still a small part of the revenue.”

A recent Edelweiss Securities’ report says the correlation between headcount growth and revenue is beginning to break, as firms deploy a shared services model. “Shared services means using fungible resources across multiple projects simultaneously. This requires non-intrusive, yet collaborative, infrastructure to be put in place along with client approvals. As companies use more shared services in their delivery, we could see realisations hold up despite pressures on rack/coupon rates with customers,” said Viju George in his report.

Global players like IBM or Accenture are much ahead of Indian IT players on offering non-linear services. However, analysts feel a comparison is not fair. “The IBM and Accentures of the world also have other business, a different asset that allows them to bundle their services offering,” opined Pai. Besides, says Apte, a large chunk of the work the MNCs do is onsite. “The consulting business of all these firms are big,” he said.

Besides, says Alok Shende, Principal Analyst, Ascentius Consulting, one has to look at the volume growth for the immediate drop in headcount growth. “The volume growth in this quarter or for some for the last few quarters has been in single digits. Most of the performance that has come is due to cost management,” he adds.

Shende feels it will be much faster for mid-cap firms to get onto the non-linear model than for the large cap firms. “Non-linear is a small proportion of the overall growth. These firms still have captive bench strength,” said he.

But analysts feel this slowdown has certainly made Indian IT firms manage their costs better. “One thing for sure is that Indian IT firms will not go back to the same levels of bench they earlier had. This slowdown has made them realise the merits of cost efficiencies,” said Sabyasachi Satapathy, Partner, Tholons Advisory.