Growth and the IT Services Pyramid

This appraisal cycle has been rough for Infosys. Unfortunately, at over $5B in revenues, everything it does becomes a media circus. Or in this case a social media circus.

Economic Times published a few stories in February and March of this year on a new appraisal and promotion policy at Infosys. The stories were their usual unremarkable fare, but what was truly remarkable was the sheer volume of comments (452 on this article as I post this) and the apparent rage of the commentors.

There are many interesting lessons one can learn from this episode. For one thing, this must have been quite an education on social media to many company managements in the industry. But the thing I find most interesting is that, unfortunate as the situation is, there is very little that Infosys or any other company can do about it. As growth slows down in the IT Services industry, career growth must also slow down.

While this seems intuitively true, to understand the extent of the impact of declining growth, I decided to build a model for the billable delivery organization of an IT Services organization. I made a few simplifying assumptions, but I am pretty satisfied that the model is robust and works well to a first approximation. I built a similar model in 2007. At that time I used the model to show why there are no senior developers in India. The description of the model and its assumptions are almost identical, so I won’t repeat them in this post.

Here’s the base case:

A company with a 1,000 person delivery organization in Year 1 makes Project Managers out of Developers after 4 years. The span of control (number of Developers per Project Manager) is 6. The company is growing its billable hours at a little over 40% a year. It is assumed that net headcount increases are done by entry level recruitment. Lateral hiring just compensates for attrition at every level, so they cancel each other out.

This was not far from reality for many companies just a few years ago. Today, the industry and most of its leading companies are looking at more muted growth, both because of the still weak economic conditions in developed countries and because of bigger year-on-year comparisons.

The trouble is, the shape of the “pyramid” as described above that worked for a 40% growth scenario, won’t work for a 20% growth scenario. Either the span of control goes down or the company must convert fewer Developers into Project Managers. Reducing the span of control has a negative impact on margins. So the logical thing to do for management is to raise the bar on becoming a Project Manager.

Promoting fewer employees to PM based upon performance has a couple of issues. One, you can’t change the performance parameters for becoming a PM from year to year based upon how many PMs you can create. Employees don’t like shifting goalposts on performance evaluations. Two, if the PMs who are appraising the DVs have only 4-6 years of experience, they may not have the maturity to make these big go/no-go decisions on promotions.

Experience is the easiest criteria to award promotions. My model says that if growth rates drop to 18%, Developers can be promoted to PMs only after 6 years of experience. Essentially, this means that if growth drops from around 40% to around 20%, it adds two years to the average experience required to become a PM.

That is really unfortunate for the Developers who are waiting to be promoted, but that’s the way the cookie crumbles. Growth begets career growth. The last two years haven’t been that good for the industry, but things seem to be picking up again. If they do, the industry will resume making PMs out of employees 4 years out of college.

And then we can go back to complaining about inexperienced Project Managers.

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7 Responses to Growth and the IT Services Pyramid

  1. Basav says:

    A suggested solution is to pay more to the senior developers. Like more pay to the Senior Techlead than to the junior PM. This way, skilled resources will still continue doing the technical work.
    Indian companies should stop relating the hikes and compensation to the roles. As in US companies they should start valuing the skill set of the employees and pay them accordingly. the real concern with the employees is that if they dont get promoted they dont get substantial hike. So even if an employee wants to stick to being a developer he cannot afford it because he will lose out on hike.

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  2. Manoj Philip Mathen says:

    Agree 100%. Lack of Senior Developers can be solved by retaining them. Demarcate the Management stream from the technical stream. Pay the senior Developers more than the Just started PM. Technical skill will flourish.

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  3. Krishna says:

    Basav, great point… But then there is Abraham Maslow's Need Hierarchy theory that will soon creep into the well-paid developer's psyche. He sees the Junior PM getting sponsorship for a management course and other such hierarchy based fringe benefits. That's when reality dawns on the developer and soon he'll become the walking wounded. Overall effect could be organization anarchy because salary is not just a recognition for relative degree of skill, it's also a barometer that helps you gauge people that you may look up to and those that you may look down upon…!!!

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  4. Dip says:

    When the volume rather ratio of promotion goes down organizations have to look at the appraisal process differently. Does the appraisal rating really depict the performance or potential? Do they add too many irrelevant points for the sake of filtering and try to pass it under the carpet of performance based evaluation. For lack of better models most large organizations turn to quota and bell curve fitment which strictly discourages people to break comfort zone or question status quo. I wonder if a seniority based approach like public service can do any further disservice.

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  5. Anurag says:

    Basab, the model is spot on. Last year was probably the first year of discontent in the Indian IT services industry, at a very large scale.

    What becomes imperative now is

    1. Large services companies need to move to a non-linear growth model, to improve revenue productivity and increase compensation (I believe additional compensation would be the reward required by a star employee, for a slower career growth path). There is not much headroom left for major salary hikes in the current model of USD 4000-6000 per month blended revenue productivity

    2. Large companies need to be more dependent on intellectual property and platform based services going fwd, basically a corollary to 1

    3. A huge surge in entrepreneurship in India, in the next few years, fueled by a greater 'absolute' number of disgruntled employees.

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  6. Shankar says:

    Basab,
    This is an across the board problem happening in services companies. I feel number of years can be one of the criteria to perform a job. However it's the ability and the potential of the person should be the strongest factor in providing the opportunity. This can be achieved with a strong apprisal system and also coaching provided to the managers who appraise the employees. This problem can also be minimized by providing a technical/subject matter expert career track in an organization with a similar growth path to general management path.

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