Accenture’s decision to add another 8,000 headcount (HC) in India is making news. This decision will make their India HC larger than US.
For me a more significant inflection point will come in a few months. It’s almost certain that Infosys will report a higher profit than Accenture this quarter. Right now they are about neck-to-neck - Infosys’ net income last quarter was $218m; Accenture was $284m.
Important to note is that Infosys is generating the same profits as Accenture on much smaller HC base. Infosys had 70K employees last quarter compared to Accenture’s 140K employees.
This is a classic “lean” business model situation where the lower-price players also end up being the most profitable. SouthWest in airlines and Wal-mart in retailing are the obvious examples.
P.S. I can’t resist a friendly dig at Vinnie Mirchandani here. In October 2005, he felt that Infosys was displaying hubris when Nandan Nilekani, Infosys CEO, suggested, in a NY Times interview, that Accenture, EDS and others needed to change their business model. Vinnie pointed out that “Infosys revenues are less than 5% of those of IBM Global Services, less than 10% of EDS, less than 15% of Accenture”, implying that Infosys had no business to offer advice to the big players. How quickly things have changed!
Sharad,
Nowadays in IT services industry, the profits are roughly proportional to “India Headcount”.
Accenture has less than 30000 employees in their India workforce in contrast to Infosys’ 70000. Once Accenture manages to come close to Infosys numbers in India, we could make a fair comparison.
Accenture and IBM are in the process of fine tuning their India strategies and making sure that they perfect the art of delivering “Cost and Higher value” to their customers. For Accenture, this “Higher Value” remains their consulting and end-to-end system integration prowess while it is “vast software landscape” for IBM.
It is also great to know that Infosys and Wipro are vigorously developing their consulting and infrastructure management capabilities respectively.
The irony is that, Accenture, IBM, EDS are learning lessons from Infy, Wipro to operate in India while Infy and Wipro are trying to emulate Accenture and IBM for higher value offerings.
It is battle of “scale and spectrum” right now in the IT Services space!!!
Thanks,
Arun.PC
Sharad,
I totally disagree with you putting ‘lean’ label on Infosys.
With Bharati and ICICI bank, it made sense as these businesses scale better and look better with more volume flowing through them (similar to Wal-Mart and Dell).
The cover story of Feb 11, 2007 issue of Business today talks about decreasing reveneue/employee and profit/employee at the top tier Indian IT outsourcing vendors. Couple with the difficulty in attracting and training suitable people, the business model could only get worse with scale.
Regards,
Ravi
Ravi,
Thanks for a different perspective.
My take is that Infosys profit/employee is still TWICE that of Accenture (based on last qtr’s results). This is despite Accenture’s high-value consulting practice and its ferocious effort to embrace the global delivery model. Since both are in a headcount-based services business, this does give Infosys a critical business model based edge.
Traditionally, a lean business would leverage its lower cost-structure to displace incumbents AND expand the market. In case of the IT Services industry, this market expansion dynamic is not playing out very aggressively. Part of the reason is that, as you point out, Infosys and others are now supply-side contrained. This is creating scalability issues for ALL players. Its not clear to me that this tight labor market will necessarily reduce the structural cost gap between Indian and MNC players. I can see one scenario where it might well perpetuate the structural cost gap.
thank you for drawing me in to this debate. No question Infosys is well run. But I would disagree about your comparison to SW and Wal Mart. Wal Mart made $ 11 bn in net profit on revs of $ 315 bn in 2005. Could you dream of Infosys ever accepting that slim a margin? SW has been unbelievably disciplined in keeping fares in check, hedging on fuel etc.
I do not see either pricing or cost discipline in Infosys. Infosys has smartly taken advantage of a fat western pricing model and is driven to please Wall Street far more than buyers. Nothing wrong with that. But it is not sustainable long term. When secular services margins are in the 20s and 30s trying to sustain 40s in mature markets is not going to work. Unless it moves into newer innovation areas, the apps and infrastructure management markets are going to be challenged by SaaS, non-Indian vendors and more automation from the IBMs.
BTW - I help CIOs negotiate deals, so I typically take the buyer not the investor or vendor POV, Nothing would please me more than to see Infosys emulate SW as I wrote below and become truly customer friendly and price and cost disciplined…
http://dealarchitect.typepad.com/deal_architect/2005/06/what_offshore_v.html
Vinnie,
Thanks for commenting. I am big fan of your blog. I do agree with you that Infosys has made itself vulnerable by getting fixated on its 30+% margins. I see Cognizant, among the Indian players, starting to put pressure on those margins in the coming year. Frankly, Cognizant has made smarter moves than Infosys over the years (see post about this). It’ll interesting to get your buyer POV on Cognizant in one of your posts.