Mar 5, 2007

10x For A BlueChip Service Company

Last evening after a dinner at an upscale restaurant (part of a blue chip, publicly listed firm), I was surprised to see a line item in the final bill. Now I rarely visit a five star hotel for a personal appointment, but this was one of those rare occasions. So the matter of surprise was this - a plain bottle of mineral water, normally available in the market for Rs 10 was being charged almost Rs 100 tax included. The rest of the food was fine and I can make myself to understand value pricing and all that stuff. But 10x times for a bottle of mineral water?

Extend the argument to IT Services industry: new hires at entry level get paid an average of Rs 200,000 p.a. and given the offshore rates basically are billable at about Rs 2,000,000 (typical Tier-1 provider). So we have another 10x formula going!

Now I am not comparing fresh software engineers with mineral water bottles (some would argue both are commodities), but from a pricing standpoint we really have something going here. When you as a company, are able to charge customers 10 x times the input cost (thanks to all those intangibles), you have truly arrived as a Blue Chip!

4 comments:

Anonymous said...

While shopping, I have always found 1:10 as a realistic conversion ratio between INR and USD.

Anonymous said...

The salary is only a steady state cost. Here's a thought for an interesting study - hiring cost, training cost, salary cost, other retention cost versus billing rates - what is the X for different service companies? IT services, Consulting co.s et al. There would be a time dimension too - the billing rates dont keep rising indefinitely whereas the salary levels do - as the billable resource becomes an overhead. This would give an approximation of the average value per resource as well as give an idea of ideal rentention time for a resource.
SB

Ram Medury said...

SB,

The X would vary depending on the company. Over time the 10x would gradually recede to a lesser number.

I was struck more by the similarity in which large companies carry huge overheads and yet customers are willing to pay the price, for the value they percieve.

Ram

Anonymous said...

Interesting note, sometimes I am baffled at how companies quantify the value-adds (or overheads as you said) in order to arrive at their billing rates.
-Hari