Phaneesh Murthy-led iGate will look to lower the average compensation levels in Patni Computer after the two companies kick start the integration process.
Patni’s gross margins are far lower than that of iGate and a rationalisation of the average compensation would be necessary to avoid a stiff margin cannibalisation. iGate is likely to change the employee bulge in Patni, lowering the average experience levels, and assign more responsibility to employees with fat pay packets.
iGate announced it will acquire a majority stake in Patni Computer Systems on January 10, creating the Indian IT industry’s newest billion dollar baby. While iGate’s gross margins for the year ended December 31, 2010, was at 42.6%, Patni’s margins stood at 35%. Patni, one of the oldest Indian IT firms, currently has an average experience level of seven years compared to the younger iGate’s four years.
However, iGate may not explore salary cuts to achieve higher margins, a top executive said. Salary restructuring is a common practice in the event of a merger, especially in the US. “Patni’s salaries are more but so are their billing rates. You cannot reduce anyone’s salary. I don't think we will do that,” member of the board in iGate and CFO Sujit Sircar said. “There are two options – either go for salary cuts or increase domains or responsibility. We will do the second,” he added.
iGate, he noted, has successfully brought down the average experience levels in the company from six years a few years back to four years now. “We will bring it down for Patni as well. We will put in a lot more freshers in the system depending on the growth, which will ensure average compensation costs come down. Giving more responsibility is one of the levers. If someone is handling one domain, or one region, we will give him two,” he said.
IT firms have three levers for margin expansion – improving revenue productivity, lowering average compensation, or asking customers for higher rates. Customers have been reluctant to give IT vendors better rates ever since the 2008 recession took hold. Some of the larger IT services firms have indicated, off late, that pricing may improve marginally this year.
The CFO said his priority after integration would be to handle sales, general and administrative expenses. Facility consolidation across India could be on the cards. “Such costs are low hanging fruit. However, a business cannot survive on a