Indian IT industry

By
Shankar Sharma, Director and Chief Global Strategist, First Global about Indian IT services industry

The Indian IT services model is a high fixed-cost, highly capital-intensive model. Put simply, for every dollar of new revenues, the sector has to add new bodies and new infrastructure. No new bodies and capex, no new revenues. Typically, capital-intensive, high fixed-cost industries enjoy tremendous operating leverage. For instance, cement, steel and automobiles. Once breakeven revenues and profits are achieved, every incremental dollar of revenues is virtually pure profit. Hence, you witness tremendous margin expansion (that is, high operating leverage) in such sectors in boom times.

The Indian IT services sector, on the other hand, enjoys all the disadvantages of a high fixed-cost business, but enjoys none of the upsides of the same. Costs remain fixed on the way down, but are variable on the way up. Hence, if you were to take a purist's view of their model, you can only conclude that the model is intrinsically flawed. Much like Sehwag's technique. So what makes the sector tick, just like what makes Sehwag click? Very simple: youth and growth. The Indian IT services model is built only for a single business scenario: growth. Change the scenario to moderate or negative growth, and the warts will begin to show. The huge, virtually inflexible fixed-cost structure will begin to bite. Just like in Sehwag's case, once youth wears off, and hand-eye coordination worsens, the lack of a sound technique will begin to hurt.

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