Monday, July 14, 2008

Infosys Rising Labour Cost

Infosys Technologies (INFY) Q1 revenues that were up approximately 24% from the corresponding quarter last year. The sequential growth was anaemic at 1.1%. Infosys has made a reputation by leveraging cheap skilled overseas labour to replace expensive skilled domestic labour. Pay someone $2 per day instead of $15 dollars per hour and the business model should work spectacularly.

Has Infosys lost its way? Or is the value proposition losing steam. Look at the comment that was included in their earnings release (I assume that the bolding was included in the original release)

“Margins for the quarter were impacted due to increases in salary and visa costs which to some extent were offset by rupee depreciation,” said V. Balakrishnan, Chief Financial Officer. “We believe that the currency market will remain volatile in the short term.”

The comment attempts to focus attention on the currency market as the main culprit. Labour as a commodity is increasing in price much as oil and other raw materials. Running away to cheap labour countries is becoming less efficient as a strategy. Currencies will eventually realign and wage relativity will narrow.
What will be next for Infosys? Infosys needs to revisit their value proposition.