IT Firm

I: Your client is an IT firm which has been reporting its profit margins lower than its competitors (like TCS, Wipro)

C: Understood. To begin, may I know how long this issue has been prevalent?

I:  It's been this way since the company's inception.

C: Alright. Could you provide some insights into the scale of the firm's operations and its employee count compared to its competitors?

I:  It's a mid-sized firm, serving Fortune 1000 companies primarily through off-shore operations. It doesn't have as many employees as TCS or Wipro.

C: Given that profit margin issues can arise from either the revenue or cost side, do you have a preference for which side we should delve into first?

I: Let's examine the cost side first.

C: Great. I'd like to understand the company's value chain. Typically, for an IT firm, we'd consider IT infrastructure costs, HR costs, development costs, marketing costs, and post-sales costs. Would it be alright to explore these areas sequentially?

I: What do you think are the major post-sales costs?

C: Understood. Post-sales typically encompasses maintenance costs, customer support, software updates and patching, remote monitoring and management, infrastructure management and warranty provisions. Are our overheads in these areas higher compared to our competitors?

I: No, our post-sales costs are competitive with industry standards.

C: Okay, interesting. It seems like post-sales isn't really the issue.

I: Indeed. I want you to look at the HR costs next, we know they have been higher for us.

C: So, I'd like to break HR costs into - the recruitment costs, training and development costs, the salaries paid to the employees and the benefits paid. The recruitment costs are proportional to the employee intake, which is a function of the churn rate and the current employee base. Do we normally experience higher attrition rates than the other organizations?

I: Not quite. The employee turnover is high in general for all IT organizations.

C: Okay, and since we are a medium-sized org is it fair to assume that we have a lower employee base?

C: Yes, that's a fair assumption.

I: Great, this means that recruiting costs are lower for our organization in general. Since cost=avg salary/employee*number of employees. Could it be the case that we are paying out more salaries to employees in general since our HR costs are high?

C: Yes. We are indeed paying more wages to employees.

I: All right. So I would like to delve deeper into the salaries. We can segment the employees in entry-level, mid-level and high-level. May I know the distribution of employees based on the seniority level?

C: Yes. It is 30% for entry-level, 50% mid-level and 20% high-level.

I: Okay. Do we have similar data for our competitors?

C: Yes, it is 55% low-level, 35% mid-level and 10% high-level.

I: Is our pay grade similar to the competitors?

C: yes

C: Given this disparity in seniority mix and assuming our salary bands are competitive with the industry, it seems our higher HR costs stem from having a larger proportion of mid and higher level employees. 

I: Yes, that's the core issue. Any recommendations?

C: In that case, I'd recommend a thorough review of our project requirements against employee seniority levels. We might be overstaffing projects with senior employees when mid or entry-level employees could suffice. Additionally, considering alternative compensation structures, like offering ESOPs, could help alleviate direct salary costs. This would make us more competitive while retaining talent. Would you like to explore these recommendations further?

I: No, thank you for your time