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Cost management, no longer an option
January, 10th 2008

In a typical software solutions company, cost management plays a vital role in the entire value chain spanning from quote to cashMR V. SRINIVAS, CFO, SATYAM COMPUTER SERVICES LTD.


It may not be long before customers start demanding to know the costs of each activity in greater detail, and to extract more value from the fiercely-competing global service providers, predicts Mr V. Srinivas , Chief Financial Officer, Satyam Computer Services Ltd.

ABC or activity-based costing, and lean principles may clamour for more attention in cost management, he adds, during the course of an exclusive interaction with Business Line recently.

Excerpts from the interview:

Is there scope for cost management in software?

Cost management is an integral part of any efficient business and more so in the case of the software solutions sector, in which the USP (unique selling proposition) is the cost arbitrage offered to customers.

In a typical software solutions company, cost management plays a vital role in the entire value chain spanning from quote to cash, and covering areas such as order receipt, order fulfilment, and accounts receivable.

In each of these areas the customer expects the service provider to optimise costs and be diligent in the utilisation of resources. Therefore, in these circumstances, cost management is more a matter of hygiene rather than a choice.

Does the IT (information technology) industry recognise the need for a structured cost management process?

Since the USP of the Indian IT industry is the providing of cost-effective and reliable high-quality software solutions to its customers, there is a huge need to effectively implement various state-of-the-art cost management techniques and processes in all the IT companies.

This will ensure that the value proposition it offers to customers remains intact and almost last forever.

IT business is a people business, and in a typical IT company 75-80 per cent of the overall cost is people-related. Therefore, there is a huge need to deploy a host of cost management techniques to rein in the people-related costs.

Recognising this fact most of the IT companies have put in place robust methodologies, tools and applications such as RCCs (resource coordination cells), TSMS (time sheet management systems), and PBMS (project-based management systems) to help in marshalling the resources well.

Apart from the people-related costs, IT companies do spend sizeable amounts on SG&A (selling, general and administrative) expenses as well. Most of the companies, therefore, have launched cost optimisation initiatives to keep a check on these overheads.

What are the cost management metrics that are part of the best practices in the industry?

Across the industry we often hear metrics such as the following:

Loading factors (also known as resource utilisation levels).

Offshore-onsite mix (proportion of offshore component in a particular project).

Associate mix or the PM:PL:TM ratio (that is, the composition of project managers, project leaders and team members in a typical project)

Time to deploy ELTPs (entry level trainee programmers) into projects, thereby reducing average cost of delivery.

Also, bench costs, training costs, attrition costs, proportion of billable travel to non-billable travel in a project etc.

The underlying mantra in all these initiatives is use your limited resources well. For example, in Satyam, we measure various outcomes on what we call a 5R dimension: fasteR (compressing cycle times), betteR (always exceed customer expectations), cheapeR (use your limited resources well), largeR (maximise scale opportunities), and steadieR (be predictable).

As an IT services leader, has India set any cost management benchmarks for the world, apart from the cost arbitrage that everybody talks about?

When working with Indian vendors, customers derive savings of anywhere between 30 per cent and 40 per cent on their original cost base. This is a great benchmark set by India Inc. The ability to achieve such high levels of cost advantage by sourcing services from India is driven primarily by the ability to access highly skilled manpower at significantly lower wage costs and the resultant productivity gains derived from having a very competent employee base.

Also the continued focus on quality and demonstrated expertise in service delivery by adopting methodologies such as Six Sigma, ISO 9000, People CMM, and so on, have helped in reining in costs significantly.

These are further complemented by relative advantages in other elements of cost structure such as lower infrastructure costs, telecom, travel and other overheads.

In the face of the rupee woes, has the industry cracked cost in innovative ways?

Rupee appreciation is definitely hurting the industry. Every one per cent rise in rupee pulls down the operating margins by 30 basis points (bps). Even after the recent steep rupee appreciation, Indias cost advantage outweighs the disadvantage of the rupee appreciation.

Operating from India continues to be economical as the cost of delivery is much lower. A gradual rupee appreciation, say 2-3 per cent per annum, is manageable but a steep rise like what we saw recently, of around 15 per cent in a short span of 5-6 months, does throw up a big challenge.

In spite of these steep movements IT companies have shown a lot of resilience. For example, in the case of Satyam, while the adverse impact on operating margins due to appreciation could be about 420 bps, we are planning to curtail its impact to around 175 bps for the financial year 2008 by adopting various innovative revenue enhancement and cost optimisation initiatives.

We have also adopted effective hedging strategies to minimise the impact. Billing the customers at higher price points by moving up the value chain and by providing high value adding solutions, and the basket of currencies approach (that is, by billing customers in various currencies like pound sterling, euro, etc.) are some of the other innovate initiatives one can take for mitigating the risks associated with a rising rupee.

Bio: Mr Srinivas, who has been heading the finance function in Satyam for over a decade, is involved in charting the overall strategic direction for the company. A graduate in law and a post-graduate in commerce, he is a Fellow Member of the Institute of Chartered Accountants of India, Institute of Company Secretaries of India and an Associate Member of the Institute of Cost and Works Accountants of India. Mr Srinivas has been involved in Satyams completion of the ADS (American Depository Shares) issue, listing on the New York Stock Exchange, and the restructuring exercise to increase transparency and enhance shareholder value. Later this week, he will be speaking in New Delhi at the Global Summit of the Institute of Cost and Works Accountants of India, on management accounting in the services sector.

D. Murali

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