Today in Tech: What sub-contracting to sales ratio tells us; Apple Vs Samsung

What sub-contracting to sales ratio tells us about IT companies Economic Times says IT Services companies, such as TCS and Infosys, are being forced to subcontract more work than ever before in the US, thanks to measures such as higher visa fees and rejection rate. It quotes from a client note put out by Prabhudas Leeladhar (PL), which says Infosys’ sub-contracting cost has doubled to its highest level (3%), and for TCS, it's 5% compared to less than 3% a year back.

Some of these ratios make more sense only over a longer term. The PL report had the numbers for the last 8 years, and they gave a better picture.

One, it's not clear if Infosys and TCS numbers are comparable. TCS discloses a number under 'fee to consultants', and Infosys, 'cost to technical sub contractors'. But there's no break up, and without additional information from management, we will not know the reasons behind quarterly movements. And, there is no way to tell if the two percentage point difference between TCS and Infosys in the recent quarter means the latter has more leeway to use subcontracting as a margin lever.

Two, when you look at the eight year movement of the ratio, what strikes you most is the way it goes up and down. When there is a surge in demand - like there was in 2006-07 - subcontracting as a percentage of sales went up too. And, when there was a pressure on companies to control costs in the aftermath of financial crisis, it reflected on the ratio. In short, it means companies use it as a tool to scale up in good times, and as a margin lever in the bad times.

Finally, the big question is why the ratio went up in the last one year. In its report, PL considered two possible reasons - one, volumes are growing and two, the demand for specialized skills are growing (as reflected in revenue from consulting and system integration) - and found neither explained the spurt adequately. It concluded it could be because of high visa rejection rate.

But, in my view, there are two reasons why visa rejection might not be the reason.

One, during a recent media interaction, Infosys CEO SD Shibulal suggested that the onsite utilization has come down too (and that more people will be assigned to projects when the utilization rate picks up in the US). Now, the visa rejections will tell on subcontracting ratio only when utilization rate has peaked. Till such time, a company would use its own employees to keep the costs low. Visa rejection rate alone does not explain higher subcontracting. It will make sense only after the utilization rate starts going up again.

Two, the conversations with IT executives and reports from firms such as Gartner suggest that there is a huge demand from new technologies such as mobile, cloud and big data. Projects such as these mean not only more onsite work (there's a higher proportion of onsite work at the beginning of a project), but also more people with specialized skill sets (IT Services companies are still in the process of scaling up these capabilities).

In short, while it's true that visa rejection rates are high, and companies feel the need to send a message that they are hiring locally, there is a good chance that the higher subcontracting-sales ratio is actually a positive indicator.

Apple Vs Samsung: Some interesting perspectives

I think this is actually a sizable win for Samsung. Why? It only cost $1 billion to become the #2 most profitable mobile company. Remember how much Microsoft paid for Skype? $8 billion. So, for 1/8th of a Skype Samsung took RIM's place and kicked HTC's behind.
-  Robert Scoble

 

I was thinking about the patents, and thought, 'If this were my patent, could I defend it?' Once I answered that question as yes, it changed how I looked at things.
- Velvin Hogan, jury foreman to Mercurynews.com

 

We should never count out Samsung’s flexibility and nimbleness. This is merely an embarrassment and annoyance to the company that they will have to find ways around.
- Mark Newman, a Sanford C. Bernstein analyst to Associated Press

 

Rather than innovate first, sort out the IP later, which has been the custom in tech, companies will need to be much more mindful of the patent landmines that are out there, and try to avoid or secure rights to them. That could literally choke innovation.”
Colleen Chien, an assistant law professor at Santa Clara University to Bloomberg

 

We chose legal action very reluctantly and only after repeatedly asking Samsung to stop copying our work. For us this lawsuit has always been about something much more important than patents or money. It’s about values. We value originality and innovation and pour our lives into making the best products on earth. And we do this to delight our customers, not for competitors to flagrantly copy.
- Tim Cook, Apple CEO in a memo to Apple employees (9to5Mac)

 

Today's verdict should not be viewed as a win for Apple, but as a loss for the American consumer. It will lead to fewer choices, less innovation, and potentially higher prices. It is unfortunate that patent law can be manipulated to give one company a monopoly over rectangles with rounded corners, or technology that is being improved every day by Samsung and other companies. Consumers have the right to choices, and they know what they are buying when they purchase Samsung products. This is not the final word in this case or in battles being waged in courts and tribunals around the world, some of which have already rejected many of Apple's claims. Samsung will continue to innovate and offer choices for the consumer.
- Samsung's response to the verdict

Also of interest

• Livestrong CEO Doug Ulman: What Lance Armstrong Created "Will Win Out" : Fast Company
• Big Data Grows Up: Three Spaces to Watch Once the Hype Subsides: Forbes
•  Why WikiLeaks is worth defending, despite all of its flaws: Gigaom
• Logitech creates washable keyboard for dirty typists: ZDnet
• How to Learn in Your Sleep: Scientific American
• Evernote triples in size, adds business service: FT
• The Skype Killers of Belarus: Businessweek
• Why Are People So Upset With Twitter? Let’s Grab a Bite: NYTimes
• New iPad Mini to Debut in October, After Latest Apple iPhone’s September Bow: AllThingsD
• Facebook to Build Swanky, Gehry-Designed New Digs: AllThingsD
• Dropbox trials two-factor authentication beta: ZDNet

The thoughts and opinions shared here are of the author.