Here’s food for thought. The average Infosys employee produces roughly the same amount of profit for his or her company in a year as the average worker at Accenture. And that’s in absolute terms, not relative: an engineer hacking out code in Bangalore is adding as much to the corporate bottom line as a consultant in Manhattan, at around $14,000-15,000 a year.

This was pointed out to me by Infosys chief financial officer V Balakrishnan, who stopped by while visiting San Francisco recently. It’s a sign of the considerable leverage in the business model of the Indian services companies (at around $50,000 a year, revenues per employee for Infosys are only 40 per cent those of Accenture, so the parity on profits looks impressive.)

There are two ways to look at this. One is that the Accentures and IBMs of the world have ample room to expand their margins. If it brings costs down closer to the level of their Indian rivals, the "global sourcing" both are pursuing should fuel profit growth for some time.

The other side of the coin is that price deflation could be about to turn scary for the Western IT services firms. The business model of the Indian firms - with healthy profits despite much lower prices - leaves them in a strong position to attack.

For now, the Western firms publicly brush off the threat: the Indian firms are stuck with lower-value work, and are not big enough to be a force in many parts of the IT services market. But that is changing fast (Infosys, for instance, plans to add 30,000 workers next year to the 80,000 it already has.) The Indian firms have also been recuiting consultants and other "front end" workers in the West to build deeper links with customers there.

It may still be the case that noone ever got fired for buying from IBM - but when it comes to future services deals, they might at least get to bargain harder over the price first.

November 26th, 2007 in Software | Permalink