Saturday, April 21, 2007

A tale of two business models

Born less than decade ago, Google Inc. (NASDAQ: GOOG and LSE: GGEA) now reigns as the most profitable—and probably most powerful—force on the Web. As usual, Google's financial firepower flowed from its search engine. That ubiquitous tool has become the hub of the Internet's largest marketing network and appears to be getting even better at identifying the right ads to display with its search results, which in turn helps elicit more revenue-generating clicks

Google 1st Quarter 2007 results snapshot

Revenues - $ 3.66 b
Net Income - $ 1.0 b
EPS - $ 3.18 per share

No. of employees – 12,238 nos.
End quarter cash balance - $ 11.9 b
Quarterly revenue productivity per employee - $ 299,068

Date of Incorporation : Sept. 7, 1998
IPO : August 19, 2004
[19,605,052 shares were offered at a price of $85 per share ]
CMP of stock - $ 482 [ P/E – 35 ]
Market cap - $ 152 b

Did you say scale ?

What stands out or boggles my mind in more ways than one is the amazing power of an ingenuous yet easily scalable business model that Google espoused. Being less manpower intensive (just 12,238 employees now) and more equipment / server capacity centric, it is least affected by the ubiquitous problem afflicting the IT industry – one of employee attrition.

Pitched against the business model of Indian IT bellwether Infosys Technologies Limited (NASDAQ: INFY) which recently celebrated its 25th anniversary, the contrast is glaring. While it can’t be compared strictly because of inherent diversities, the power of robust business models that enable rapid scaling and by that, shaping the very fortunes of businesses is evident here.

Infosys 4th Quarter 2007 results snapshot

Revenues - $ 898 mm
Net Income - $ 272 mm
EPS - $ 0.48 per share

No. of employees – 72,241 nos. (incl. that at subsidiaries)
Quarterly revenue productivity per employee - $ 12,430

Date of Incorporation : July 2, 1981
IPO : February 1993
[1,378,947 shares were offered at a price of $2.26 per share ]
CMP of stock - $ 42 [ P/E – 22 ]
Market cap - $ 30 b

Here’s where the significance of the business model hits home. While it took 23 years for Infosys (with its strength of 72,241 employees) to notch up a billion dollars in revenues, Google’s business model helped it achieve $ 1.46 b in 2003, in just 5 years of its incorporation and one year before its IPO – with just 1/6th of that strength.

Throw in a few other companies like TCS, Wipro, Satyam, HCL Tech and not wanting to be outhired, MNCs like IBM and Accenture too open shop locally and adopt massive ramp up from the limited pool of qualified engineers, you create a mecca for job hoppers. They are all in the same turf just to stay competent. Hiring becomes a non-process as anyone who can spell binary is recruited diluting the quality of the hire. Skill gaps are hurriedly addressed by on-the-job training if not on induction itself. If the hires are not on a project, it hits their bottomlines hard. Billability becomes the watchword instead of quality.

This lacuna is being realized now and precisely the reason why Infosys top brass is tempted to rethink the viability of its business model. Related news item is here and my earlier insights here and here.

What do you make of it ?
[PSI must also place on record the fact that the indian companies mentioned above took birth in the third world aiming to work for the first world. These companies started operations with severe handicaps when Indian businesses were reeling under the yoke of licence raj, a period between 1947-90 when the state policy was riddled with red tape, hostile to businesses, with severe import restrictions even for high end technology. Exports were severely restricted too.
Despite the ongoing reforms, India still ranks in the bottom quartile of developing nations in terms of the ease of doing business; and the average time taken to incorporate a company or to invoke bankruptcy is much greater.

Google by contrast took birth in the capitalist mecca - USA, and measured by that yardstick, it took off with an inherent advantage.

My purpose here is to bring out the criticality of business and revenue model in shaping the fortunes of businesses alone and not to denigrate the shining Indian star corporates mentioned above.]


Tanmay Kelkar said...

I admire your writing skills and approach, but don't you think comparing Infosys and Google is very much like comparing apples to oranges?
Look at Infosys or any other software services company in the US and one will have to count in the fact that the business model followed by these companies is "replacement of costly resources by not so costly but equal or more efficient resources". In contrast, the business model of Google is vastly different. It offers a genuine standalone product which is better than its competitors and through the customer base that it has, piggybacks on the advertising revenue.
The business that has the value proposition of cost reduction, there will be inherent challenges for that business to come upto the levels of a business offering standalone product on the internet.
I believe a better comparison would be of Infosys with IBM or Accenture and as you rightly pointed out, the success of the Indian software model is reflected in the fact that these companies could not ignore it long. They had been beaten, on their shores by an Indian company which is something to be proud of.
On the other hand, compare Google with Yahoo! or MSN and one would know how Google stunned competition on piggybacking on a better technology.

Krish said...


Thanks for stopping by and welcome to reader base.

The thrust of my post was on the power of business models to influence rapid scale up of businesses; not to downplay India's IT might (or illusion?). Look up the bottom few paras in my post in italics.

That said, I agree that Indian IT vendors figured out “replacement of costly resources by not so costly but equal or more efficient resources”. Why did they stop at just that? How, when and why did they lose out that early mover advantage (purely on labor arbitrage) to overseas vendors? Just setting up a sweat shop next door was all that it took for other vendors to challenge much touted Indian IT magic. Why did they let these foreign vendors eat their meal?

Going by your own citation, did Google lose out to MSN, Yahoo or IBM on its search technology, just as Indian vendors lose out to IBM, Accenture, EDS lately? What stopped them from rolling out SOA and other SaaS offerings that would’ve carried their early mover advantage far into the future, erecting entry barriers? In fact, now by rolling out large data centers for its on-demand suite of products, Google tempts and even threatens established enterprise behemoths like Oracle, HP, Microsoft and SAP in their own domains. Now that’s futuristic planning and orientation as I would reckon.

Now they realize the impact of wage inflation, incremental visa costs, manpower attrition that exposes the porosity of their business models. If this smugness continues, Indian vendors will soon be out of global IT map. Even Indian clients will soon prefer foreign vendors with their track record of high R&D initiatives (ROI impacting innovation in areas like process automation, SI, Data center management, on-demand SaaS offerings etc.) and LOB consulting expertise.

In comparison, take a look at Indian IT vendors R&D spends - tell me if it doesn't look like rounding errors.

You are right. We can't compare Infosys with Google. I say even IBM, Accenture and EDS are not comparables; for the visible lack of enterprise demonstrated by India's IT vendors :)