A recent news article about Bangalore-based IT major Infosys releasing about 9,000 employees in the past one year drew my attention. The number sounded significant at a time when layoffs at several media companies were something that I was hearing loudly. But, on closer look, the report revealed details of these 9,000 being up-skilled from their lower-end jobs, which were being automated. The head of HR at Infosys clarified that these employees were now working on more advanced projects. Shorter product life cycle makes for faster redundancies. Once Google and other open source software started offering word processing and spreadsheets for free, sale of Microsoft Office took a beating.

Here today, gone tomorrow. Unpredictability is paramount in most professions these days, irrespective of the sector. If the economy behaves the way it is behaving; manufacturing would be dead is what people in that sector would scream. If offshore orders don’t flow in or visa rules change, those in software will be in pain. If there is general gloom in spending, as is the case right now, businesses such as the one I work in is impacted by advertising revenues, as most companies first freeze on spending and advertising is the first one to be impacted.

Investment options

When uncertainties loom large, consumers and investors get attracted to predictability, which is nothing but guarantees with their investments. FDs and PF are classic examples of inefficient instruments given the effective returns they pay, but they attract scores of savers because of the guarantees they offer. There is a false sense of safety, which is infectious, which results in a large base of people moving into the comfort zone by putting their monies in the bank. But, chances are these very people may be willing to pay a premium on say a razor or detergent. The sale of Gillette or Surf does not get overly impacted, even though they charge more than the competition.

Yes, challengers in the form or Nirma, Ghadi or Laser II and Super Max exist, but they are unable to thwart the premium players. Smart investors hunt for value, but they too love predictability in their own ways. Even the legendary Warren Buffett loves guarantees in the form of predictability. He has never invested in an InfoTech (IT) stock because he hates unpredictable earning patterns. He foregoes the higher growth rates of a Microsoft for the predictability of a Coke and Gillette and that is a lesson that one can learn from.

Investing in tech stocks

So, what should one look into when investing in an IT company? The usual indicators exist, but I love to dig a bit deeper into the people employed. Technology companies tend to spend a lot of money on their employees. Take for instance TCS, which has over 3.5 lakh employees as mentioned in its 2015-16 annual report; landed up spending about Rs 365 crore in hiring and training. The belief that creating software is more of an art than an engineering discipline is well demonstrated by spending on employees.

HR audits are par for course when it comes to IT companies and herein sits the source to evaluate them as an investment option. Mind you, it’s difficult to assign a monetary value to human skills, and companies aren’t legally bound to do so. Yet, when big IT companies share such data, it not only helps the hire the best, it also draws investors who are interested in the best.

When considering investments in IT companies, pour over their HR data to get the best idea on what you are getting into when it comes to investments. A good sign is high employee retention, because it will have a low ‘churn rate’, worked out by looking at new recruits over the years. A good IT company will also have a low percentage of support staff; you can figure this by looking for data on non-technical staff.

It is difficult to value employees, especially when it comes to assigning a monetary value to them. A model that is commonly used is based on the replacement cost. But there are other models such as training costs, incentive linked costs and profit share per employee. A former boss and a huge influence, Devangshu Datta, had once explained employee’s earning potential in his typical unassuming manner.

The explanation goes somewhat like this: an employee is assumed capable of earning a certain amount in his remaining years of service. If a certain sum of money (principal) is lent at a certain interest rate, it would generate a return equal to that earned by the employee over the same period of time. That principal is the present value (PV) of the employee’s future earnings: the higher the PV, the more the HR potential.

I debated that this equation was too simple and had its share of flaws. Most important – employees could leave the job. He was quick to retort that analysts account for churn and it is factored in pricing. My naivety took the better of me, when some years ago I was voicing my angst on the needless re-entry of Narayana Murthy at Infosys with Devangshu. His wisdom was there for me to experience yet again when he explained the worth of an elderly CEO or board member, which was many a times underestimated. “He is well networked and may win contracts as clients trust him,” he quipped.

Although it’s not a perfect model, there is merit in evaluating companies on the basis of its employees and people power. I am trying to work on my own maths to evaluate companies based on its people, something that I would discuss when it is in a better shape to find merit to talk about. If you have any better way to evaluate companies by looking at its people, do write back, for I would like to know your views on this aspect.

nk@outlookindia.com