It may not be long before customers start
demanding to know the costs of each activity in
greater detail, and to extract more value from the
fiercely-competing global service providers, predicts
Mr V. Srinivas, Chief Financial Officer, Satyam
Computer Services Ltd.
“ABC or activity based costing, and ‘lean’ principles
may clamour for more attention in cost management,” he
adds, during the course of an exclusive interaction
with Business Line recently.
Excerpts from the interview.
Is there scope for cost management in software?
Cost management is an integral part of any efficient
business and more so in the case of the software
solutions sector, in which the USP (unique selling
proposition) is the cost arbitrage offered to
customers.
In a typical software solutions company, cost
management plays a vital role in the entire value
chain spanning from ‘quote to cash,’ and covering
areas such as order receipt, order fulfilment, and
accounts receivable.
In each of these areas the customer expects the
service provider to optimise costs and be diligent in
the utilisation of resources. Therefore, in these
circumstances, cost management is more a matter of
hygiene rather than a choice.
Does the IT (information technology) industry
recognise the need for a structured cost management
process?
Since the USP of the Indian IT industry is the
providing of cost-effective and reliable high-quality
software solutions to its customers, there is a huge
need to effectively implement various state-of-the-art
cost management techniques and processes in all the IT
companies. This will ensure that the value proposition
it offers to customers remains intact and almost last
forever.
IT business is a people business, and in a typical IT
company almost 75 per cent to 80 per cent of the
overall cost is accounted for by people-related costs.
Therefore, there is a huge need to deploy a host of
cost management techniques to rein in the
people-related costs.
Recognising this fact most of the IT companies have
put in place robust methodologies, tools and
applications like RCCs (resource coordination cells),
TSMS (time sheet management systems), and PBMS
(project-based management systems) to help in
marshalling the resources well.
Apart from the people-related costs, IT companies do
spend sizeable amounts on SG&A (selling, general and
administrative) expenses as well. Most of the
companies, therefore, have launched ‘cost
optimisation’ initiatives to keep a check on these
overheads.
What are the cost management metrics that are part of
the best practices in the industry?
Across the industry we often hear metrics such as the
following:
Loading factors (also known as resource utilisation
levels).
Offshore-onsite mix (proportion of offshore component
in a particular project).
Associate mix or the PM:PL:TM ratio (that is, the
composition of project managers, project leaders and
team members in a typical project)
Time to deploy ELTPs (entry level trainee programmers)
into projects thereby reducing average cost of
delivery.
Also, bench costs, training costs, attrition costs,
proportion of billable travel to non-billable travel
in a project etc.
The underlying mantra in all these initiatives is ‘use
your limited resources well’. For example, in Satyam,
we measure various outcomes on what we call a 5R
dimension: fasteR (compressing cycle times), betteR
(always exceed customer expectations), cheapeR (use
your limited resources well), largeR (maximise scale
opportunities), and steadieR (be predictable).
As an IT services leader, has India set any cost
management benchmarks for the world, apart from the
cost arbitrage that everybody talks about?
When working with Indian vendors, customers derive
savings of anywhere between 30 per cent and 40 per
cent on their original cost base. This is a great
benchmark set by the India Inc.
The ability to achieve such high levels of cost
advantage by sourcing services from India is driven
primarily by the ability to access highly skilled
manpower at significantly lower wage costs and the
resultant productivity gains derived from having a
very competent employee base.
Also the continued focus on quality and demonstrated
expertise in service delivery by adopting
methodologies such as Six Sigma, ISO 9000, People CMM
and so on have helped in reining in costs
significantly.
These are further complemented by relative advantages
in other elements of cost structure such as lower
infrastructure costs, telecom, travel and other
overheads.
In the face of the rupee woes, has the industry
cracked cost in innovative ways?
Rupee appreciation is definitely hurting the industry.
Every one per cent rise in rupee pulls down the
operating margins by 30 basis points (bps). Even after
the recent steep rupee appreciation, India’s cost
advantage outweighs the disadvantage of the rupee
appreciation.
Operating from India continues to be economical as the
cost of delivery is much lower. A gradual rupee
appreciation, say 2-3 per cent per annum is manageable
but a steep rise like what we saw recently, of around
15 per cent in a short span of 5 to 6 months, does
throw up a big challenge.
In spite of these steep movements IT companies have
shown a lot of resilience. For example, in the case of
Satyam, while the adverse impact on operating margins
due to appreciation could be about 420 bps, we are
planning to curtail its impact to around 175 bps for
the financial year 2008 by adopting various innovative
‘revenue enhancement and cost optimisation’
initiatives.
We have also adopted effective hedging strategies to
minimise the impact. Billing the customers at higher
price points by moving up the value chain and by
providing high value adding solutions, and the ‘basket
of currencies’ approach (i.e. by billing customers in
various currencies like pound sterling, euro etc.),
are some of the other innovate initiatives one can
take for mitigating the risks associated with a rising
rupee.
**Bio:
Mr Srinivas, who has been heading the finance function
in Satyam for over a decade, is involved in charting
the overall strategic direction for the company. A
graduate in law and a post-graduate in commerce, he is
a Fellow Member of the Institute of
Cost and Works Accountants of India. Mr Srinivas has
been involved in the Satyam’s completion of ADS
(American Depository Shares) issue, listing on the New
York Stock Exchange, and the restructuring exercise to
increase transparency and enhance shareholder value.
Later this week, he will be speaking in New Delhi at
the ‘Global Summit’ of the Institute of Cost and Works
Accountants of India, on ‘management accounting in the
services sector’.
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