Living on the margins

A large Indian software company is claiming it’s going to add an eye-popping 25,000 employees, almost half of Microsoft’s worldwide headcount, in the next 12 months.

And Infosys’ 28% margins are extremely high for a services company:

The company plans to hire another 25,000 employees over the next year, increasing its payroll by nearly 50 percent. Infosys said its revenue should increase by 22 to 30 percent this year, and its profit should rise by 26 to 28 percent…

… despite 15 percent wage increases this spring, Infosys said that it expected its profit margins for fiscal 2007 to be about 28 percent, unchanged from last year… The Indian technology services companies like Infosys, Wipro and Cognizant have operating profit margins that are two to four times the level of their American rivals like I.B.M., Accenture and Electronic Data Systems. [Link]

The margins are likely to fall in the future; stories of raises and job-hopping in Bangalore are already legion:

The forces squeezing margins, analysts say, include regular wage increases in India of 10 to 15 percent a year, high turnover, and more competition from American companies that are hiring and acquiring in India to narrow the cost advantage enjoyed by the Indian outsourcers. [Link]

The only way to compete with Indians’ intrinsic cost advantage is to join ‘em. And, in fact, EDS just made a bid for Mphasis in addition to doubling its own Indian headcount.

37 thoughts on “Living on the margins

  1. …but then the question is – of these 25000 is there even a single person who can match up to the level of any random Microsoft employee?

  2. but then the question is – of these 25000 is there even a single person who can match up to the level of any random Microsoft employee?

    considering how bad MS security loopholes are…the question should be the otherway round.

  3. considering how bad MS security loopholes are…

    I used to work at MS. People conflate general computing issues with MS-specific issues all the time. It’s as stupid as a traveler blaming an entire country after meeting one rude shopkeeper.

    • There is nothing unique about MS’ security issues– I have to update my Mac every two weeks to fix security holes in OS X, and Firefox every month. This is a problem with software complexity far outstripping human mental capacity under current software methodology.

    • Unlike all other OS’s, Windows’ update speed is slowed by a massive compatibility test matrix; neither Apple nor Linux support even a fraction of what Windows commits to supporting

    • XP was not designed for always-on broadband connections — Vista is the first OS where that’s a fair question

    Having said that, they need to double or triple their rev speed by doing smaller releases. The Vista schedule has been a train wreck.

  4. wow… i know the nephew of the infosys empire.. he just visited bangalore and sent me photos of the entire ‘campus’… woah nelly..didn’t know it was THIS BIG!!?!?!?!?!

  5. Well.. i went to school with Rohan, Narayan Murthys son, its really sweet to see a desi company kicking some ass.. and Infosys is way cool, i remember, they’d donated an entire computer lab to my school Bishop Cottons in bangalore..

  6. Manish – You obviously know more about MS security issue than most of us. However, that doesn’t afford you the right, esp, since you are the minder of this blog, to call people who critique your erstwhile employer “stupid”. Totally unbecoming for you guys.

    “I used to work at MS. People conflate general computing issues with MS-specific issues all the time. It’s as stupid as a traveler blaming an entire country after meeting one rude shopkeeper.”

  7. Expose:

    Manish – You obviously know more about MS security issue than most of us. However, that doesn’t afford you the right, esp, since you are the minder of this blog, to call people who critique your erstwhile employer “stupid”. Totally unbecoming for you guys.

    Actually, he didn’t call anyone stupid- he just called what they did stupid. Read what he said again..

    “I used to work at MS. People conflate general computing issues with MS-specific issues all the time. It’s as stupid as a traveler blaming an entire country after meeting one rude shopkeeper.”

    So there.

  8. …but then the question is – of these 25000 is there even a single person who can match up to the level of any random Microsoft employee?

    And that matters…how? I don’t really think anyone at Infosys is comparing themselves to MS…yet.

  9. Expose,

    oh please, daycruz - the implication was clear as daylight.

    Wow… this is very impressive, can you please tell me what I’m thinking now?

  10. Infosys said that it expected its profit margins for fiscal 2007 to be about 28 percent, unchanged from last yearÂ…

    One of the reasons Infosys and other Indian software firms have high margins is due to the exchange rate of Rupee against US Dollar. It is helping the IT industry (95% exports), whoes upwards of 90% business comes from the US, but hurts other industries. Industries that require buying American machinery is hit directly with this low exchange rate. It costs more to them to import machinery. In 1994 the exchange rate was $1= Rs. 32 Now $1 = Rs.45 A depreciation of almost 50%

    Just imagine is the exchange rate went back to what it was in 1995, there wont be any margin left for the IT exporters. Thats why there was NO IT exporters in 1994.

  11. Pretty reckless to add so much personnel, then?

    I assume this is addressed at my comment. I just pointed out the reason for HIGH margins (well atleast one of them) in IT exports. Thats all.

  12. I used to work at MS. People conflate general computing issues with MS-specific issues all the time. It’s as stupid as a traveler blaming an entire country after meeting one rude shopkeeper.

    I am not conflating general computing issue w/ MS. I dont work for msft/infy. I do on occasion write wince code(primarily i am not a sw person in the traditional sense…Embedded,DSP if any) I use windows as my primary web/editing pc, i dont have a religion against MS like some on the gnu side of the aisle. However ms’s security loopholes are annoying to say the least and when contrasted w/ freebie nixes around its a serious charge that msft has to accept. As a consumer i did not have to pay anything for those, so the expectations are lower. yet they are more secure wrt permissions and internet secturity. Since msft does charge money the level of satisfaction is quite low. Most of the security problems are MS architechture related. Eg, i had a BHO that installed a sw on my machine. It was annoying trouble i had to deal with. It was clearly and example of stupid design choices by MS. And they can not complaint about lack of resources, they made stupid choices. This is why i dont use ie any more, Despite firefox hogging up the CPU. Add to that there bizzare choice of any application installing a global system hook. And the comment had to do w/ comparison of msft intelligence and infy, msft has done a marketing campaign of sort to suggest that their employees are ‘smarter’ than the rest of the world. Its one thing to boost employee moral, but another when any one really buys into any of that. Looking at their past track record they are not smarter than the rest of the industry nor have they been more creative.

  13. However, that doesn’t afford you the right, esp, since you are the minder of this blog, to call people who critique your erstwhile employer “stupid”.

    The argument is stupid. Hate the sin, not the sinner.

    By way of background, you should check out the crap posted on Slashdot and Digg sometime. Virtually all the dominant tech sites are anti-Microsoft tin-foil hat conspiracy-fests 24/7. Not to mention the NYT technology section, which weekly credits Apple with inventing fire, instead of popularizing other people’s innovations.

    Thats why there was NO IT exporters in 1994.

    Infosys says it’s 25 years old, which would place its founding around 1981. Not sure when they began selling overseas.

  14. Most of the security problems are MS architechture related. Eg, i had a BHO that installed a sw on my machine.

    Yes, the defaults were corporate intranet feature-oriented rather than Internet security-oriented. They didn’t anticipate malware. That was stupid. Then they took half a decade to rev IE. That was bad execution (I can’t fathom what they were thinking in disbanding the team).

    They chose bad defaults based on the wrong target market. It was not an architectural issue– corporations use browser extensions on intranets all the time and bemoan Firefox’s lack of support. XP SP2 set the correct defaults.

    Add to that there bizzare choice of any application installing a global system hook.

    Again, that’s a key feature for developers. RocketPost uses it today (F8 for quick posts).

    msft has done a marketing campaign of sort to suggest that their employees are ‘smarter’ than the rest of the world.

    Certain groups got the cream of the university crop back in the day, and their interviews were by far the toughest I had (I hired maybe 2 out of 50 who made it through three screening rounds). They’ve since lost their recruiting mojo.

    Looking at their past track record they are not smarter than the rest of the industry nor have they been more creative.

    Actually, they’re suffering from exactly the same problem as other giants, e.g. Ebay and Yahoo: they have very smart people hobbled by BigCorpitis and excessive stock option wealth, the quietly vesting. They need to spin out into smaller units, issue separate tracking stocks and eliminate the Microsoft integration tax on entrepreneurial new products.

    A good place for insider critique is the Mini-Microsoft blog.

  15. According to RC Just imagine is the exchange rate went back to what it was in 1995, there wont be any margin left for the IT exporters. Thats why there was NO IT exporters (sic) in 1994.

    Actually, back then comp levels were way lower — so the margins would likely have been unchanged.

  16. Thats why there was NO IT exporters in 1994.

    Pioneers of IT exports are PCS (Patni Computer) and TCS in India. When I graduated from undergrad (in 1993) we had PCS come to our campus for Campus interview not Infosys. in 1994-95 all of these PCS/TCS/Infy were exporting Sw. but what I was pointing out in my comment is that the margins were not there. Mainly due to exchange rate. During Y2k revenues shot up for onvious reasons, but exchange rate helped out great in margins. I wouldnt complain a 50% devaluation of the rupee if I were in the export business.

  17. …but then the question is – of these 25000 is there even a single person who can match up to the level of any random Microsoft employee?

    Comparing Apples and Oranges.

  18. Thats why there was NO IT exporters (sic) in 1994.

    Oh, cmon you think I wish that India shouldnt have any IT exports?? IT exports are just like any export business that gets helped when currency is devalued against the de-facto world currency. Thats all.

    Actually, back then comp levels were way lower — so the margins would likely have been unchanged.

    In 1994 IT exporters were looking for revenues, which started coming in due to Y2K.

  19. Pretty reckless to add so much personnel, then?
    I assume this is addressed at my comment. I just pointed out the reason for HIGH margins (well atleast one of them) in IT exports. Thats all.

    Yes, it was addressed to your comment…if high margins are highly dependent on the exchange rate then expansion should be somewhat cautious, right?

    Anyhow, thanks for pointing out that particular factor.

  20. RC,

    Pretty good analysis.

    TCS (Tata Consultancy Services)/ TU (Tata Unisys) used to be king of getting Indian software personal all over the world on contracts, back in the days. That had been going on for ages. It was more exporting personnel than work being done from India.

    Didn’t Wipro start as a soap manufacturing company? Isn’t the Wipro guy, a Stanford grad?

    You are right, Y2K was the turning point, in part of paucity of specifically COBOL and other assembly languages (I guess used a lot for legacy banking software/ hardware) programmers in US.

    Around that time, “The Economist” had ads after ads every week for services offered by Bangalore-based Companies. At that time, it did not seem that things would turn around so fast.

  21. This comment very long and i am dumping tidbids facts here, they are not totaly random. there is a pattern there if you read it through

    A lot of activity had gone on in the 80Â’s, but it wasnÂ’t noticed. (A) journalists did not notice it (B) politicos did not notice it, you know IBM was kicked out, but TI came in and no brouhaha arundhatis mamas did not notice that. (C) the culture as a whole did not notice it.

    TV as a cultural thing happened in india in the 80′s. Before Hum-Log or Buniyaad there wasnÂ’t a hit TV series in north india. Around the same time significant amount activity was happening in these industries and India overall had a decent economic growth. The mainstream Indian culture had ignored it.

    Think back to the 80Â’s in America. Terminator was a big hit movie. There is a line when the human time traveler described the terminator as being “micro processor controlled.” Thats an eg of US mainstream culture noticing these things, Note genetic engineering was not the word used in terminator. But if the movie was to be written now Genetic engineering would be used, perhaps even a distributed nueral network.
    If i remember correctly RISC was thrown around in Mission Impossible.(early or mid 90s). The point was buzzwords were being picked up by mainstream media and incorporated into entertainment. Perhaps it had to do with the high visibility of desktop computers every where and TV,movies, literature had all sort of mentioned it.

    If one looks at movie, literature, TV from the 80′s in India nothing like this was picked up, b/c all these things were not visible every where. But they were there just beneath the surface so to speak.

    A year or so back there was a silly movie(all bollywhat is silly but thatÂ’s another point) called “om, jai jagdish”. In it anil kapoor yells at his brother saying “you are just a bloody hacker” when he hacked in to change exams grades or something like that. Mainstream entertainers just picked up on it. But this thing has been in the brew for a while.

    So now back to the 80Â’s Well infy used to do many things back then. They even sold a pc clone back in the day. It was 8088 called Gemini. Those were interesting times HCL claimed it had its own OS, compatible with CP/M. It was so compatible that it had the same bugs as CPM

    There was a computer that was sold in India called pineapple. (it was a Singapore reverse enginnering of apple II) they licensed some production to india, the days of kdk (knock down kits) Applese ROMS were copied, and they did some string substitution nothing that well Every now and then you had strings which revealed the word ‘][‘ or apple on those thingies. That machine was sold allover asia.

    TCS had been exporting mainframe sw since the 60′s (as others have already mentioned)

    But largely it was internal market where these companies were doing there bit. India also had semiconductor firms selling 7400/4000 series of ttl/cmos IC and a few transistor companies such as BEL, Punjab Semiconductor, Keltron etc, Largely these were government subsidized if not owned outright as a public sector companies. All of these firms also had software labs.

    Foreign players started showing up in India very selectively. Ti stands out. TI started a DSP division in india in 85, both for local sales(C-Dot doing ADPCM) but also for some design for export too. These all happened after 8t

    There was a government tender under which param series of super computer(basicaly a (100+)of 68k/ (later with sparcs) with crossbar switches). This was used for weather as well as non linear nuclear simulation. The reason was you could pick up sparcs from many sources US/Japanese but buying a cray was out of the question b/c of export restrictions/

    Ever wonder ISRO was able to make pretty decent imaging satellites in the late 90Â’s. And why Antrix makes a good amount of cash selling these images to global custormers.

    This is why I had previously laughed at some simplistic comments here on SM on Indian society being transformed b/c of outsourcing of technical jobs as if all that showed up to India overnightÂ…The history is long and convoluted.

  22. Didn’t Wipro start as a soap manufacturing company? Isn’t the Wipro guy, a Stanford grad?

    No not a grad a dropout. Wipro = western india products. Its still in just about every other thing Wipro got into computing in late 70′s which became its dominant revenue earner after 95 or so. The bad thing about wipro is no employee stock option…

  23. “…but then the question is – of these 25000 is there even a single person who can match up to the level of any random Microsoft employee?”

    And why should we consider an application development/ maintenance services company to a product development company? And exactly what do you mean by level – IQ levels? It’s a successful company, and has touched revenue figures of $2 bil in about 27 years since it’s inception. I’d take that anyday.

  24. I agree with a lot of Manish’s comments regarding MS. I think MS gets a lot more flack for their security issues than they deserve. I ran Red Hat Linux for a while, and that had many security updates almost every week. The market share of Windows also makes it a big target for hackers. It will be interesting to see how OSX copes with increased attention if it becomes more popular.

    Another issue with Apple’s OSX is the lack of consistency. I haven’t used OSX as much as Win XP (I’m primarily an XP user), but I find the OSX interface less consistent than the Win XP interface. I think MS has done a good job of standardising its interface across all its products. I am a heavy keyboard user and find that the keyboard shortcuts are similar across all applications, too.

  25. Greetings: Any suggested links to the legendary job-hopping in Bangalore that you refer to? Also, how is the Indian educational/training system coping with the growing demands of the IT skills-based Indian economy? And how accessible is it for your average Indian?

  26. 1> People, if you dont like MS SW, stop using it. People complain about MS products but then turn around and fire up their windows to do anything. There are options available and unless you start encouraging those options (Mac, linux, whatever) MS would continue to have the market share they have. Please do not use the point I am trying to make to start another argument about MS hegemony of the operating system world. They may be good or bad, smart or stupid . . they are selling you just another product like everyone, if you dont like their product, stop using it.

    2> The profit margin Infosys is making has less to with the exchange rate and more with the cost of labor in India and plain economics. Just because exchange rate was USD 1 = INR 35 many years back does not mean much. If that was the case then India would be exporting everything rather than importing stuff. In case you read basic economics, it will tell you that demand and supply would decide what is the exchange rate. We are not a managed exchange rate economy like China.

    Cheers

  27. No one ever asks how Infosys treats its employees. I am close friends with several people in Infosys, and my reaction to what they get: pathetic. They work 10-15 hours every weekend, and have no life. No one looks at this aspect of it.

  28. I am close friends with several people in Infosys, and my reaction to what they get: pathetic.

    Is that your reaction or their account of what is happening? Infosys stopped recruitment advertising a while ago. They receive a zillion applications of which about 2% get hired. It’s an open job market. Pathetic.

  29. No one ever asks how Infosys treats its employees. I am close friends with several people in Infosys, and my reaction to what they get: pathetic. They work 10-15 hours every weekend, and have no life. No one looks at this aspect of it.

    ??? Is infy forcing them to do that job…The individuals involved choose to do that. They r free to find another career if they routinely find that they need to take there work into weekends… without knowing individual its a hard thing to say but quite often if that individual is struggling its their inability to not perform in that environment. Maybe your buddies shouldnt work at that kind of job. There may be other companies where they can be more productive and have a life.

  30. Just imagine is the exchange rate went back to what it was in 1995, there wont be any margin left for the IT exporters.Thats why there was NO IT exporters in 1994.

    In 1981 (infy start) and 1991 the exchange rates (INR/USD) were 9.1 and 23 rupees per US dollar. So according to your theory by weakening the currency successively IT exports should have exploded all the way to 1994. In fact the exchange rate was 43 INR/USD in 1999. Which is pretty much what it is right now ~ 45 INR/USD. Yet, look at IT exports from 1981 to 1999 and from 1999 to 2006, the respective currency devaluations of (43/9.1) ~ 80% devaluation and 44/43 ~ no change. Another reason which has been mentioned is the salaries of employees. The major component of IT companies’ cost is salaries. Take a look at salary increases between 1994 and 2006 and you can see the minimal impact a 50% weakening is going to have on margins. Salaries at the bottom level have increased by a factor of three and in middle management they are approaching 10-20X increases (anecdotal). Heck people these days have a 30% increase in salary in 1 year.

  31. Tata Consultancy Services Ltd. will recruit 30,500 Employees in one year. We can expect a lot of rivalry between Infosys, Wipro and TCS in the coming years. The interesting thing is that both TCS and Infosys are trying to hire more non-Indian nationalities. This shows that Indian companies are trying to become global players.

  32. Peterpan,

    I hope you have heared of a phenomenon called Y2K. It was once in a lifetime thing that did so many changes that its hard to list here. – 1991 forex crisis in India and famous then Finance Minister Manmohan Singh’s (and PV Narsimharao at PM) opening up of the economy with the move to make Rupee partially convertible … Focus on exports to get Forex situation under control ….

    All of these events matter, but over riding all is Y2K and the internet bubble.

    BTW Rupee is still not fully convertible.

  33. All of these events matter, but over riding all is Y2K and the internet bubble.

    I disagree. The real reason is availability of large manpower to do this kind of work. Eastern Europe has several locations cheaper than india but no one can assemble large teams there. On the other side so far india has not had a skype coming out of there, this is where eastern european companies are taking advantage of. Y2K was mostly a sham operation. I worked for a company which was forced to hire outside consultants so that it can get a government approved Y2k seal of approval, ow some moron(or criminal as he may have been bribed) refused to budge, without that selling this hw to government entitiy was out of the question Our software was time dependent but not date dependent and it did not have an OS, it was a self contained state machine, yet he refused to have a separate category, so the boss decided to find a cheapest consultant to sit and drink soda and sign off that there is no Y2k bug.

  34. GGK, What I am saying is that due to Y2K Indian IT firms got the exposure that they were seeking. They used the exposure beautifully to show what they can do and what other services they can provide. While this was going on due to the internet bubble massive internet infrastructure projects were going on creating the bandwidth needed for a good offshore IT operation. As the internet bubble burst, the infrastructure was already in place and INFY had won over lot of clients by sheer enormity of their talent. Then the flood gates really opened as to cop with the Telecom/internet downturn more and more companies needed more and more work to be outsourced.

    I lived thru’ the whole cycle working in a major Telecom equipment manufacturer. I saw how outsourcing stated and where it is today. In my company there are certain functions that are 70% outsourced now, which were all done by US based employees in 1999.

    INFY and other Indian IT exporters are a good example of making the most of an opportunity. They were able to do it because of the huge pool of talented people that they can draw upon.