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Recently, someone in the IT Outsourcing business told me that they preferred to keep a bench (people who have no work) instead of working for customers at a lower price.
They have arrived at a minimum hourly rate that helps them keep their net profit margins at 25% and they don’t accept any business at a lower rate.
They have a substantial bench and do not plan any major layoffs. They want to be prepared for the economy, when it eventually rebounds.
Since employee cost is the major cost component (about 70%) and they are not going to cut that – they should ideally want to maximize revenue and get whatever they can. But, what they are presently doing is paying a person and then instead of getting that person to work for $20 (instead of the usual $50) an hour – they are keeping him idle.
The reason for that is simple – you can’t charge $20 from one customer and $50 from another (for long). Eventually, the one who is getting charged $50 will realize what is going on and would want to come down to $20. If you don’t let that happen – he will move to competition.
The price point of $50 has been derived based on certain profitability figures. But, now it’s acting exactly against that.
He said that retailers have come up with an easy way to get rid of excess capacity – discounts! But, you can’t sell excess capacity at a discounted price in the consultancy business. This is primarily because customers who discover this feel cheated and you risk losing them.
So given this scenario and the limitation that you can’t fire people, what do you think is the best way of going about this?