And where is the money?
by Vadym Synakh
Expenses of IT service company
The sources of income of IT service companies are written and said a lot, but how much is distributed earnings, there is not much information. Accordingly, employees often have rather fantastic versions about where money goes. At the same time, it would be useful to know how outsourcing business works, in particular, in order to understand the mechanism of wage formation and ways to increase own incomes. The topic is extensive, so the idea was born to write a series of articles. Let's start with the costs of the service company.
The following items can be identified:
- Salary of technical personnel. This is the main article, which is 55-65%;
- Administrative expenses - 15-20%. This includes accounting, HR, PR, office expenses, IT (hardware, software, network equipment), office rental, insurance, cookies, mandatory payments, business trips, corporate parties and team building;
- Sales and marketing - 10-15%. The figure is justifiably large, since roads are expensive, especially given that they should be in the same place where customers (in America, Europe, etc.), meet with them, actively participate in conferences;
- And sacred, the company's profit is 10-15%.
For example, let's look at the performance of the largest outsourcers in Eastern Europe (Gross Profit is the difference between total income and salaries of technical personnel):
With administrative costs, everything is more or less clear, there is enough written about sales and marketing, and we'll talk about the distribution of profits in more detail in the next articles of this series. In the meantime, let's try to figure out the calculation of expenses for the salaries of technical personnel.
Income and salariesThe average rate for a customer of service companies operating on the Ukrainian market is now about $ 30-40 / hour. Average development rates are now: junior - $ 5-10 / hour, middle - $ 10-15 / hour, senior - $ 15-20 / hour, expert - $ 20-25 / hour. Of course, there may be deviations in larger and smaller sides, but it can be argued that 80% of the rates are in the indicated intervals.
If $ 30-40 is the cost of an hour that is sold to the client, and $ 12.5-17.5 / hour is the average bet between the middle and the senior, it seems that it turns out that the salary of a particular developer goes 40-45%, not 60 %, As stated above. Let's try to figure out where the difference goes.
The revenue of the service company (Gross Profit) consists of the difference in the cost of the hours and hours sold to the customer, purchased from employees:
But the company is not able to sell to the client all the hours that she pays employees. The ratio between the hours sold to the customer (according to the customer's schedule), and the hours purchased from the employee (according to his, employee, rate) is called Billability:
In the case of service companies in a healthy business environment, the Billability level is about 70%.
When planning their activities, companies usually operate on average values, rather than on the rates of specific employees or customers. To calculate the average employee's rate, it is necessary to multiply the average customer's rate by the percentage that goes to the salaries of technical personnel, and on Billability:
Hence, there is a difference between the payroll fund (60%) and the share of the customer's expense that goes to a specific employee (60% × 70% = 42%).
What are the payable hours used for?1) As I said above, 65-75% is directly working on projects, the results of which are sold to the customer.
2) In the service company there is a technical management that manages teams, departments, projects. Far not always it is possible to convince the customer to pay expenses on management on the party of the contractor, especially if the customer already has his PM. Usually uncompensated expenses for payment of technical management are 5-10%.
3) Even less often it turns out to sell the client time to system administrators. For example, this is possible if the project uses cloud services, and the IT company provides the customer with a service for their servicing. But the time spent by IT staff on maintaining internal IT infrastructure is usually not compensated by customers. This article accounts for about 5%.
4) About 10% are holidays, holidays and sick leave. "Buy" them from the employees you need, but sell to customers will not work. Even if the customer pays the company a fixed monthly fee, he takes into account the average number of VHS days (vacation, holidays, sick) in a month.
5) And, finally, training, research projects and bench. For the training of "youth" the client will not pay, so the companies train juniors at their own expense. In addition, in any company there is a bench - people who have already completed the project, but the new one has not yet begun. The break between projects occurs almost always, someone can measure it in weeks, someone takes a couple of months. In addition, the company can launch its research projects, as well as invest in its work, which will then be used on client projects. These expenses amount to 5-10%.
Now, having got an idea of how the costs are distributed in the service company, we can estimate the limits of individual salaries and consider ways to increase this limit for individual developers. I will talk about this in the next article, devoted to the ceiling of salary growth.
Original article on dou.ua