India IT Offshore Outsourcing - 2 Sept 2009

Productivity of India’s Offshore Outsourcing Sector: The TFP Approach
Productivity of India’s Offshore Outsourcing Sector:

The TFP Approach
Dr. Suman Modwel, Ph.D.
Professor and Director of Research, Chargé Mission Inde, School of international Management,
Dr. Tawfik Jelassi, Ph.D.
Professor and Dean, School of international Management
Ecole Nationale des Ponts et Chaussées (ENPC)

Paris, France
Abstract: Following on an earlier paper discussing the sustainability of India's comparative

advantage in IT offshore outsourcing, the authors pursue their enquiry whether rising labour costs
are being compensated by rising productivity. A sample of six firms including the big three in
Bangalore was selected for a field survey, and the total factor productivity (TFP) approach used
to look at trends of output, capital employed and wage costs per unit labour, enriched by
insightful discussions on site. While the trend towards decreasing age profile of the work force
has succeeded in maintaining mean salary per capita constant, productivity performance in TFP
terms is not so uniformly brilliant across the sample. Caveats and cautionary notes on using TFP
as a reliable tool to gauge efficiency of labour especially in times of sharp changes in capital and
labour resources and other exogenous factors including exchange rate movements have been
expressed.
Keywords: Offshoring, outsourcing, total factor productivity, output, capital employed, wage
costs, age profile, attrition rates, Bangalore, tier 2 cities.
1
Table of Contents
Abstract: 1
Keywords: 1
Table of Contents 2
1. Introductory 3
2. IT Offshore Outsourcing in India 3
Rapid Growth in Key Business Infrastructure 5
Enabling Business Policy and Regulatory Environment 5
Abundant Talent 5
Cost Advantage 5
Emphasis on Quality and Information Security 6
3. Sample Size, Methodology and Scope of the Field Research 6
4. Zooming in on Indian IT Offshore Outsourcing Firms 9
5. Company Descriptions and Analysis 10
Infosys 10
Wipro Technologies 13
Tata Consulting Services 15
Metacube 17
Axis IT&T 18
Alcatel Lucent Development, Chennai 19
6. Cross Comparison Between The Big Three 20
7. Concluding remarks 22
Annex I
Agenda For Discussion During Company Visits I
Wage Trends I
Productivity Related Issues I
Competitiveness Issues II
Sample Estimation Sheet III
Total Factor Productivity (TFP) IV
Where does the 0.3 come from? V
EVA and TFP contrasted VI
Company Specific Estimation Sheets VII
2
1. Introductory
The rise of India as the leading destination for IT offshore outsourcing has made it a rich field for
discussion, surveys, articles in scholarly journals, case studies for business education and prolific
discussion in the popular media. Of late, there has been some speculation about the sustainability
of India’s competitive advantage because of rising costs of skilled labour and emergence of
several other low cost competitors, with China the closest behind it. The authors too joined this
discussion and presented a paper on the sustainability of India’s comparative advantage in
offshore outsourcing at the European Conference of Information Systems (ECIS) in Gothenburg
(June 2006)1. That paper presented the benefits and concerns in IT offshore outsourcing and
discusses the sustainability of the comparative advantage that India has as the leading offshoring
destination in the world. It argues that the currently low wages of skilled IT staff in India may be
eroding over time and companies will be shifting their attention to other value-adding benefits as
opposed to looking in offshoring countries for just lower cost provision of IT tasks and services.
The dynamics of supply and demand of labour have been made and the dramatic reversal of roles
of some labour costs in the Indian economy, ranked amongst the lowest wage economies, to the
most expensive one (in purchase price parity terms) for senior managers in "hot Indian spots" like
Bangalore and Mumbai demonstrated. At the same time, the argument has been developed that
nevertheless if Indian offshoring capabilities concentrate more on high value-added knowledge
processing services leveraging on the well recognised skills of its senior managers in the IT and
other service sectors, then it can retain its competitiveness. Comparisons of health care costs
between the US, India and some other countries were used as an illustration.
The question whether rising labour costs can be matched by rising productivity (total factor
productivity at the firm level) in order to retain India’s leading position in offshore outsourcing
needs to be answered at the micro level by profiling across time the movement of some key
indicators in a sample of a few firms, e.g. total revenue in value added terms, wage costs, output
per worker, capital per worker, nature and extent of capital and technology used in different
locations in India, including Bangalore. Even though the sample would not be truly
representative, the data furnished by the firms enriched by discussions with senior managers of
these firms could provide insights. Additionally, a typology had been attempted by the authors of
the ECIS paper separating the price sensitive low added value offshoring services from the
sophisticated price inelastic ones. It was hypothesised that the former category cannot be
competitively provided in these high cost centres, whereas the latter type does require being
located at these hot spots like Bangalore to exploit learned externalities. It was thought that these
assumptions also need to be tested in the field. This could be the second aim of a field-study
based project. The ENPC School of Management and the Groupe d’Economie Mondiale of the
Sciences-Po accordingly commissioned a project with these objectives.
2. IT Offshore Outsourcing in India
As an industry-leading supplier of IT offshore-outsourcing, India maintains to attract the

investments of multinational corporations (MNCs). With a growing market for outsourcing
services, India matures towards achieving a globally sustainable and unique-value proposition.
1
Tawfik Jelassi & Suman Modwel, “The Sustainabilty of India’s Comparative Advantage in IT Offshore
Outsourcing“, European Conference of Information Systems (ECIS), Gothenburg, 12-14 June 2006
3
Double-digit revenue growth mirrors this trend and underscores India’s cost competitiveness and
quality of talent when it comes to offshore outsourcing.
Offshore outsourcing refers to a broad spectrum of services ranging from (1) traditional IT
outsourcing services (ITO), to (2) business process outsourcing (BPO), (3) the outsourced
development of packaged software and (4) outsourcing of R&D and engineering. 2 By definition
business functions in these areas are contracted to external organisations in countries with a
preferably lower wage level than the one in which the final product or service will be consumed.
The term “offshoring”, in contrast, refers to the outsourcing of services to foreign subsidiaries of
the same firm and therefore does not involve external organisations.3
Although figures and trends speak for India as a destination for offshore outsourcing, worldwide
competition continues to grow. In order to maintain its competitive advantage, India needs to
strengthen and reinforce its value proposition by actively responding to a very dynamic and
continuously changing macro-environment. There are still untapped market opportunities in
terms of size and scope, which India has to take advantage of in order to successfully compete
with other low cost outsourcing countries such as China, Indonesia, Philippines, Romania or
Czech Republic. The penetration of new markets as well as intensification of contracts with
existing clients furthermore will boost revenues and will allow Indian firms to deepen their
service offerings. Multi-location delivery already adds to India’s value proposition and the
domestic markets gain on relevance with software and service growth surmounting hardware
linked growth for the first time.4
For FY2007 the Indian IT-BPO business was projected to grow by an estimated 28% reaching
USD 47.8 billion in revenues, which is almost a 1.000% increase over the last nine years
(FY1998: USD 4.7 billion). Given this, the growing sector represents app. 5.4% of India’s
national GDP. The industry is primarily dominated by services and software exports to the US
and UK which represent the main markets. Software and Services export revenues alone are
estimated to grow over 16-17% to reach USD 47 billion in 2009 5. Banking, Financial Services
and Insurance as well as Technology already account for the majority of revenues, while
Manufacturing, Retail, Media, Utilities, Healthcare and transportation follow behind with rapid
growth. India’s comparative advantage is based on five factors according to NASSCOM 6: (1)
India’s rapid growth in key business infrastructure (2) enabling business policy and regulatory
environment, (3) abundant talent, (4) cost advantage and (5) an emphasis on quality and
information security.7
2
cf Strategic Review 2007, “The IT Industry in India“, NASSCOM, p.30
3
cf. Source Paradigm Limited (2007): “Risks, Rewards, Challenges and Opportunities in Offshore Outsourcing”;
White Paper, February 2007.
4
cf. Strategic Review 2007, “The IT Industry in India“, NASSCOM, p.8
5
NASSCOM Strategic Review 2009
6
cf. Strategic Review 2007, “The IT Industry in India“, NASSCOM, pp.9 - 13
7
The year 2008 witnessed the effects of the global financial crisis. Despite the unprecedented economic downturn
NASSCOM (NASSCOM Strategic review 2009) predicts that the IT industry will still witness sustainable growth
estimated to reach USD 71.7 billion accounting for 5.8% of India’s GDP; software and services revenues aggregated
to about USD 60 billion.
4
Rapid Growth in Key Business Infrastructure
High quality telecommunication connectivity throughout the country is a fundamental driver for
India’s success as offshore outsourcing destination. With declining telecommunication costs and
improving service quality, the IT sector is in favour of a supporting technological infrastructure.
While the landline penetration is already moving at high levels, India is picking up on wireless
telephony. In addition to the telecommunication infrastructure, the physical and real estate
infrastructure including roads, air travel, hotels and office facilities is growing at high rates and
power as well as water supply has proven to be reliable.
Enabling Business Policy and Regulatory Environment
In combination with India’s well-established technical infrastructure, India’s policy environment

is supporting and encouraging the IT sector through fiscal and procedural incentives.
Furthermore, the government has made infrastructure development a key priority in order to
avoid socio-economic problems which will make a big call for IT services. In fact, with the
general economic downturn following the global financial crisis, the Indian IT industry will have
to turn more and more to the domestic sectors, including manufacturing and agriculture too, in
order to reduce its dependence on exports (especially to the US and Europe).
Abundant Talent
Already today, more than 50% of India’s population is younger than 25 years and academically
well-educated in light of a dense academic network. Direct employment is expected to reach
nearly 2.23 million in 2009, an addition of 226,000 employees, while indirect job creation
estimated at ~8 million.8 Furthermore, due to the legacy effects of British colonisation there is a
large pool of English-speaking recruits whose skills are once-more nurtured through firm-internal
initiatives. The abundance of English-speaking talent is a main differentiator in comparison to
other low cost outsourcing destinations, which often lack this key asset.
Cost Advantage
The absolute cost advantage of Indian wages over wages in developed countries continues to be
present, though diminishing in its contribution as a competitive advantage. Yet there is potential
for further decreasing infrastructure and overhead costs. Studies show that operational
efficiencies can be further driven down through the adoption of industry best-practices, which is
especially important in light of rising wage inflation which in turn could erode the sustainability
of India’s cost advantage in the long-run in comparison to competition from China and
elsewhere9. Both, in India and China, “double-digit growth rates have fuelled wage inflation,
with average compensation costs for sample functions rising by around 30% in China and
around 20% in India. But these cost escalations have been matched by corresponding increases
in skill supply and quality indicators. … For all the concern about overheating, wage inflation
8
NASSCOM Strategic Review 2009
9
Studies refers to: “Ensuring India’s Offshoring Future” in The McKinsey Quarterly 2005 special edition: Fulling
India’s; Promise, Grossman, Rossi-Hansberg (2006): “The Rise of Offshoring: It’s not Wine for Cloth Anymore” in
Paper prepared for the symposium sponsored by the Federal Reserve Bank of Kansas City on “The New Economic
Geography: Effects and Policy Implications,” Jackson Hole, Wyoming, August 24-26, 2006.
5
and service levels, India still offers an unbeatable mix of low costs, deep technical and language
skills, mature vendors and supportive government policies.”10
Emphasis on Quality and Information Security
India focuses on compliance with international standards in order to keep up its high reputation of
high quality services. The number and level of quality certifications achieved surpass the number
of other countries certifications underlining that India’s service offerings are top-notch and
ubiquitous. NASSCOM states that the Indian IT-BPO industry actively tries to extend the
emphasis on quality on information security which is a global issue. By engaging key
stakeholders, educating industry constituents about policies and practices, enactment of policy
reforms and assisting in the effective enforcement, the objective of information security is
addressed.
3. Sample Size, Methodology and Scope of the Field Research
Having laid out the macro picture, one has to remain very modest in the descent from the macro
level discussion, as further discussed in our ECIS paper, to micro (firm) level investigation
because of the limited resources and time at our disposal. Hence the sample of companies was
limited to six. Through the contacts of one of our authors we could arrange for interviews at CEO
or top corporate level with the following companies:
The “Big Three”11, namely Infosys, Wipro Ltd and Tata Consultancy Services (TCS) at
Bangalore
AxisIT&T, a merger between an Indian and US company dealing in engineering services and
interactive voice services (VOIP) at Noida and Gurgaon around in the Delhi national capital
region (another “hot spot” like Bangalore), much smaller in size
Alcatel Lucent Development, Chennai, an internal testing facility of Alcatel-Lucent. This was the
sole sample of an offshoring (not outsourcing) facility of a big European group
Metacube, Jaipur, a small sized software development company in a “second tier” city.
As preparation for this primary research we developed a discussion agenda sheet and a total
factor productivity (TFP) estimation sheet which we sent to the companies in advance 12. It would
be seen from the agenda sheet that the discussion was sought to be focussed on wage trends
(their effect on changes in products and services offered, attrition rates, etc.); productivity related
issues (upgradation and improvements in technology and processes; HRD policies to enhance
skills and motivation levels of employees; positive and negative externalities impacting on
productivity); competitiveness issues (reflections on how to stay on top of it); and strategic
10
AT Kearney Survey (2007)
11
The reference is to Indian companies – Some multinationals like IBM India and Accenture that have offshoring
operations in India are bigger.
12
See Annex for further reference.
6
options and future perspectives (A free ranging discussion was suggested - strategies that may
enter in the conversation may include looking at alternative lower cost locations (the so called
second/third tier cities); performing only high value sophisticated jobs for select “star” clients to
whom quality and security concerns override cost; looking outside and acquiring outsourcing
facilities in other low cost economies or in those locations “nearer” to clients (geographically,
linguistically, culturally); reverse offshore outsourcing to US and Europe; capital deepening
(making the service less labour intensive through more capital inputs (technology, automatic
processes).
The second instrument (TFP estimation sheet) did require some effort and goodwill on
everyone’s part to understand and appreciate its purpose! As can be seen from the sheet, the
numbers are meant to trace out across time (we suggested a 2003-2007 span) the changes in value
added (Y), i.e. operating income less expenses on bought out materials and services (excluding
wages and salaries), numbers of employees (L), expenses on wages and salaries (W); capital
employed (K) which includes all the technology that comes with it; and capital employed per unit
labour (K/L). In simple conceptual terms without getting into complexities of growth
accounting13, and staying close to the businessperson’s vocabulary of performance metrics, the
idea was not only to look at the well accepted proxy of productivity, value added per unit labour
(Y/L), but go a little deeper and look at what was responsible for its increase (or decrease). What
for example was the role of capital deepening i.e. increasing K/L? How did, to take an
hypothetical example, overall productivity (Y/L) increase despite resources of labour (L) and
capital (K) remaining constant? The intuitive answer of course lies in the quality and efficiency
of labour, their skills, motivation, learning culture of the company, supportive business
environment, etc. – all these combined to make them work “faster and better” despite resources
remaining the same. These are all the notorious “grey box” areas, difficult to extract and measure
accurately both at the macro and micro level.
Nevertheless, the TFP approach, with all its caveats and limitations does go some way in at least
pointing at some trends in a relative sense whether countries, or firms, are extracting more (or
less) out of given quantities of capital and labour resources over time. TFP derives its definition
from the growth accounting literature in economics attributed to Solow. Evidence was shown that
countries grew wealthy mainly through corresponding increases in TFP. This logic would argue
that growth in TFP is the critical lever for sustained growth of firms too.
The basic equation that we used to measure TFP is:
TFP = Y / [L0.7 × K0.3],
where L is the number of employees and K is the value of the firm's capital. The exponents
represent the fraction of the firm's value added contributed by labour (0.7 or 70%) and by capital
(0.3 or 30%) -- taken as the general average for the services sector which is considered more
labour intensive. We use the sector averages or the economy-wide average, since the data needed
to compute this parameter for each firm is normally not publicly available. Unfortunately the
13
Attributed first to Solow and Swan (1956). Total Factor productivity (TFP) or Multi-factor productivity (MFP) is
“measured residually as that change in output that cannot be accounted for by the change in combined inputs of
labour and capital (OECD Glosary of statistical terms)”
7
sector averages for India are also not available so we have taken the averages for other economies
e.g. Canada, where figures are available. A little mathematical manipulation (taking logs and
differentiating across time) yields the equation used in the estimation sheet:
% change in TFP = %change in productivity per worker – 0.3* %change in contribution of

capital per worker
We elaborated a short note on TFP explaining all this for the benefit of the sample companies 14.
In this we noted that “Economic Value Added (EVA) has become a widely used measure of firm
performance. It is however criticised by some on the grounds that it measures the productivity of
capital alone, measuring its return against a benchmark, cost of equity, to see if value has been
created. The advantage of the TFP measure is that it takes into account both labour and capital in
measuring productivity. This could be more meaningful for firms operating in economic sectors
(like IT related services) where human resources play a key role in driving performance”.
We did caution that “it would be unwise to abandon one measure favouring the other.
Juxtaposing both tools side by side may lead to more insights. For example strong EVA and
negative TFP may lead to reflections whether economic value is being created in the short term
but managerial performance shows scope for improvement (for long term sustainability). The
opposite may be the case where TFP growth is robust but shareholders are not happy with the
returns to their capital. Thus it would be best if firms use both the EVA and TFP tools, with
plenty of “footnotes” in their calculation sheets to explain deviations in particular years that
neither of these tools can properly capture (e.g. .abnormally high investment periods requiring
long gestation or surges in fresh recruitment that will yield output in later years but will depress
TFP in the short term).” In the event, we did notice such unusual deviations from normal trend in
our analyses of the estimation sheets of some companies as discussed below, and have properly
explained them.
It may interesting to observe here that in the process of navigating through, and pushing the
companies to navigate through and plug in the numbers (or check what we put in based on their
public documents like annual reports), and make the calculations a very brisk and lively exchange
of emails, telephone and Skype calls took place with each company after our return from the field
trip (September 2006). This in itself was an unanticipated experience of trying to extract primary
data with appropriate comments from the sample companies for our research. One such sample
correspondence is given below:
E-mail exchange with a company correspondent, with author’s responses in brackets:

----------------
“Dear Suman,
1. What is the logic of TFP ? What statistical behaviour does it represent ?
(Thanks for this question which prompted me to write out a short piece on TFP, contrasting it
too with the EVA tool, as attached. Please do give me your comments on this);
14
8
2. How have you computed Wages & Salaries to include benefits etc. ?
(We just took the figures in the value added statement, e.g. on page 140 for the AR 06-07, and
assumed that they included benefits etc).
3. How have you computed Operating Expenses minus Wages ?
(Indeed, we left this row blank because we were not sure whether extracting out the salaries and
bonus values from the expenses relating to software development, general and administration
and selling and marketing expenses (pages 51-53) would get us the right figure. We therefore just
took the value added figures from the value added statement. The head-count also includes
employees already hired but still under training. Example - FY07 Annual report (Page 55)
mentions utilization factor including and excluding training. Given that about 70% of our new
hires undergo 4 month training and are not deployed until then, would you want to take that into
account while calculating productivity. The annual report 2006-07 on p55 mentions about SEZ,
Exceptional Items etc. so we were not able to find this reference. You raise a good point – would
it not be possible to calculate a broad average of the head count adjusting downwards the labour
force (by 70%*new hires*8/12months or something like that)? What would be important however
is to do it consistently for all the years.
(Incidentally, it would also be interesting to discuss the age profiles of the work force. The
picture for 2006 and 2007 is in the 06-07 annual report (p.131) which shows that the %share of
the 20-25 age groups increased from 58.8%. to 59.7%. Could you give us the earlier years'
figures? It would be interesting to see whether this group is increasing its share steadily.)
Warm regards
XYZ”
4. Zooming in on Indian IT Offshore Outsourcing Firms
After the description of India’s unique value proposition which determines India’s success as an
offshore outsourcing destination on a macro-scale and the description of the TFP concept, it
becomes apparent that on a micro-scale a firm’s contribution to the whole industry’s productivity
is especially dependent on the productivity per employee and the relative cost (wage) for it.
Therefore this paper will look in detail at the firm specific total factor productivity, which
depends on revenues in value added terms, capital employed, the size of the workforce and their
respective wages.
The focus of this study will be on six companies which can be categorized according to their size,
their offered service portfolio and the tier they operate in. “While the larger players continue to
lead growth, gradually increasing their share in the industry aggregate; several high-performing
SMEs also stand out.”15 While companies such as Wipro, Tata and Infosys dominate the IT sector
15
Strategic Review 2007, „The IT Industry in India“, NASSCOM, p.8
9
in terms of revenues and value-added, smaller players such as Metacube, Axis IT&T and Alcatel
Lucent impress with their growth performance and productivity measures. Service-wise, as an
offshoring company servicing its parent, Alcatel Lucent stands apart from the other two.
These sample companies are located in different “tiers”. Bangalore, Mumbai and Delhi (Gurgaon
and Noida) are the so-called first tier (tier 1) regions in India. Their attractiveness is determined
by a high development of the value-adding characteristics, with higher (burgeoning) costs on the
flip side. Hyderabad and Chennai, for instance, are cities which pick up on these characteristics
and are therefore called tier 1-1. Cities such as Kolkata belong to tier 2, less of both valued added
sophistications and costs, but still have reasonably good value propositions. Jaipur could also be
classified as tier 2. Ahmadabad is part of tier 3 cities which have expressed (with strong
encouragement and support from the local authorities) a vision to become an attractive location
for the IT industry, relatively lacking in availability of skilled labour and other externalities that
exist in tier 1 clusters, but with even lower costs. They have not yet realized this vision.
5. Company Descriptions and Analysis
In the following we will discuss the companies which are part of our study: Wipro, Infosys, Tata,
Metacube, Axis IT&T and Alcatel Lucent. During these descriptions we will portray the
company’s performance regarding size, service portfolio and tier. Furthermore, this discussion
will be fuelled by critical remarks as well as critical claims by company representatives from our
interviews during the field visits in September 2007.
Infosys16
Infosys started in 1981, went public in 1992, and has been registering hundred percent growth
year on year. Infosys has a large number of Fortune 500 clients, and the challenge is to “retain”
their loyalty by providing higher value in terms of quality, delivery and security. Software is
looked upon as a service, using the SAS business model where the client is not the proprietor of
the software, instead buys the outsourced “solution” that is delivered remotely by the application
service provider (ASP) over a network. The central objective is to deliver credible value to the
client creating outcome based revenue, finding and plugging revenue leakages. As Rao, Assistant
of the Co-Chairman, put it, “We try to understand the business of the customer, not only the
technology he uses”, and they do not hesitate to enter into transaction based and revenue sharing
pricing arrangements with their clients.
Supply side challenges of getting, training and retaining the right talent are a major challenge,
with entry of foreign players too as suppliers of outsourcing services adding to the ferocity of
competition. Furthermore, to manage a workforce of nearly 80.000 employees adds to the
complexity of the business. Infosys emphasizes the importance of training at the “bottom of the
pyramid”. The company has a huge facility in Mysore with more than 5.000 classrooms where
intensive training for 4 months is imparted, including short duration domain specific modules for
which certification is also provided. The performance appraisal system is unrelenting.
16
Interview with Vinay Rao, Office of the Co-Chairman, 17/09/07.
10
A key insight that emerged in our discussion was their hiring policy. Infosys focuses on hiring
smart people, regardless of their background. They do not need to be engineers, they can be
medical doctors with MBBS degrees and even about 70% have no prior experience. The average
age of the work force is about 26 years. This recalls to one mind the model that existed amongst
several multinationals like the oil companies or the Detroit big three motor companies, GE,
Unilever, et al, in the middle decades of the last century: “Catch ‘em young, mould them, and
hopefully retain them for life!” The ability to learn and problem solving were the mind-sets and
skills that were solicited and fostered.
Vinay Rao is optimistic that the private sector will play a much stronger role in the future, despite
current government policies which are not very friendly towards privately run engineering
colleges and which are downright hostile to foreign institutions entering the supply market in the
higher technical education sector. Hence the demand-supply mismatch, much commented upon
and lamented by business (NASSCOM) analysts and media alike is likely to ease in the not too
distant future according to him.
Meanwhile, however, high attrition rates and body-snatching amongst the IT companies is a
problem. Infosys has an 11 ½ % annual attrition rate, which is half of the current industry
average, according to him. Infosys salaries are not any higher than the general norm, and they are
comfortable losing 5-6% annually to competition. 17 Infosys is evidently not relying on the wage
factor for employee retention, rather playing its brand card, its well known quest to capture the
“mind” of the employee.
Narayana Murthy, first CEO, and an icon of the IT world puts it:
"Our assets walk out of the door each evening. We have to make sure that they come back the
next morning.”
One could see what he meant as we toured through their huge campus with all the facilities and
landscaped parks and greenery for leisure, sport, special events including family gatherings,
restaurants, and bicycling employees. These amenities rather resembled a five star luxury resort
sitting rather bizarrely alongside huge amphitheatres and conference rooms fitted with multiple
screens where state of the art communication and control systems operate at the service of their
clients world-wide in real time.
In light of the recent rise in salary costs coupled with another appreciation of the Indian Rupee
against the US$18, Indian IT companies face financial challenges. However, in the case of
Infosys, 90% of billings are repeat business and the company successfully leverages their long
term client-supplier partnership, as discussed above, such that the price of their product and
service becomes relatively “inelastic”. In other words, the more important considerations to the
client are the continued quality and reliability of the solution proposed in the supply offer and its
perceived potential to increase revenues (or decrease internal net costs). As long as the client is
assured of this, the increased billing rate, if any, is implicitly factored into the package. In
addition, it is significant to note that in any case the average salary per employee is steady over
17
“I can get 2 to 3 times higher pay outside Infosys”, say these quitters.
18
about 12% over the last 12 months
11
the last 3 years at almost Rs. 1 million per annum. This would point to a trend of new hires at
relatively lower levels (hence lower starting salaries), compensating for the salary hikes at higher
levels.
Infosys seems to intensely leverage technology and automation rather than the cost-effectiveness
of Indian IT skilled manpower. This is startling since it is counter-intuitive for an IT player in
India.
Vinay Rao says:
“Our defining process is through increased automation and labour arbitrage is only 25% in the
product/service.”
At a very broad level this may mean, whatever be the final consequences which we cannot
predict, that the company is placing its bets on the technology factor to remain on top of
competition. This seems to be consistent with, and validates, the numbers in the Infosys
estimation sheet19. The tables show that the capital/labour (K/L) ratio is very high, Rs.1.27
million per employee in 2007, and much higher than the one for the other two big players in
Bangalore, Wipro and TCS. The total value added per employee (Y/L) is actually very
respectable (Rs.1.59 million), and higher than for WIPRO. 20 However, we find a negative trend
for TFP (-11.2% in 2007 as compared to 2003. But TFP comes back into positive territory when
we compare it with the previous year 2006 (4.5%). In simple words, all this implies that the
major determinant of productivity per capita (Y/L) is the high capital available per employee, not
the growth rate of the efficiency of labour (TFP), which in fact is decreasing after 2005.
The merit of the TFP approach lies in trying to answer the question whether a company increases
its productivity through increasing unit labour efficiency without additional capital. Apart from
the role of capital deepening (K/L) in making workers more productive, productivity may
increase through the growth in the efficiency of labour without additional capital investment.
Thus the TFP measures a sort of “free lunch” enjoyed by the company.21.
It is however important to note that no conclusions beyond this simple observation can be drawn
without going deeper into the matter, which is beyond the scope of this paper. It may well be that
Infosys will later reap the fruits of this high capital deepening when the skilled manpower goes
down the learning curve of such sophisticated automated processes and delivers the “free lunch”
at an increasing rate. Such caveats 22 are an essential aspect of the TFP model of looking at the
determinants of productivity. Making judgments based on the present data in the estimations
sheet could be misleading. What can be said is that TFP holds up a mirror, perhaps sometimes
distorted, that is neither a messenger of good news, nor of bad news, but an invitation to go
through further analysis of the data to explain and understand real trends and their implications.
19
20
See the section below on the comparisons we made of the big three for more discussion on this.
21
The expression is used by some researchers like Shlomo Maital and Brendan Cahill
22
See TFP note in Annex for further reference and explanation.
12
Wipro Technologies23
Wipro is another firm among the big three Indian IT software companies, alongside TCS and
Infosys, owned largely by Aziz Premji. Its organisational structure comprises the following units:
IT Services; Product Engineering Solutions; Technology Infrastructure Services; Business
Process Outsourcing (BPO) like Financial, Banking, Insurance, Health and Travel Services; and
Consulting Services (Business, Process, Technology and Quality consulting) 24. These units share
common services like HRD, Finance and Marketing but otherwise operate as autonomous profit
and loss centres.
Like Infosys, Wipro’s hiring policy does not target engineers only, despite an engineering bias of
90% in the IT sector13. In Wipro too the hunt is on in full cry for what Vinay Rao of Infosys
termed “smart people”, whatever their background may be. The intensive in-company training,
makes it possible to hire B.Sc graduates, which can then deliver the same quality and quantity of
output for certain jobs, but with 50% less pay. This means in turn that there is no need to employ
traditional engineers for these kinds of jobs. Wipro is recruiting not only science graduates but
generalists, including MBAs, in increasing numbers. The company has cast its net wide, not
restricting itself only to the top Indian Institutes of Technology (IIT) and Management (IIM).
Desired qualities they look for include self-initiative, ability to work creatively in unstructured
environments where tasks are not always “given, to be done as prescribed”. Employees with such
potential picked from the less perceived technical institutions and universities (about 1600) often
feel that they are as good as those graduating from prestigious schools such as IIT and IIM and
are “hungry to prove themselves”. Wipro gives them an opportunity to do so.
The changing demographic profile of their human resources is another factor working for them in
holding salary costs from rising too sharply. Wipro provided a detailed breakdown of different
age groups for the years 2003-2007 as shown in the table below. The major change between 2003
and 2007 is the proportional rise of the first and the decrease of the second category. While there
is an increase from 23.6% to 38% of the population “less than or equal to 25”, there is a decrease
from 49.2% to 33.7% in the “26-30” age category. This has had an effect in dampening the total
salary bill because obviously the juniors get less pay. We can see from the data in the estimation
sheet that the mean salary (total salary costs/number of employees) has gone up from Rs. 0.79
million in 2006 to Rs. 0.85 million, i.e. a rise of about 8% whereas at the macro level surveys
report much higher wage hikes as we brought out in our ECIS paper. The following section on
comparison of various indicators between these three big Indian companies also shows that
Wipro has, and always had since 2003, the lowest mean salary of the three.
Age profile (Numbers and percentage-WT population)
23
Interview with Pratik Kumar, Senior VP, HRD on 18/09/07. As we entered their premises we could not help
comparing them with Infosys. The layout of their buildings where their different units are lodged were elegant and
pleasing in their design but less impressive in their grandeur, with modest landscaping surrounding them. We were
not invited to take a tour. This was in contrast to the “bells and whistles” show window approach of Infosys. The
human resource perspective, with their almost 90000 strong work force, naturally dominated our discussion and
much useful information and insights emerged which we weave into the numbers in the TFP estimation sheet
furnished by them.
24
www.wipro.com
13
March March March March March

Age Category 2003 2004 2005 2006 2007
Less than/ equal to
25 3162 5468 8326 13077 18589
26-30 6601 8640 10865 13467 16491
31-35 2669 3548 4890 6973 9696
36-40 690 930 1243 1849 2796
41-45 216 317 383 484 807
46-50 60 77 108 189 364
>50 22 34 46 62 125
Grand Total 13420 19014 25861 36101 48868
March March March March March

Age Category 2003 2004 2005 2006 2007
Less than/ equal to
25 23.6% 28.8% 32.2% 36.2% 38.0%
26-30 49.2% 45.4% 42.0% 37.3% 33.7%
31-35 19.9% 18.7% 18.9% 19.3% 19.8%
36-40 5.1% 4.9% 4.8% 5.1% 5.7%
41-45 1.6% 1.7% 1.5% 1.3% 1.7%
46-50 0.4% 0.4% 0.4% 0.5% 0.7%
>50 0.2% 0.2% 0.2% 0.2% 0.3%
Grand Total 100.0% 100.0% 100.0% 100.0% 100.0%
Infosys claims to have a uniform pay policy in all their units across India. However, the salaries
for Wipro are lower in their tier 2 locations, e.g. Bhubaneswar (in the state of Orissa), justified on
grounds of lower cost of living in such smaller cities adjoining the rural countryside. Regarding
attrition rates, the “less than one year category” departures have increased from about 8% in 2003
to 13% in 2007. This appears to be below the industry average. Although there are no authentic
statistics regarding attrition rates in the IT sector, many leading businessmen voice their
estimates. For instance, at NASSCOM's ITeS/BPO Summit held in Bangalore in August 2007,
Mr. Bhasin, CEO of Genpact was quoted as saying, “According to industry estimates, attrition
rate in voice-based BPO is in excess of 50%. Also the attrition rate in non-voice BPO ranges
between 20-30% as reported in the “India Edunews”25.
Value added is a finer measure for output as it nets out bought out expenses from revenues.
Wipro’s value added increased by almost 500% during the period of review (2003-07) and this
increase was much faster than the increase of mean salary (145%) and the head count (265%).
This yielded a growth rate of 61% in value added per employee (Y/L), the generally accepted
measure of productivity. As discussed earlier in the case of Infosys, the TFP approach attempts to
explain where most of this productivity increase came from. We can observe from the WIPRO
estimation sheet (Annex 16) that year on year, there was a hefty increase in TFP growth (78%) in
2005, followed by a negative rate (-5%) in 2007 for which a disproportionately large build up of
capital employed (77% increase) appears to be responsible. Overall, however the 4 year trend rate
of positive TFP growth of 50% registered by Wipro could certainly be a cause for celebration.
25
website http://www.indiaedunews.net
14
The attached note on TFP deals however with some caveats and further cautions against jumping
to conclusions based on TFP trends. It is always advisable to consider as large a set of historical
data as possible in order to smoothen out abnormal incidents in particular years. Incidents
include, for instance, a large injection of capital, or spurt in hiring, all of which require many
years to amortise and yield results. Unexpected fluctuations in revenues and salary costs too
affect the value added (Y), with consequent effects on TFP.
Tata Consulting Services26
We were not quite clear how many offices TCS has in Bangalore itself. Dr Desai received us in a
medium-rise building surrounded by other equally drab surroundings in a congested part of the
city. Apparently TCS has yet to decide to define its personality with its own “campus” as Infosys
and Wipro have done. Tata Consultancy Services Limited (TCS Limited company), a part of the
gigantic empire of the Tata group, is one of the world’s largest providers of information
technology, consulting, services (system integration and testing solutions), software application
development and business-process outsourcing. It is Asia's largest and has the largest number of
employees among the Indian IT companies with strength which has crossed 100,000 by the end
of 2007, with IT consultants in 47 countries (source: Wikipedia). The company generated
consolidated revenues of US $4.3 billion for fiscal year ended 31 March 2007 (written Rs. 186
billion in our TFP estimation sheet discussed further below).
The discussion started with Dr. Desai mentioning that their revenues are 9% from India, 30%
Europe, 51% US, and the rest other regions including Latin America and China. TCS is the
world’s first organisation to achieve an integrated Enterprise Wide Maturity Level 5 on both the
Capability Maturity Model Integration(CMMI) and the People CMM appraisal system. CMMI,
developed by the Software Engineering Institute of Carnegie Mellon, “helps integrate
traditionally separate organizational functions, set process improvement goals and priorities,
provide guidance for quality processes, and provide a point of reference for appraising current
processes”, whereas “the People Capability Maturity Model (People CMM) is a framework that
helps organizations successfully address their critical people issues.” Based on the best current
practices in fields such as human resources, knowledge management, and organizational
development, the People CMM guides organizations in improving their processes for managing
and developing their workforces.” (Source: http://www.sei.cmu.edu/tools-methods/process.html).
Dr. Desai observed that TCS “is a strong tech company trying to get to the business side”, with
its products and consultancy business growing but the services segment dominating.
On the human resources side, the challenge of managing a workforce touching 100000, growing
every year by 30000 or so, was underscored. There was a wide gap between the skilled and semi-
skilled, younger, work force and confirmed that this seems to be a major factor pushing IT
companies to broaden the pyramid base to keep HR costs in control. He hinted that this was
influencing the shift to more “automatic processes”, quite apart from the latter being an
imperative per se, as all IT players that wish to remain globally competitive are realising. This
gap in productivity between the two levels is being diminished by providing intensive training for
3 months on entry at their about 8 training sites. Their facility in Souzhou, China, was mentioned
in this context: “To go out from China may be easier than from India”. A strong appraisal system,
26
Interview with Dr. Pradeep Desai, technology Head, TCS Financial Services on 17/09/07.
15
for which the People CMM mentioned above, is undoubtedly being put to use is in play: “What
value do you bring to the company?” is the hard question that has to be convincingly answered.
Interestingly some of these observations sit well with the trend analysis we make of the data in
the TFP estimation sheet27*. We see that while there have been heavy injections of capital in 2006
and 2007 giving an overall trend of 126% for the period 200-2007, the work force increased more
impressively (184%). The resulting capital employed per employee (K/L) was negative at -20%.
The work force increase was also more than the increase in value added (169%) over this period,
hence output/employee (Y/L), widely accepted as a broad measure of productively went into
negative territory (-5%). The TFP approach discussed earlier in the paper and elaborated in the
note in the annex seeks to look deeper at the respective contributions of capital (K/L) and worker
“efficiency” (TFP), which discounts the role of capital, in the increase (or decrease) of the
overall productivity trend rate. We see then that the negative role of K/L was compensated by a
modest, but positive trend of TFP (1%). In fact, the year 2007 could be signaling a turnaround as
both K/L and TFP turned positive, giving a positive growth of 5.3% over 2006 of Y/L so one
could even tentatively conclude that recent integrative and appraisal measures on the
management and HR side and automotive and other processes on the technology side are
beginning to give their fruit. We should also remember that negative exogenous changes in Y i.e.
revenues in value added terms, also affect productivity negatively. The 12% appreciation of the
rupee against the dollar during 2007 has undoubtedly caused unexpected pain (the rupee has
historically only rarely appreciated in the past) as most of the billings of these IT companies are
in dollars, and many IT companies, and NASSCOM on their behalf too, have expressed concern
from time to time over the drop in export earnings resulting from such currency changes.
Decreasing L, the work force to maintain the ratio. Albeit for reasons of poor performance, media
reports of TCS’ dismissal of 500 employees are significant in this context:
After cutting down on variable pay across the board, Tata Consultancy Services has shown the
door to 500 employees, citing poor performances as the reason. India’s largest private sector
employer and Asia’s largest software exporter has been going through a lean period because of
external business dynamics.
The rising rupee vis-à-vis the US dollar has been building up the pressure on margins and
revenues. Another factor that has been bothering IT companies is the signs of a slowdown in the
US economy, the largest spender on IT systems and outsourcing. (Times of India, Mumbai
edition, Feb 6, 2008)28
27
See Annex for further reference on TFP calculations.
*
Regrettably however we should point out that Dr. Desai declined to furnish these figures, which was puzzling as
they are all extractable from several different sources like annual reports and quarterly “results” all in the public
domain in their website (www.tcs.com), which we in fact did ourselves. These are therefore not verified by the
company. Moreover, as we could not easily locate the numbers for 2003, we left that year out, considering only the
span 2004-2007.
28
At the time of submission of this paper (Sept 2009) the Rupee is back to its weak level hovering around Rs. 49 to
the US$. The arguments can thus be run in reverse! Implications of the weakening Rupee could have many
implications, Indian offers becoming less uncompetitive, being only one oft them. These would have to be set against
many challenges other challlenges such as demand becoming more price inelastic and slackening more because of
re-awakening resistance to outsourcing in the wake of this slowdown in the US and other developed economies.
16
Metacube29
Meta cube is an IT solutions and services company developing enterprise software applications.
It is Met cube's business model to develop and sell these applications to software companies
which in turn offer their final software services to their clients. Metacube has many clients in the
trade management sector. One of their important clients is Tradebeam, USA, for instance, a
global logistics company that delivers an “end-to-end solution across order, logistics and
settlement to improve global trade operating efficiencies and cash flows”. Metacube has an on-
going relationship with them with a dedicated team of 30 engineers and has developed a global
trade management software, TradeBeam 3.0 that allows for streamlining global trading processes.
Another important client is Valdero, a leading provider of enterprise class software solutions for
real-time supply and demand chain execution, with whom Metacube is in an ongoing relationship
with a team of 14 engineers providing development and quality assurance services.
The company is situated in the Jaipur Software Technology Park which is currently under
development. Jaipur is one of the “tier two” cities about 350km from New Delhi that are coming
up as alternative options to the “hot” centres like Bangalore, Mumbai, Gurgaon, NOIDA where
salaries, especially of skilled IT engineers are exploding and the infrastructure deficit is
challenging. The work-in-progress atmosphere mirrors the characteristics of typical tier 2/3
regions. The poor infrastructure, the few learning opportunities (externalities), the still scarce
availability of skills are all challenges Metacube has to deal with despite a growing quality of life
and a growing political support.
On the supply side Sharma, CEO of Metacube, estimates that of the graduating engineers from
about 50 regional colleges in Rajasthan state (of which Jaipur is the capital) about 40-50% get
placed in software development companies, the rest in BPO call centres and other lower value
added IT related activities. Sharma also has an IT background and shares the opinion of
colleagues (see the section on Infosys) that the private sector is resolutely marching in with
projects to open more and more regional engineering colleges to restore the supply demand
equilibrium. The activity of the private sector grows, despite the fact that state authorities do not
yet recognize the degrees.
The TFP calculations point to quite an impressive picture, which does not mirror the otherwise
dull appearance of the physical location. Albeit starting from a very small base, the income from
operations and value added (Y) has leapt by more than 1000% by 2007. Work force grew by 62%
over the previous year with 133 as the present head count (it is significant to note that the CEO
does not want the company to move beyond 400 employees). The even higher growth of wages
and salaries (1189%) was evidently neutralised by corresponding increase in business volume
and hikes in billing as income also showed high growth (940%).
Overall there is a clear and impressive increase in value added per employee (185%) and TFP
(142%)30. The latter figure shows that growth of value added per employee was not just owing to
more capital (technology, improved software and processes) but also because of “better and
faster” performance of its work force with these (capital) tools. It is relevant in this context to
recall the CEO’s emphasis on mentoring by senior staff. Their staff has an average of 3 years
29
Discussion with M. Keshav Sharma, CEO on 24/09/07.
30
See Annex for further notes on TFP calculations.
17
experience, salaries ranging from Rs. 600000-800000 p.a. Those with 6/7 years earn around Rs 1-
2 million p.a., some even Rs. 2 million. Keshav Sharma, CEO of Metacube, underlined the “huge
and identifiable” difference in productivity between the junior and more experienced staff. In this
context, he laid special emphasis on mentoring by senior staff as a critically important HR policy
in their company. Attrition rates were of the order of 10/15% p.a, the majority of those quitting in
the 2-4 years experience range.
Axis IT&T31
Axis, a US company and IT&T merged in 2003, the latter taking over the former. The AXIS -
IT&T group now comprises AXIS-IT&T Limited, Axis Inc. and Axis EU Limited Engineering. It
considers itself to be a design and business process outsourcing (BPO) services provider. AXIS -
IT&T operates in the USA, UK, Europe and India through the offices of its group companies in
Illinois, Leicestershire, and Noida.. Services Offered include Engineering Design Services-
Product Design, 3D Modelling and Assembly, Drafting & Detailing, FEA, Reverse Engineering
and NC Programming. Back Office Services such as Content Development & Data Conversion,
HR Services are also provided. In Software Development they are active in Product Development
& Maintenance, Software Re-engineering.
Amongst the major clients Caterpillar, Cummins, Intervoice, were cited. A particular challenge
that they faced was illustrated by recalling the three stages involved from original conception
(styling) to assembly/manufacturing, with engineering design in between. In the 3-stage
development of superbikes, for instance, AXIS IT&T converts blueprint drawings for the
engineering process. The conversion takes place between the actual design of the superbikes and
the assembly and manufacturing phase which are done by other parties. They are thus caught in
the middle of the chain between styling and assembly/manufacturing. Zero defect and zero delay
performance become even more crucial because of this.
For the purposes of analyzing the movements of value added, wages capital employed etc. it was
agreed that only the figures for the company’s India operations would be considered. It was
pointed out that figures for 2003, before the merger, in the TFP estimation sheet are really not
comparable with later years, as income and salaried staff sharply decreased. According to Rohit
Chand, salary-costs increased by app. 15% on average last year (40% in low, 20% in middle, and
8-10% in senior staff). Their fresh hiring intake is of engineers with 2 years experience on
average. With a 12% appreciation of the rupee and no corresponding increase in billing rates, this
represents a major challenge for a small B-to-B company such as AXIS IT&T.
The attrition rate was estimated at 35-40% per annum. This was a higher figure than that
disclosed by other companies we visited, but those were in other locations like Bangalore,
Chennai and Jaipur. It is likely that the Noida and Gurgaon areas around Delhi area are facing
even more pronounced boom conditions. Additionally, small companies without the same “brand
pull” as the big Indian and foreign players face even greater threats of attrition.
31
Meeting with Rohit Chand, Chairman and his colleagues (20 Sept 07) as well as website information:
http://www.axisitt.com
18
TFP figures in the estimation sheet need to be interpreted keeping in view the fact that there was
significant increase in salaried staff starting from a small base in 2004 after the merger, while the
capital employed (rather large!) remained basically unchanged32. Furthermore, taking note of
remarks in footnote c) in their estimation sheet regarding the structural changes that took place
during 2003-05, with unusual variation in figures, we have added a column tracking % changes
from 2005 to 2007, rather than from 2003. This may be a fairer comparison – it shows that value
added increased hugely (268%), with the increased workforce (195%) giving better overall
productivity as the value added per employee too showed an improvement of 25%. There was
hardly any change in capital employed which appears unusually immense compared to turnover
(Rs.200 million vs. Rs.55), perhaps a “legacy” of the merger and re-structuring in earlier years.
The result was that the capital per worker decreased by 64%. The impressive increase in value
added per employee on the one hand despite no addition to capital employed on the other can be
interpreted to mean that the work force performed with relatively greater productivity with the
same capital inputs. The TFP score of 44% validates this interpretation.
Rohit Chand had observed that the triple blow of increase in salaries (15% as estimated by him),
the 12% appreciation of the Rupee against the US$ and constant billing rates has affected their
profitability. However this does not appear to be borne out by the numbers in the estimation
sheet. Value added (Y) increased faster (268%) than wages (194%) over the period 2005-2007.
And over this same period the average salary (wages/employee) remained steady (Rs.0.31
million). This could mean that, as for the Bangalore companies, the age of the work force is
decreasing, with new hires at comparatively lower salary ranges compensating for the wage hikes
at higher levels. Additionally, it is interesting to note that the mean salary of the big three at
Bangalore is of the order of Rs. 1 million, three times more than that in small companies like
Axis IT&T and Metacube.
Alcatel Lucent Development, Chennai33
Alcatel mainly focuses on product testing, broadband wireless access solutions like WiMAX, and
product development. In this regard Alcatel filed 39 patents in 2007 as compared to 11 in 2006.
Alcatel’s software development centres are located at Gurgaon, Noida, Chennai, Bangalore and
Hyderabad. Today, Alcatel-Lucent technologies make up 50% of India’s fixed and CDMA
wireless lines.34 The company entered the South Asian market in 1982. In cooperation with ITI
Ltd., Alcatel-Lucent became the first company to manufacture digital switching equipment in
India significantly fostering the development of the Indian telecom market.
As the estimation sheet depicts35, the work force growth has been very high (356%), but value
added per employee (Y/L) has also shown impressive growth (78%), thus predictably showing
impressive TFP growth too (57.8%). Alcatel’s key objective is to adhere to the delivery date of
tested products within a set of rigid parameters of early defect removal. Furthermore, quality
predictability, decision review schedule adherence and content adherence represent major goals.
Attrition rate was estimated at 10-14% compared to about 22% in the region for similar IT
32
Figures for 2003, before merger, are really not comparable with later years, as income and salaried staff sharply
decreased.
33
Chennai center visited on 19/09/07. Interview with the MD, BVS Krishnamurthy and his colleagues.
34
Cf. website : http://www.alcatel.co.in
35
See Annex for further notes on TFP calculations.
19
companies36. The average age per employee has been constant during the last two years. This
observation is contradictory, given the big wage hike of the last years 37, but again the explanation
is the fact that the work force is progressively getting younger and is being paid proportionately
less. This trend is borne out in the figures in the estimation sheet for the years 2005 and 2006 and
can be confirmed by the big three companies in Bangalore as well.
One could argue, as some members of the team we interacted with felt, that the TFP measure for
the centre in Chennai is not applicable since the centre is an internal facility generating no
revenues from direct clients. Rather the company itself pays the centre for jobs done on a cost
plus basis, and there are no sales and marketing costs. But, as we explained to them, this is
irrelevant to the basic task underlying the TFP concept of analysing where the increase (or
decrease) of output in value added terms per unit labour comes from, no matter whether the
output is related to external sales in the market or internal payments by the parent for services
rendered.
6. Cross Comparison Between The Big Three38
For obvious reasons, it will be meaningful to make a comparison of the big three Bangalore
companies, as the other three – Axis IT&T, Metacube and Alcatel-Lucent - are all so different in
their characteristics. The two charts in the following page help us in making some comparisons
and contrasts in the performance metrics indicated in the respective estimation sheets of TCS,
Infosys and Wipro.
36
according to the MD
37
see footnote 2
38
All values in the ratios are Rs.Million
20
Value- added per unit labour (Y/L): This is the broad measure of productivity. Wipro (1.29,
2007) appear to be closing in on Infosys (1.59, 2007) as the years go by, although both are still
behind TCS (1.73, 2007), which is the clear leader. In absolute income values WIPRO has almost
caught up with Infosys, but the gap between the two is still perceptible in value added per unit
labour terms. TCS’ value added per capita ranges between 1,89 and 1,64, while Infosys’
numbers range from 1,49 to 1,92 and Wipro’s between 0,64-1,29. Despite certain volatility,
Infosys is seen to be moving moves towards TCS.
A certain volatility in the companies’ performance growth covered during the years 2003 to 2007
can be seen. In general TCS shows steady growth of figures and maintains its high level (Y/L: -
5,29% 2007/2004). Infosys’ value added decreased by -17,13% between 2003 and 2007, which is
mainly due to relatively high drops in 2004 and 2006. Wipro managed to steadily grow,
increasing Y/L by 60,94% between /2003 and 2007.
TFP and Capital Employed per Unit Labour (K/L): This is a measure of the capital intensity of
the firm, and in the TFP context, indicates the contribution of capital to total productivity per
capita (Y/L). In absolute terms, Infosys has the highest amount of capital employed representing
almost twice the amount that Wipro employs in 2007. The K/L ratio reflects this contrast between
the two companies. Both Infosys and Wipro have the same level of workforce (around 70000),
but the K/L ratio by 2007 for Infosys is much higher, making it perceptibly more capital intensive
in its operations. Some may argue that for this reason Infosys appears to have the highest growth
potential and could therefore deemed to be more sustaining in the long run, others may look at
the consequent negative TFP growth rate and hold that that is responsible for the decreasing
trend in its value added per unit labour, which is the overall productivity measure. In contrast,
Wipro emerges as the clear winner in terms of positive TFP growth (49.48%) over the period
2003-2007. As for TCS, its capital employed in 2007 (Rs. 72 billion) is between the two, and its
K/L on par with that of Wipro. Its TFP growth remains constant over the period 2004-07.
21
Wage trends and Mean Salary (W/L): TCS has the largest workforce over the covered period of
time (85.500, 2007), whereas Infosys and Wipro have the same level (around 70000, 2007).
Wipro has the lowest mean salary level, Rs. 0.85 million (2007) although a rising trend can be
seen. It can also be seen that Infosys and Wipro have managed to remarkably contain mean salary
ratio over the period 2005-07 despite the sharp hikes in wages and salaries during this period.
This validates the discussion in previous sections on the work force becoming younger and
younger, thus dampening the effect of sharp wage hikes at senior levels.
7. Concluding Remarks
After a cursory look at the macro picture of India's IT off shore outsourcing sector, more to warm
up and set the ground for discussion at a micro-level which is our main thrust, the paper
addresses the major research issue: Whether rising labour costs are being compensated by rising
productivity and other measures to keep average costs in control? A sample of six firms including
the big three in Bangalore was selected for a field survey, and the total factor productivity (TFP)
approach used to look at trends of output, capital employed and wage costs per unit labour,
enriched by insightful discussions on site with all the six firms. It is important to underline here
that the discussion does not get into complexities of growth accounting but stays close to the
businessperson’s vocabulary of performance metrics in simple conceptual terms. The idea was
not only to look at the well accepted proxy of productivity, value added per unit labour (Y/L), but
go a little deeper and look at what was responsible for its increase (or decrease). We have
discussed for each of the six sample firms what, for example, was the role of capital deepening
i.e. increasing K/L? Did overall productivity (Y/L) increase despite resources of labour (L) and
capital (K) remaining constant, which is what TFP tries to bring out? TFP estimation sheets were
developed, and a short non-technical note on TFP sent to the firms in advance of our visit. The
discussion with the management of the firms visited centered more on the quality and efficiency
of labour, skills, motivation, learning culture of the company, supportive business environment,
and their HR policies in general. One of the key insights that emerged from these discussions was
that in practically all of them the policy to hire younger and younger people ("smart" graduates
from all disciplines, not necessarily engineers only) succeeded in maintaining mean salary per
capita more or less constant across the period 2003-07 covered in the survey.
It emerged that while companies such as Wipro, TCS and Infosys dominate the IT sector in terms
of revenues and value-added, smaller players such as Metacube in Jaipur , Axis IT&T in NOIDA,
and Alcatel Lucent in Chennai impress too with their growth performance and productivity
measures. Wipro emerges as the clear winner in terms of positive TFP growth (49.48%) over the
period 2003-2007. As for TCS, its capital employed in 2007 (Rs. 72 billion) is between the two,
and its K/L on par with that of Wipro. Its TFP growth remains constant over the period 2004-07.
Both Infosys and Wipro have the same level of workforce (around 70000), but the K/L ratio by
2007 for Infosys is much higher, making it perceptibly more capital intensive in its operations,
and as a consequence its TFP is in negative territory. It obviously therefore ranks high by the
Economic Value Added (EVA) measure. We took this opportunity to express that neither EVA
nor TFP are complete tools by themselves, both need to be used (instead of EVA only, which is
more popular in the corporate world) and the limitations of both needs to be stated with plenty of
“footnotes” to explain deviations in particular years that neither of these tools can properly
interpret. In the event, we did notice such unusual deviations from the normal trend in our
analyses of the estimation sheets of some companies and have properly explained them. TFP by
22
itself holds up a mirror, perhaps sometimes distorted, that is neither a messenger of good news,
nor of bad news, but an invitation to go through further analysis of the data to explain and
understand departures from real trends and their implications.
Service-wise, as an offshoring company servicing its parent, Alcatel Lucent stands apart from the
other two, but it too measures up very positively in registering high TFP growth.
At the time of submission of this paper (Sept 2009) the Rupee is back to its weak level hovering
around Rs. 49 to the US$. During the period when we were on our field visits (end 2007) the
Rupee had appreciated to levels of Rs.40, so the arguments related to loss of competitiveness
used by NASSCOM and others in India's export sector can thus be run in reverse now!
Implications of the weakening Rupee could have many implications, Indian offers becoming less
uncompetitive, being only one oft them. These would have to be set against other challenges such
as overseas demand becoming more price inelastic, slackening more because of rejuvenated
resistance to outsourcing in the US and other developed economies in the wake of global
economic slowdown, not therefore so tempted by more price competitive Indian offers. These
developments are perhaps worthy of scrutiny more deeply, but outside the scope of this paper. All
these exogenous changes do underscore again however the need to use the TFP measure with
caution as discussed earlier.
23
Annex
Agenda for Discussion during Company Visits
To facilitate an efficient interaction during our visit to your company the following anchor
questions/points are listed around which discussions could focus. These are by no means
exhaustive – discussions would undoubtedly bring out more insights. Having supporting data
ready at hand (apart from the TFP related data solicited in the second excel sheet document)
would be helpful.
Wage Trends
What has been the impact of the rise in salaries and wages of skilled and semi-skilled workforce
in the last five years?
On changes in your target market (client profile). Less clients, more preference for projects
requiring higher skills? Upward changes in prices?
On changes in the products and services offered (or tasks entrusted to your offshore location by
your parent company headquarter)
On attrition rates
On HRD policies (hiring, training, employee retention measures to combat competitive body
snatching etc. in the light of the acute supply-demand mismatch.)
On provoking specific “economy drive” measures (not related to productivity enhancement,

which are mentioned in next section), e.g. restrictions on travel, changing mix of permanent and
casual staff, etc.
Productivity Related Issues
At a crude level, one can state that wage cost escalations need to be matched with productivity
(output per unit input) improvements to retain cost competitiveness. Productivity improvement
could come through superior and more cost effective technology, or more efficient use of existing
technology, or both:
What upgradations in technology and improvements in processes have been implemented

recently? Faster communication links, application of next level of software, process and cycle
time improvements, six sigma etc.(Improving “capital productivity”)
What measures to enhance the skills and motivation levels of the workforce have been initiated in
the recent past? (“Better and faster with the same tools”). Supply side issues such as increasing
I
labour scarcity (supply-demand mismatch) and inadequate quality of graduating engineers from
regional colleges, high cost of IIT graduates etc. could be discussed here.
What positive and negative externalities do you perceive that impact on company performance
(role of government and its policies, business climate and culture, infrastructure issues)
Competitiveness Issues
How do you assess the threat of foreign competition, especially in a dynamic, evolutive, sense?
What would be your strengths (tied relationships with loyal client base, English speaking staff, all
that is positively perceived about India) and weaknesses (escalating wage costs, appreciating
Rupee, all that is negatively perceived about India) in facing it?
Strategic Options and Future Prospective:

A free ranging discussion would be appropriate. Strategies that may enter in the conversation
may include looking at alternative lower cost locations (the so called second/third tier cities);
performing only high value sophisticated jobs for select “star” clients to whom quality and
security concerns override cost; looking outside and acquiring outsourcing facilities in other low
cost economies or in those locations “nearer” to clients (geographically, linguistically,
culturally); reverse offshore outsourcing to US and Europe; capital deepening (making the
service less labour intensive through more capital inputs (technology, automatic processes).
II
Sample Estimation Sheet
ESTIMATING TOTAL FACTOR PRODUCTIVITY

...
%change
Company: 2003 3
%change 2004 %change ... 2007/2002
Income (from operations) - A
Less: All operating expenses

except wages and salaries - B
Value Added (A - B) = Y
Work Force (no. of employees)1-

L
Wages and Salaries2

(W)
Value Added per employee -

Y/L
Capital Employed (net assets,

book value) - K
Capital per Worker - K/L
Total Factor Productivity (TFP)

[%changeTFP= %change Y/L -
%change K/L*0,3]
Notes: 1. Apart from permanent

employees, part time resources
may also be counted with
suitable co-efficient
2. From employer's perspective,
i.e. include social benefits,
pension contributions, bonuses
etc.
3. If 2002/03 is the actual
reference period, please clarify
this in this footnote
III
Productivity, especially labour productivity is a critical indicator of efficiency and progress, both
at the macro level (GDP per capita is a good proxy) and at the firm level (output per employee).
However, it should be even more vital for managers, investors and for stockholders to know why
labour productivity (value added per employee) has risen, or why it has not, and its behaviour
across time.
Value added per employee for firms, as for countries, grows either because a) capital investment
(in which technology is embodied) makes workers more productive, or b) better methods,
technological processes, incentives, education level and skills, motivation, etc., makes workers
more productive WITHOUT additional capital investment. This b) is the TFP factor. Without
getting into complexities TFP derives its definition from the growth accounting literature in
economics attributed to Solow and Swan in 1956 and then developed by many others (not
entirely free of controversy!). Evidence was shown that countries grew wealthy mainly through
(b), TFP. This logic would argue that growth in TFP is the critical lever for sustained growth of
firms too. An example could help in understanding TFP:
ABC Corporation
2004 2005 % change

Sales $110M. $125M. %13.6
- Cost of Raw Materials 30M. 35M.
= Value Added (Y) 80M. 90M. 12.5%
Labour (no. of employees) 400 420

(L)
Value added per employee $200000 $214286 +7. %

(Y/L)
Capital Employed (K) $35M. $37.8M
Capital per employee (K/L) $87500 $90000 +2.8%
IV
Consider the % change in value added per employee, 7%, which is the measure of labour
productivity. The question is, why did labour productivity rise by 7%? Was it because of 'capital
deepening' -- each worker had more capital during the year 2005 than during the year before (i.e.
more software, machines, computers, IT, etc.)? Or was it because of non-capital factors, such as
management, motivation, efficiency and skills, product innovation, more supportive external
environment, etc.
To find the answer we subtract from the %change in value added per worker (Y/L) i.e. 7%, 0.3
times the %change of contribution of capital per worker (K/L), 2.8%. We are in effect removing
the productivity growth caused by increased capital per worker from the total productivity growth
equation:
% change in TFP = 7% - 0.3*2.8% = 7% -0.84% = 6.16%
The 0.3 is the 'weight' or 'contribution' of capital to value added, or the fraction of value added
attributable to capital (the corresponding weight or contribution to value added of the other
factor, labour, would be 0.7 assuming no economies of scale,)
Conclusion: ABC Corp managed to boost its sales, production, and productivity, not so much by
using costly shareholders' capital but mainly by 'free lunches' -- increasing the motivation,
efficiency, and energy of workers, and the competitiveness in the marketplace of its products.
Where does the 0.3 come from?
Total Factor Productivity is defined as the ratio between output and a 'package' of inputs (labour
and capital). The package of inputs is a geometrically weighted average. Thus:
TFP = Y / [L0.7 × K0.3], where L is the number of employees and K is the value of the firm's
capital. The exponents represent the fraction of the firm's value added contributed by labor (0.7
or 70%) and by capital (0.3 or 30%) -- taken as the general average for the services sector which
is considered more labour intensive. We use the sector averages or the economy-wide average,
since the data needed to compute this parameter for each firm is normally not publicly available.
Unfortunately the sector averages for India are not available so we have taken the averages for
other economies e.g Canada, where figures are available. A little mathematical manipulation
(taking logs and differentiating across time) yields the above referred equation:
% change in TFP = %change in productivity per worker – 0.3* %change in contribution of

capital per worker
The rate of change in TFP could thus be interpreted as the rate of change of overall productivity
per worker after netting out the contribution of capital per worker in causing this overall
productivity change.
V
EVA and TFP contrasted
Economic Value Added (EVA) has become a widely used measure of firm performance. It is
however criticized by some on the grounds that it measures the productivity of capital alone,
measuring its return against a benchmark, cost of equity, to see if value has been created. The
advantage of the TFP measure is that it takes into account both labour and capital in measuring
productivity. This could be more meaningful for firms operating in economic sectors (like IT
related services) where human resources play a key role in driving performance.
However it would be unwise to abandon one measure favouring the other. Juxtaposing both tools
side by side may lead to more insights. For example strong EVA and negative TFP may lead to
reflections whether economic value is being created in the short term but managerial performance
shows scope for improvement (for long term sustainability). The opposite may be the case where
TFP growth is robust but shareholders are not happy with the returns to their capital. Thus it
would be best if firms use both the EVA and TFP tools, with plenty of “footnotes” in their
calculation sheets to explain deviations in particular years that neither of these tools can properly
capture (e.g. .abnormally high investment periods requiring long gestation or surges in fresh
recruitment that will yield output in later years but will depress TFP in the short term).
VI
Company Specific Estimation Sheets
INFOSYS
ESTIMATING TOTAL FACTOR PRODUCTIVITY Fig in Rs. Million
%chg
Company3:Infosys Yr.ending March 31, 2003 2004 %chg 2005 %chg 2006 %chg 2007 %chg 2007/2003
Income (from operations) - A 36.540,00 47.860,00 30,98% 72.540,00 51,57% 95.210,00 31,25% 138.930,00 45,92% 280,21%
Less: All operating expenses except wages and

6.040,00 6.020,00 -0,33% 12.010,00 99,50% 16.700,00 39,05% 23.920,00 43,23% 296,03%
salaries - B
Value Added (A - B) = Y 30.500,00 41.840,00 37,18% 60.530,00 44,67% 78.510,00 29,70% 115.010,00 46,49% 277,08%
Work Force (no. of employees)1- L 15.876,00 25.634,00 61,46% 36.750,00 43,36% 52.715,00 43,44% 72.241,00 37,04% 355,03%
Wages and Salaries2 (W) 16.400,00 23.770,00 44,94% 35.390,00 48,89% 48.010,00 35,66% 71.120,00 48,14% 333,66%
Mean Salary (W/L) 1,03 0,93 -10,23% 0,96 3,85% 0,91 -5,43% 0,98 8,10% -4,70%
Value Added per employee - Y/L 1,92 1,63 -15,04% 1,65 0,91% 1,49 -9,58% 1,59 6,90% -17,13%
Capital Employed (net assets, book value) - K 24.930,00 31.250,00 25,35% 43.310,00 38,59% 61.770,00 42,62% 91.470,00 48,08% 266,91%
Capital per Worker - K/L 1,57 1,22 -22,37% 1,18 -3,33% 1,17 -0,57% 1,27 8,06% -19,37%

-8,33% 1,91% -9,41% 4,48% -11,32%
[%changeTFP= %change Y/L - %change K/L*0,3]
Notes: 1. Apart from permanent employees, part time

resources may also be counted with suitable co-efficient
2. From employer's perspective, i.e. include social
benefits, pension contributions, bonuses etc.
3. May be left blank if anonymity preferred
Source: Data extracted from annual reports and website information. Figures not verified by company.
VII
Tata Consulting Services
ESTIMATING TOTAL FACTOR PRODUCTIVITY Fig in Rs. Million

%chg
3
Company :TCS Yr.ending March 31, 2003 2004 %chg 2005 %chg 2006 %chg 2007 %chg 2007/2004

16.240,00 19.929,00 22,72% 29.320,00 47,12% 38.372,00 30,87%
salaries - B 136,28%
Value Added (A - B) = Y 54.987,00 77.343,00 40,66% 103.134,00 33,35% 147.965,00 43,47% 169,09%
Work Force (no. of employees)1- L 30.121,00 40.992,00 36,09% 62.832,00 53,28% 85.582,00 36,21% 184,13%
Wages and Salaries2 (W) 36.738,00 50.939,00 38,65% 69.239,00 35,93% 101.515,00 46,62% 176,32%
Mean Salary (W/L) 1,22 1,24 1,88% 1,10 -11,32% 1,19 7,64% -2,75%
Value Added per employee - Y/L 1,83 1,89 3,35% 1,64 -13,00% 1,73 5,33% -5,29%
Capital Employed (net assets, book value) - K 31.910,00 32.090,00 0,56% 48.650,00 51,60% 72.220,00 48,45% 126,32%
Capital per Worker - K/L 1,06 0,78 -26,11% 0,77 -1,09% 0,84 8,99% -20,34%

0,00% 11,19% -12,68% 2,64% 0,81%

Special Note: Figures extracted buy authors from public

documents (annual reports, "results" for various
quarters) in the TCS website www.tcs.com) as company
declined to furnish data
Source: Data extracted from annual reports and website information. Figures not verified by company.
VIII
Wipro
ESTIMATING TOTAL FACTOR PRODUCTIVITY Fig in Rs Million
%chg
Company3: WIPRO Yr.ending March 31, 2003 2004 %chg 2005 %chg 2006 %chg 2007 %chg 2007/2003

24.972,37 33.094,48 32,52% 26.855,70 -18,85% 37.569,38 39,89% 49.450,55 31,62% 98,02%
salaries - B
Value Added (A - B) = Y 14.875,80 18.232,32 22,56% 45.475,91 149,42% 64.701,79 42,28% 87.388,45 35,06% 487,45%
Work Force (no. of employees)1- L 18.580,00 28.502,00 53,40% 41.857,00 46,86% 53.742,00 28,39% 67.818,00 26,19% 265,01%
Wages and Salaries2 (W) 6.424,70 8.644,41 34,55% 28.785,34 232,99% 42.790,25 48,65% 57.681,93 34,80% 797,82%
Mean Salary (W/L) 0,35 0,30 -12,29% 0,69 126,75% 0,80 15,78% 0,85 6,82% 145,97%
Value Added per employee - Y/L 0,80 0,64 -20,10% 1,09 69,84% 1,20 10,81% 1,29 7,03% 60,94%
Capital Employed (net assets, book value) - K 11.206,92 19.290,66 72,13% 20.643,73 7,01% 31.953,00 54,78% 56.535,00 76,93% 404,47%
Capital per Worker - K/L 0,60 0,68 12,21% 0,49 -27,13% 0,59 20,55% 0,83 40,21% 38,21%

-23,77% 77,98% 4,65% -5,03% 49,48%

Source: Data provide by company.
IX
Metacube

%chg
Company4: Metacube Yr.ending March 31, 2003 2004 %chg 2005 %chg 2006 %chg 2007 %chg 2007/2005
Income (from operations) - A 8,06 29,53 266,50% 83,83 183,85% 940,30%

1,98 7,50 277,77% 14,14 88,53% 612,22%
salaries - B
Value Added (A - B) = Y 6,07 22,04 262,81% 69,70 216,29% 1047,52%
Work Force (no. of employees)1- L 33,00 82,00 148,48% 133,00 62,20% 303,03%
Wages and Salaries2 (W) 2,88 12,33 328,79% 38,67 213,59% 1244,63%
Mean Salary (W/L) 0,09 0,15 72,56% 0,29 93,34% 233,63%
Value Added per employee - Y/L 0,18 0,27 46,01% 0,52 95,00% 184,72%
Capital Employed (net assets, book value) - K 5,27 17,55 233,08% 51,65 194,27% 880,15%
Capital per Worker - K/L 0,16 0,21 34,04% 0,39 81,43% 143,19%

-1,452 -5,077 35,80% -15,127 70,58% 141,76%

Source: Data provided by company.
X
Alcatel-Lucent

%chg
Company4: Alcatel India Yr.ending March 31, 2002 2003 %chg 2004 %chg 2005 %chg 2006 %chg 2006/2002
Income (from operations) - A 279,80 380,00 35,81% 754,00 98,42% 1.510,00 100,27% 2.323,00 53,84% 730,24%

133,00 156,00 17,29% 402,00 157,69% 784,00 95,02% 1.129,00 44,01% 748,87%
salaries - B
Value Added (A - B) = Y 146,80 224,00 52,59% 352,00 57,14% 726,00 106,25% 1.194,00 64,46% 713,35%
Work Force (no. of employees)1- L 257,00 358,00 39,30% 758,00 111,73% 779,00 2,77% 1.173,00 50,58% 356,42%
Wages and Salaries2 (W) 96,40 94,00 -2,49% 264,00 180,85% 554,00 109,85% 894,00 61,37% 827,39%
Mean Salary (W/L) 0,38 0,26 -30,00% 0,35 32,64% 0,71 104,19% 0,76 7,17% 103,19%
Value Added per employee - Y/L 0,57 0,63 9,54% 0,46 -25,78% 0,93 100,69% 1,02 9,22% 78,20%
Capital Employed (net assets, book value) - K 227,90 395,00 73,32% 846,00 114,18% 1.215,00 43,62% 1.746,00 43,70% 666,13%
Capital per Worker - K/L 0,89 1,10 24,42% 1,12 1,15% 1,56 39,75% 1,49 -4,57% 67,86%

2,21% -26,13% 88,77% 10,59% 57,85%
Source: Data provide by company
XI
AXIS IT&T
%chg
Company3: AXIS ITT Yr.ending March 31, 2003 2004 %chg 2005 %chg 2006 %chg 2007 %chg 2007/2005
Income (from operations) - A 94,85 28,93 -69,50% 16,18 -44,06% 40,51 150,36% 55,36 36,64% 242,10%

55,37 12,57 -77,29% 4,67 -62,83% 5,65 20,99% 13,00 129,85% 178,11%
salaries - B
Value Added (A - B) = Y 39,48 16,36 -58,57% 11,51 -29,63% 34,86 202,88% 42,36 21,52% 268,08%
Work Force (no. of employees)1- L 354,00 29,00 -91,81% 45,00 55,17% 83,00 84,44% 133,00 60,24% 195,56%
Wages and Salaries2 (W) 62,79 15,71 -74,98% 13,89 -11,57% 27,24 96,08% 40,88 50,07% 194,25%
Mean Salary (W/L) 0,18 0,54 205,42% 0,31 -43,01% 0,33 6,31% 0,31 -6,35% -0,44%
Value Added per employee - Y/L 0,11 0,56 405,73% 0,26 -54,65% 0,42 64,21% 0,32 -24,16% 24,54%
Capital Employed (net assets, book value) - K 259,63 189,12 -27,16% 187,49 -0,86% 208,13 11,01% 200,45 -3,69% 6,91%
Capital per Worker - K/L 0,73 6,52 789,17% 4,17 -36,11% 2,51 -39,82% 1,51 -39,90% -63,83%

168,98% -43,82% 76,16% -12,19% 43,69%


Source: Data provide by company
XII

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Productivity of India’s Offshore Outsourcing Sector: The TFP Approach

Productivity of India’s Offshore Outsourcing Sector:

Dr. Suman Modwel, Ph.D.

Dr. Tawfik Jelassi, Ph.D.

Professor and Dean, School of international Management

Ecole Nationale des Ponts et Chaussées (ENPC)

Abstract: Following on an earlier paper discussing the sustainability of India's comparative

2. IT Offshore Outsourcing in India

As an industry-leading supplier of IT offshore-outsourcing, India maintains to attract the

Rapid Growth in Key Business Infrastructure

Enabling Business Policy and Regulatory Environment

In combination with India’s well-established technical infrastructure, India’s policy environment

Emphasis on Quality and Information Security

3. Sample Size, Methodology and Scope of the Field Research

The basic equation that we used to measure TFP is:

TFP = Y / [L0.7 × K0.3],

% change in TFP = %change in productivity per worker – 0.3* %change in contribution of

E-mail exchange with a company correspondent, with author’s responses in brackets:

1. What is the logic of TFP ? What statistical behaviour does it represent ?

3. How have you computed Operating Expenses minus Wages ?

4. Zooming in on Indian IT Offshore Outsourcing Firms

5. Company Descriptions and Analysis

Vinay Rao says:

Age profile (Numbers and percentage-WT population)

March March March March March

March March March March March

Tata Consulting Services26

Alcatel Lucent Development, Chennai33

6. Cross Comparison Between The Big Three38

On provoking specific “economy drive” measures (not related to productivity enhancement,

Productivity Related Issues

What upgradations in technology and improvements in processes have been implemented

Strategic Options and Future Prospective:

Sample Estimation Sheet

ESTIMATING TOTAL FACTOR PRODUCTIVITY

Income (from operations) - A

Less: All operating expenses

Work Force (no. of employees)1-

Wages and Salaries2

Value Added per employee -

Capital Employed (net assets,

Capital per Worker - K/L

Total Factor Productivity (TFP)

Notes: 1. Apart from permanent

Total Factor Productivity (TFP)

2004 2005 % change

= Value Added (Y) 80M. 90M. 12.5%

Labour (no. of employees) 400 420

Value added per employee $200000 $214286 +7. %

Capital Employed (K) $35M. $37.8M

Capital per employee (K/L) $87500 $90000 +2.8%

% change in TFP = 7% - 0.3*2.8% = 7% -0.84% = 6.16%

Where does the 0.3 come from?

% change in TFP = %change in productivity per worker – 0.3* %change in contribution of

EVA and TFP contrasted

Company Specific Estimation Sheets

Less: All operating expenses except wages and

Total Factor Productivity (TFP)

Notes: 1. Apart from permanent employees, part time

Tata Consulting Services

ESTIMATING TOTAL FACTOR PRODUCTIVITY Fig in Rs. Million

Less: All operating expenses except wages and