FE Editorial Why Infy buys

Written by The Financial Express | Updated: Aug 27 2008, 05:47am hrs
The $753-million acquisition of UKs Axon is a landmark event, both for Infosys and the Indian software industry. Unlike in manufacturing, the IT industry has been quite cautious in overseas expansion, despite large reserve stockpiles. The SAP skill-set of the company purchased will assist Infosyss attempts to move up the value chain by strengthening its consulting business, and also help it spread out risks by further enhancing its share in European markets. This relatively big purchase will also boost the confidence of other large and medium Indian software companiesthe Indian software industry may at last reduce its excessive dependence on organic growth to boost revenues. Also, with software export growth slowing down by close to ten percentage points over the last four years, Indian companies may now be more amenable to take on new risks to sustain revenue growth and boost marketshare. There is still a lot of distance to be covered by Indian firms competing with the largest and best in the worldeven TCS, the largest Indian software company, with annual revenues of $5.7 billion, is just about a tenth of Microsoft, the world leader in software services with revenues of $51 billion.

However, the real reason for worry is not the large gap in revenues between Indian and global firms, but rather the value of services offered. While Microsoft garners its huge revenues with an employee base of just 79,000, it takes TCS 1,11,000 employees to earn just about one-tenth of the revenues. The huge gap in the value of services offered is a bugbear that just refuses to disappear despite concerted efforts by Indian companies to move up the value chain. Though companies like Infosys have sought to make forays into areas like consulting services, the overall gains have been rather unimpressive. For instance, back-of-the-envelope calculation shows that average revenues per employee at Infosys had peaked at Rs 24.3 lakh in 2002 and have now stagnated in the Rs 17-18 lakh range. Overall trends in the Indian software export sector are not too different. In fact, output per employee in Indias software export sector has climbed only marginally, from $24,662 in 2003-04 to $26,705 in 2007-08. Thats a reality check Indias IT should never ignore.