CFO Bridge Insights July 2023

PAT Waterfall

FY23 – Financials across 10 Major IT cos.

• PAT (Profit after Tax) of TCS is the highest and the leader in the IT Segment.

• Using PAT of 18.5% of TCS we are doing a PAT Waterfall / Gap analysis to showcase what are the areas for improvement to reach the best-in class performance, Any of the IT company in the SME segment can do a similar benchmarking waterfall chart and focus on improving their P&L

Inter firm comparison - key observations

• Employee Benefit + Outsourced / Production costs must be seen in aggregate and compared. There are advantages and disadvantages to this line item. If the business is certain, then one would onboard the resources on a permanent basis else one may try to run it on an outsourced basis only. So, when the project ends the resources need not be a permanent cost. Sometimes companies use this outsourced mode initially to tide over the shortage of resources and after a few months when they onboard a regular resource, they would terminate the third-party resource. This cost also includes some low-end or complex work which might be outsourced end-to-end to third-party service providers as well. Some of these costs have scope for better negotiation basis economic bargaining capability. (Refer Issue 02/Jun for Resource Optimization ideas)

• Cost of Equipment and Software Licenses: This has linkage to the nature of the revenue mix and typically these could be system integration business and margin could be lower unlike services business or it can be products and platform business and the margins could be quite different from services business.

• Depreciation and Finance costs: Barring few companies, the spend % is in a similar range.

• Facility Costs: Where data is not shared specifically – Rent + Power & Fuel + R&M have been aggregated to arrive at this number. Few companies might have their own facilities and in which case spend on assets and equipment would come in depreciation. It is observed the spend is range bound. With a work from home scenario, most companies have optimized the facility costs both in India and abroad. Some have moved to low-cost tier-2/3 locations in India and low-cost countries too.

• Travel & Conveyance: While post Covid the spend has been subdued and range bound, but post easing out it is essential one does optimize on travel spend, leverage technology and remote working. A few tips here is travel should be planned to get best pricing options on air-fare. Have budgetary control in place to control the spend. 

• Communication expenses : This is range bound. Review the idle and unutilized bandwidth to optimize the costs.

• Other expenses: This includes any exceptional items too. Spend is range bound. We will explore this in future issues.

How to approach for your company to do the bench marking:

• Keep the same line items as a reference

• Group your final P&L line items as per the listed line items

• Try to compare with the right referenceable company

• Do the Gap analysis

• Map the data points from gap analysis similar to the table above

• Select the data and select “Waterfall chart” in excel to get the depiction as above

• Small tips: Start and End points – Set as Totals in the chart and change their colour

• Also change the colour themes ( custom settings) to depict increases in Green and decreases in Red

• In case of any doubt see few YouTube videos

• If you need any help or guidance do write to us.