Friday, May 13, 2016

IT Services Business Model Made Simple

IT services business model is quite easy to comprehend.

The primary "raw material" in this type of business is the human brain. And since brain is inside a human being and put to use for IT services work, the primary cost driver is the employee salary.

The primary "revenue source" in this type of business is payment received from customers for person-hours consumed or milestones achieved.

The good thing about this business when done in an outsourcing mode is that you incur expenses in a certain currency, say currency (E) but bill your customers in another currency, say currency (B).

The key point is that the exchange rate between currency (E) and currency (B) should be such that:

1 unit of currency (B) = N units of currency (E)

For example, if currency (B) is USD and currency (E) is INR, then based on the exchange rate today (13-May-2016) the above equation can be written as:

1 USD = 66.76 INR

The above equation is the backbone of the entire IT services business model.

Just imagine what will happen if  1 INR = 66.76 USD instead?

Catastrophe would be too mild a word to describe what will happen!

Following Google sheet provides a simple template to analyze the revenue and gross margin of an IT services business.

IT Services Business Model

As you can see yourself it is quite simple and easy to comprehend!

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