Customers come to India with a cost equation in mind and the beauty parades (by the IT vendors) kill you as they commoditise what we all offer to a dollar per man hour offering, says Wipro vice chariman Vivek Paul.
Wipro chief financial officer Suresh Senapaty says: There are two things Indian software companies have to address. One is the existing kind of space which is not so value-added and is becoming commoditised. It is facing pricing pressures and you need to deal with that by re-aligning the cost structure to that effect so that you are able to make sure that the margins are retained. The other thing is getting into the transformation in terms of having more and more value-added work. We would need to have these two structures co-existing with different cost structures.
To offset the price pressure, Wipro claims it is aggressively climbing the value chain and says that about 53 per cent of its revenues come from higher value-added services. The trick is to climb the value chain faster than the prices are falling, says Mr Paul.
The IT services segment is getting commoditised and the big boys of the game are fighting it out, said Mahesh Murthy of Passion Funds (an angel investment fund).
A clear trend pointing to the commoditisation of the lower end of IT services spectrum, is the decline in billing rates. While frontline IT companies are tight-lipped about the rates at which they are signing new contracts, industry sources indicate that rates could be as low as $12 per hour for routine work like maintenance.
The fact is clients do not see a major differentiation in delivery among the top three or top five players in India in certain kind of assignments. So, they go shopping on the basis of the rates offered. This trend is not limited to India. Senior partners of US IT consulting companies are offering their services at $100 per hour and as a firm at rates of $60 per hour. The view is any cash coming in is okay, said an analyst with a domestic brokerage house.
A reason often pointed out for the commoditisation is the overcapacity built into the industry. There is 30-40 per cent overcapacity. Either the demand has to pick up rapidly or the excess capacity will continue to cause a lot of pain to the industry, said an industry consultant.