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Price pinch forces IT industry to take up contracts with discounts

IT-BPO industry is offering price cuts for contracts in the range of 8-10%.

Written by P P Thimmaya | Bangalore | Published: October 29, 2013 5:37:42 am

The growing commoditisation of the bread and butter businesses of the Indian IT-BPO industry has led to an environment of price cuts in the range of 8-10% and companies are geared up to take these contracts with such discounts. This traditional segment comprise services such as application development & maintenance (ADM),testing,infrastructure services,and some segments of BPO. These account for more than 50% of the revenues for the large Indian IT majors like Tata Consultancy Services (TCS),Infosys Ltd,Wipro and HCL Technologies.

Talking to FE on the pricing environment in the IT industry,TK Kurien,chief executive,Wipro,said,“Pricing is under crazy pressure. It’s massive.”

This pressure is largely on the non-discretionary spend — traditional segments of the IT outsourcing and offshoring industry. The IT industry has been under pricing pressure for quite sometime and it is getting more pronounced now,reflecting the maturity of the sector. Today,the companies that give out these contracts are more aware of the various pricing models and with competition increasing,they are able to bargain for deeper cuts.

Analysts say earlier the going rate for these kind of contracts would be around $25 plus per hour but this has been now reduced to $18-20 or in some cases even lower. This kind of discounting has largely been focused on the large deals or those contracts which have come up renewal.

In such scenarios,any company putting up these contracts for bids will always seek for a discount and there are various players who are willing to take this on a lower price. According to market estimates,contracts coming up for renewal would total about $40 billion in value and including the large deals this figure could touch around $100 billion.

Sid Pai,president,ISG Asia Pacific,an outsourcing advisory firm,said,“Contracts that are coming up at end of tenure for renegotiation tend to be the ones which have the most pressure. The incumbents tend to want to provide discounts ahead of renewal so the contract doesn’t get re-competed and if it does get re-competed the new competition is likely to be aggressive on price.”

Rajiv Bansal,chief financial officer,Infosys,said,“It is going to be price sensitive as it much more commoditised market. It is usually the lowest bidder who wins.”

However,this would not mean that profitability for any of the large Indian IT majors has taken a hit on taking these lower priced contracts. The onus lies on firms to make the best out of these deals through various permutations and combinations.

“Hyper automation and hyper productivity. You cannot afford to do work,the same way you were doing in the past,” said Kurien.

He felt that any IT major which can run their internal operations more effectively can afford to maintain reasonable amount of profitability even while bagging contracts at a lower price point.

Bansal said,“One needs to have different execution strategy on how do we get margins in spite of the lower bids.”

There are various levers which Indian IT services companies use to offset these disadvantages. Firstly,they can raise the level of staff utilisation,secondly they could also move most of the projects to fixed price projects which gives them the flexibility on using the number of resources,unlike a time & material contract.

As Pai puts it,“Moving a larger proportion of work offshore (India) than is currently being done on any specific contract allows for additional savings.”

Though the overall pricing situation remains stable now with the confidence returning back. Industry players said that clients are slightly more optimistic on preparing for their IT contracts of next year. Also,the current value of the rupee against the US dollar is also acting as a cushion against these discounts.

Pradeep Mukherji,president & managing partner,Avasant,an offshore advisory firm,felt the current environment is a natural progression and Indian companies would have to look at different ways of delivering their services to remain profitable in the industry.

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