Saturday, May 10, 2008

Developing technical leadership: Rs. 15 Lakh salary dilemma

I remember having a chat with a practice head (let’s call him Arun) of a mid-sized Indian IT services company. It was evident that topic of technical leadership was close to Arun’s heart. He himself had grown through the ranks as a techie in the initial part of his career. Now Arun is responsible for developing competent engineers in this practice and making them available to various business verticals and more importantly making them billable. He does not have any senior technical folks like senior architects or principal engineers in his group. To explain this situation, he said, “Look Vinay, as salary of a specialist approaches Rs.15 Lakh, his value decreases for my business. I don’t have a way to leverage their expertise profitably. I encourage such folks to become project managers or else I don’t have any place of them”.

Let’s call this issue “Rs.15 Lakh salary dilemma”. This issue is not specific to Arun’s company. It is representative of the entire IT services industry. I referred to this in an earlier post called “Two faces of Moving Up the Value Chain (MUTVC) Syndrome”. And it is not very difficult to see why this dilemma arises.

It is safe to assume that 80% to 90% of IT services projects are Time and Material (T&M) contracts with average billing rate around USD 3000 per person per month. This translates to around Rs.15 Lakh per anum. As salary of an engineer starts to approach the billing rate, it starts pinching the profitability. The next natural step is to do what is called “re-profiling” of the team in which the engineer with Rs 15 Lakh salary either becomes a manager or he sees that there is no place for him. A junior gets inducted in the team which brings the average cost of the project down restoring the margins. Company is lucky if this engineer becomes a good manager, else sooner or later he moves on to another company which offers him an attractive role.

This supply chain equation by itself is not bad. It looks something like this:

In this simplistic case, it is assumed that the average billing rate Firm-2 can command is more (say USD4000) than what Firm-1 can command (say USD3000) due to its ability to execute more complex projects. Things work fine until Firm-1 realizes that its business is getting commoditized and it needs to get into doing what Firm-2 is doing (e.g. System integration, end-to-end solution building, consulting etc). Now what should Firm-1 do? How much should it invest before it can expect to move to the next stage in value chain? This is the dilemma of the business leaders. And mind you, Firm-2 might be facing the same issue as its cost structure will be different from Firm-1 and it wants to grab pie from Firm-3 and so on.

To summarize, any IT services firm with T&M as the predominant mode of servicing will find it a challenge to retain and leverage engineers with salary approaching average billing rate. We will see how companies are approaching this issue in the subsequent article.

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