Major Indian IT companies will continue to face pricing pressure during the next 18 months to two years, as clients will remain very cost-sensitive. Sudin Apte, senior analyst with Forrester Research, said the impact of the price pressure would manifest in areas of compensation, payments, credits, billing, currency fluctuations and liabilities for the IT companies.
Apte said, ?These conditions have put the tier-two players in a better position to grab small deals, as they tend to be more flexible in terms of pricing and accepting complex commercial terms and conditions. These include accepting change orders, committing company-specific payment and other contract terms, and agreeing to stringent service-level agreements (SLAs).?
Keshav Murugesh, CEO of IT firm Syntel Inc, which clocked revenues of over $410 million in 2008, said: ?We hardly see discretionary spending as more projects are based on cost-saving budgets in the range of $5-20 million. Tier-two firms are better positioned and grab new projects as big vendors opt out.?
Firms are constantly witnessing changes like new clauses in deals, manpower delivery models, deal structuring and support levels, he said. Tier-one players, on the other hand, are not flexible. They are hungry for large deals and some of them are even looking at deals after a certain benchmark in terms of size.
Before the recession in the US and other developed markets, large firms would avoid contracts that did not have a run rate of $8-10 million in about 18 months. Though the threshold has been lowered now, the pressure on these firms continues to mount. ?This is largely because tier-two players, some of which are not listed and some are just family-owned, are struggling to survive. On the other hand, large firms are listed and have to respond to their investors,? he said.
V Balakrishnan, CFO at Infosys Technologies, had earlier told FE, ?Clients are always at the demanding end when it comes to terms and conditions, but we need not necessarily accept them.?
Apte said that it is important for clients to choose the right vendor at this time since the format of the service industry would undergo a sea change in the coming two years. ?Clients cannot change their vendors overnight and they need to understand that these vendors should be able to serve them in longer terms. Lower billing rates by mid-tier firms wouldn’t necessarily mean low cost over the entire project. Though there are about 300-plus mid-tier firms, only 10% of them will survive and can provide better services than the large vendors.?
In his report, Why Do You Need Tier-Two Providers (And You Do Need Them), he said, ?The provider’s productivity, technology excellence, team configuration, and ability to handle complex work contribute to more than mere rates. Furthermore, software engineering factors like per person throughput, first time right code , tools, automatic code generators, and quality processes also dramatically impact total cost per function point in software development. Considering these multiple and complex considerations, the lowest hourly billing rates don’t always result in lowest cost of delivery.?