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India IT Services
Pushing the envelope on utilization - the "new normal"
on utilization may be higher than historical measures
due to innovation and scale
• Tier-1 Indian IT companies (TCS, Infosys) are running at all-time highs on
utilization as they scramble to service strong demand but we argue there is
a happy consequence of this. Ordinarily, we might be tempted to reason that
this should revert to historical average as these companies purposefully revert to
keeping the traditional bench once again to cater to demand. In our view, this
may not be so as the Big 3 (TCS, Infosys and Wipro) continue to push the
envelope on utilization drawing on innovation and scale. This is likely to lead to
a “new normal" for utilization, which we believe is higher than historical
measures. Happily, this might also mean that margin drop that we might
have expected in FY12 for the Big 3 on account of lower utilization may not
materialize to the same extent.
• Why would the “new normal” of utilization be higher than in the past? This
is because bench is really meant primarily for (a) initial staffing of new project
sign-ups and (b) internal initiatives/development. Also, with better
productivity of the workforce and greater non-linear pricing based on
transactions (BPO) or devices (Infra Management), the need for bench to
keep billable and available hours for clients is getting lesser. Initial staffing
of new projects is normally limited to 10-15 professionals for a new project start
which gets pulled from the bench. Thereafter, project ramp-up is more gradual
(3 weeks to one month onwards) for which recruitment can be done in a planned
manner. Clients allow vendors time to scale up beyond the initial typical count
of 10-15 professionals needed (at short notice) for new project starts.
• This means that bench requirements can be thought of in absolute terms
rather than in % terms, a thinking that Wipro pioneered during the
downturn. If new project starts for Infosys in a year amount to about 1,500
(25% growth over the current total project count of 6000), then the company, in
theory, does not need a bench exceeding 15-22,000 (about 10-15
personnel/project for initial staffing) and that too for only a limited time of the
year besides reserve for backfill (for attrition replacement). In other words,
bench is reduced to absolute terms as opposed to % terms. Also, we note that
internal initiatives of companies requiring the bench will not scale as
proportionately as revenues (thus moderating in % terms).
• Companies are working on what the new normal utilization could be. They
selectively acknowledge that this could be higher than in the past. For eg, TCS
operated at utilization levels of 83%+ in the Sep-10 quarter (vs annual average
of 77-79% in the past) but is now pushing the envelope on this to see how
sustainable the current level might be without compromising growth.
• Beneficial impact of potential “new normal" utilization not factored in by
street. Currently, we expect about 80-120 bps of negative impact on FY12
margins due to lower utilization alone (offset by other factors such as moderate
pricing uptick and strong volume growth). In the event of a new higher normal
on utilization realizable in FY12, the impact is halved thus further helping Tier-
1 companies maintain margins in FY12 (vs FY11). TCS (OW) remains our top
pick, we prefer HCL Technologies (HCLT, OW) at better price points.
The "new normal” on utilization could be higher than in the past. This is
because of three factors:
(a) A relatively determinate/fixed bench of 10-15 people for new project starts.
New projects for a company of Infosys' size grow in line with revenue
growth (about 1500 on an existing project population of 6000).
(b) Personnel for internal initiatives may not increase in proportion to
revenues/existing people strength.
(c) Greater productivity of the workforce and better use of non-effort based
pricing mechanisms especially in infra-management, BPO and maintenance
For example note the increasing use by TCS of transaction-based pricing in
BPO (about 40% of TCS' BPO revenues )) and device-based pricing in
infra-management (about 80% of TCS’ infra-management revenues derives
from device-based pricing). This might mean that the focus moves to
system-based or person-based productivity and the need to keep and show
“higher billable/available” bench is getting less important.
Conclusion: This might mean that utilization may be progressively viewed in
absolute terms than in % terms. As companies double in size, it does not stand to
reason that the bench should double for planning growth for the reasons cited before.
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