The competitive scenario for the Indian IT services companies has started to intensify, for many of them to win new business or contracts. One of the key weapons in their arsenal has always been the prospect of offering a discount to bag a new client or get more work in an outsourcing and offshoring environment which is still not buoyant.
One of the key reasons for this situation is the growing commoditisation of the bread and butter businesses of the $76 billion Indian IT-BPO export services industry. This 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 of services like application development & maintenance (ADM), testing, infrastructure services, some segments of BPO account for more than 50% of the revenues for the large Indian IT majors like TCS, Infosys, Wipro and HCL Technologies.
Traditionally, a similar pricing environment is always maintained with most of the companies following an unwritten rule of not offering any major discount. Though, there have been cases, where one or two firms act in an irrational manner to get new business in a particular year.
Talking to FE on the pricing environment, TK Kurien, chief executive, Wipro, had admitted that pricing was under ?crazy pressure?. This pressure is largely on the non-discretionary spend, that is, traditional segments of the IT outsourcing and offshoring industry.
This bread and butter business segment of the Indian IT-BPO services industry has been under pressure of price cuts for quite sometime and it is getting more pronounced now reflecting the maturity of the sector. Today, the companies that are giving out these contracts are more aware of the various pricing models and with competition increasing, they are able to bargain for deeper cuts.
It is also a reflection on how the overall IT outsourcing industry is changing with companies not able to let go of the traditional business which is of lower margin but contributing bulk of their revenues while not getting enough traction from the newer segments like cloud, mobility, social or analytics.
According to industry analysts, earlier the going rate for these kind of non-discretionary spending contracts would be around $25 plus per hour but this has been now reduced to $18-20 or some cases even lower. This kind of discounting has largely been focused on the large deals or those contracts which have come up for 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.?
This reality is something which most of the Indian IT companies have more or less accepted. Rajiv Bansal, chief financial officer, Infosys, said, ?It is going to be price sensitive as it is much more commoditised market. It is usually the lowest bidder who wins.?
However, this would not be 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 these 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 inspite of the lower bids.? There are various levers which Indian IT services companies to offset these disadvantages. Firstly, they can increase the level of utilisation of their employees, secondly they could also move most of these projects to fixed price projects which gives them the flexibility on using the number of resources, unlike a time & material contract.
As Pai put 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 in the marketplace remains stable now with the confidence returning back and sentiment turning better. Industry players said that clients are slightly more optimistic on preparing for their IT contracts of next year. At the same time, the current value of the rupee against the US dollar is also acting as a cushion against these discounts.
Pradeep Mukherji, president and managing partner, Avasant, an offshore advisory firm, felt that the current environment is a natural progression of the industry and Indian companies would have to look at different ways of delivering their services to remain profitable in the industry. However, many of the companies are tweaking their blended pricing model which is lowering the onshore prices while hold on to their offshore rates to give that comfort factor for the client.
Today, the depreciating rupee is also providing certain cushion for the IT companies in offering these kinds of discounts as Pai put it, ?The rupee depreciation allows for some margin cushion now and therefore Indian firms may choose to provide some pricing flexibility as a competitive advantage to win more work.?
