Pricing pressures mount on IT industry

Written by Rachana Khanzode | Mumbai | Updated: Jan 15 2009, 04:08am hrs
Pricing pressures and client acquisitions are going to make times tougher for the Indian IT industry. The countrys second largest IT company, Infosys Technologies that reported its results for the quarter ending December 31, 2008, saw a pricing decline of 1.8% in constant currency terms. In reporting currency (rupees), it was down by 5.8% quarter-on-quarter (Q-o-Q) in onsite, 4.6% Q-o-Q offshore and 6% Q-o-Q overall.

The firm added 30 clients in the third quarter, making it a total of 583 clients, as compared to 40 clients in the last quarter ended September 30, 2008 and 49 clients in the quarter ended March 31, 2008. Industry observers opine that further, it will become increasingly difficult for IT companies to negotiate in terms of pricing. This is largely driven by vendor consolidation at the clients levels, especially in the banking and financial sector which has been in the bad shape. A Mumbai-based analyst said, As clients want to cut down costs, they want to consolidate work and cut down the number of vendors. Therefore, a contract distributed among 10 vendors might actually go to six to seven of them. So, IT companies will either have a larger pie of work or they will lose a client. At the same time, Indian IT firms will see increasing competition from international firms like IBM, HP and Accenture, he added.

The banking and financial industry in the US recently saw a turmoil when banks like Lehman Brothers went bankrupt, Merrill Lynch got acquired by Bank of America and Bear Stearns got bought by JP Morgan. Analysts also add that tier-I companies would see pricing pressures of 2-3% while tier-II companies might see increased pricing pressures of about 3-4%. Larger players would benefit because with their legacy to prove expertise will help them negotiate better, but when it comes to tier-II companies, pricing negotiations will be tougher, the Mumbai-based analyst said.

Meanwhile, Harit Shah, an analyst with Angel Broking said, For Infosys, we expect FY10 to be tougher. The coming six to nine months are expected to be difficult for the industry in terms of pricing.

CLSA India, in a report said that it expects Infosys peers to experience larger headwinds in terms of volumes and pricing. Infosys chief financial officer, V Balakrishnan, said, The current pricing pressures are manageable but when the pricing goes beyond a certain level, we opt out to work for that client. We assume the pricing in the next quarter to be flat. Justifying the client movements, he said that there were client movements because of marginal change in their revenues due to currency movements and that no client has left the firm. He added that the companys top 10 clients grew by 3% and the rest by 1%. The management said some clients are looking at freezing budgets and expect more clarity in February, but most clients say they are looking to increase allocations. The company expects clients budget in 2009 to be flat to down.

Tech blues

To face difficulty to negotiate on pricing

To either have a larger pie of work or lose a client

Tier-I cos to see pricing pressures of 2-3% while tier-II cos to see increased pricing pressures of about 3-4%