IT firms opt for fixed-price contracts amid low demand

Clients cutting costs, demanding more efficiency, IT firms are going in for fixeed-price contracts

Indian information technology (IT) service companies are signing more fixed-price contracts with clients, to combat a slowing business in traditional services.
 
Software service companies traditionally billed clients on time and material or the number of people deployed on projects. Now, customers are cutting costs and demanding more efficiency. Wipro, Infosys and Mindtree had increased their revenue from fixed price contracts last year.
 
Cognizant saw marginal growth. For Wipro, third largest IT services company, fixed price contracts contributed 57.1 per cent of the revenue; for Infosys, it was 49.4 per cent, a nearly five percentage point jump.
 
With technology shifting 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 to the confidence on your business model and ability to deliver. Such models make us responsible for outcomes. We can also manage our delivery the way we think is most optimal,” said Jatin Dalal, chief financial officer of Wipro.
 
Their share of fixed price projects in India was much higher, he said, given less competition and reputation in the domestic market. “Whereas, when we compete globally, we have Accenture, IBM and others,” he explained.
 
The company expects further growth in that segment, driven by its flagship artificial intelligence platform, Holmes, and the recently acquired IP Data Discovery Platform. By the end of 2016-17, the $7.7 billion company had 1,662 patent applications and expects higher growth in the future through digital technology coupled with IP-led services.
 

Fixed price contracts could be a double-edged sword if operations are not managed well. “In such projects, IT service firms have to manage their cost and manpower better. In time and material, the 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,” says Pareekh Jain, analyst at HfS Research India.
 
Infosys, which saw a five percentage point jump in fixed price contracts with chief executive Vishal Sikka’s push on 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, the revenue is very much fixed and we have more flexibility in offshoring, as well as changing the rule mix,” said Ravi Kumar S, deputy chief operating officer.