IT firms feel the pinch as clients review tech spend

Clients investing in newer technologies like cloud, analytics and social media

With global clients reviewing their investments in traditional technology upgradation and, instead, investing in newer technologies like cloud, analytics and social media, competition among information technology (IT) outsourcing services providers has become more intense, affecting their pricing power.

This was evident in the financial numbers posted by most Indian IT services companies in the June quarter.

Infosys, India’s second-largest IT services company, said its pricing was down 3.3 per cent year-on-year on constant currency basis and declined 0.8 per cent sequentially, while for Tata Consultancy Services (TCS), the realisation was down 1.3 per cent sequentially on constant currency basis. According to sectoral analysts, on an average, pricing for the quarter was down in the range of one per cent to three per cent.

This also impacted the margin profile of the IT services companies in the April-June quarter, with most of them reporting a decline in operating margins, both sequentially and on a year-on-year basis. The companies said operating margins were down in the quarter because of wage hikes and increase in visa costs, but clients’ intention to cut infotech spending also affected margins.

“Clients are looking at investing in newer areas and that means they have to figure out a way to repurpose their spending. If you look at application maintenance, infrastructure management, testing or business process outsourcing (works), there is tremendous pressure on pricing,” Praveen Rao, chief operating officer (COO) of Infosys, said last week during the company’s results press conference.

Analysts said it was not the competition but the nature of the business that was squeezing profit margins. “Large players are still winning deals, so there is no major disruption. The factor that is affecting margins is that clients do not want to pay more when they renew contracts or invite bids for old and traditional services,” said an analyst with a global financial services firm who did not wish to be named.

Sector leader TCS, which reported lower realisation from traditional business in the first quarter, said pricing would be largely stable throughout the financial year.

“We feel pricing will be stable for the year. There will always be situations where there will be pricing pressure and there will always be deals in which we will be getting a pricing uptake. But we are not seeing a big pendulum swing in either direction,” N Chandrasekaran, chief executive, TCS, said earlier this month in an interaction with analysts after it announced its results.

For some companies, the drag on operating profit margins was because of industry-specific issues. Tech Mahindra, which generates a major part of its revenue from clients in the telecommunications sector, said the industry was going through a wave of consolidation, which usually resulted in a period of spending review.

“We did not feel pricing issues in this (April-June) quarter, but they have been around for some time,” said Milind Kulkarni, COO, Tech Mahindra, on the sidelines of the company’s results announcement on Monday.

According to some analysts, companies across the globe are seeking newer areas to use infotech services and there is a shift in business focus.

The current phenomenon was temporary, they said.

“Pricing is not a concern for Indian infotech companies as they have retained market share. Some short-term effect is visible, but I am sure the companies will evolve and offer new services to make money,” said Sarabjit Kour Nangra, vice-president (research-IT), Angel Broking.