Indian IT looks at fixed price deals to squeeze higher margins

Indian IT services firms such as Wipro, Infosys, Cognizant and Mindtree are increasingly signing fixed price contracts with clients as they look at using optimal resources and automation to deliver software projects, to combat slowing business in traditional services.

Software services firms traditionally billed clients on time and material or the number of people deployed on projects. As customers cut costs and demand efficiency, these firms are shifting to fixed price contracts allow them to have better control on resources and also result in automation. Wipro, Infosys, Mindtree have increased revenue from fixed price contracts from customers last year, while Cognizant witnessed a marginal growth.

For Wipro, the third largest IT services firm, fixed price contracts contributed 57.1 per cent of the revenue, while for Infosys, it was 49.4%, nearly five per cent jump in revenues from the model that allows flexibility to deploy tools to deliver services to customers.

With the technology shift from traditional maintenance of software on-premise to cloud-based delivery, such services are now offered against a fixed price or based on outcomes. Increased focus on Intellectual Property (IP) based service offerings have also changed the focus towards fixed-price projects.

"The amount of fixed-price projects we run is directly proportionate of confidence on your business model and ability to deliver to customers. Such models make us responsible for outcome. We can also manage our delivery the way we think is most optimal," said Jatin Dalal, chief financial officer, Wipro, in an interview.

Interestingly, Dalal said, the company's share of fixed-price projects in India was much higher given lesser competition and reputation in the domestic market. "Whereas, when we compete globally, we have Accenture, IBM and others," added Dalal.

The company expects further growth in that segment driven by its flagship artificial intelligence platform Holmes and the recently acquired IP Data Discovery Platform. At the end of last fiscal, the $7.7 billion IT services firm had 1662 patent applications and expects a higher growth through digital technology and IP-led services going forward.

Analysts say Indian firms to manage costs as well as manpower as fixed price contracts could end up being a double edged sword if the operations are not managed efficiently.

"Benefit of automation will come in the fixed price projects so they are moving more towards such projects. Both vendors and customers are comfortable. Earlier if an IT vendor deployed 100 people for a $5 million project. Now the vendor may want 25 per cent automation as the customer says the project is fixed at $3 million tells they are only bothered about the outcome," says Pareekh Jain, analyst at HfS Research India.

"So in such projects IT services firms have to manage their cost and manpower better. In time and material, margin was more or less fixed given the pre-decided contractual rate. But in fixed price it is important to maintain the margin through cost management. It can be upside or downside both. While IT services providers cannot remove employees from projects immediately, they need more operational efficiency."

Infosys, which saw a five percentage points jump in fixed price contracts on the back of chief executive Vishal Sikka's push towards automation and delivering software led services, says this gives it higher flexibility than time and material projects.

"We undertake a lot of fixed price projects onsite. By reducing the days of course, the revenue is very much fixed and we have more flexibility in offshoring as well as changing the rule mix in fixed price projects," said Ravi Kumar S, deputy chief operating officer, Infosys.