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Indian IT firms may have to cut prices further

Bibhu Ranjan Mishra  |  Bangalore 

Already working on thin margins, the information (IT) services industry in India will have to cut prices by 5-20 per cent over the next three quarters, say analysts.

Global clients continue to keep purse strings tight and very few deals are coming from traditionally large markets like the Americas and Europe, which account for almost 80 per cent of revenues of most Indian IT firms.

The billing rates of most Indian IT firms in the third quarter were either flat or were cut, compared with the second quarter of the current financial year. For instance, Infosys’ pricing in Q3 came down by about 1.8 per cent compared with the second quarter. The pricing for Mindtree in Q3 was almost flat when compared with Q2.

Most IT firms, say analysts, have already cut prices by 5-12 per cent for new contracts or while renegotiating the existing ones.

In many cases, to retain clients at the same price, IT vendors are offering additional services. They also agree to finish outsourcing projects ahead of schedule.

These measures are expected to be reflected in the balance sheets of the IT firms in the fourth quarter of the ongoing fiscal and the first three quarters of the next fiscal (2009-10).

Gartner says prices of IT services in outsourcing are anticipated to shrink 5-20 per cent in 2009 and 2010 due to an uncertain economic climate, IT budget constraints and general market consciousness. Further, cost-focused buying will be a key factor for IT infrastructure outsourcing services from 2009 to 2010, with much variability on each deal, it says.

“This is a tough environment and the only option before us is to manage costs optimally. With this in mind, we are expecting that the pricing (billing rate) may come down 4-5 per cent this (calendar) year. The industry can still sustain a cut, as the depreciation of rupee will help to a certain extent,” Phaneesh Murthy, CEO of Nasdaq-listed iGate, told Business Standard.

The financial services sector, traditionally a big client for the IT outsourcing industry, has been badly affected by the global slowdown. Sources say the slump in the sector may continue to stay for three more quarters. Many leading firms in financial services have already gone for a budget cut of about 25-30 per cent for the ongoing calendar.

“Pricing is challenging, as clients want to reduce their operating costs. The client today wants substantial savings. Definitely, there is going to be a price reduction, though I don’t know by what percentage," said a senior executive of one of the top five IT service companies.

Potential average outsourcing price reductions in 2009-10
IT Infrastructure Outsourcing
Average Outsourcing
Price Reductions
Data center services 5% to 15%
Desktop/help desk services 5% to 10%
Network services 10% to 15%
Application hosting services 10% to 20%

Rostow Ravanan, CFO, MindTree, said: “The environment right now is a bit confusing. The customers are under tremendous pressure and doing whatever best is possible to save costs. But it is too difficult to say how much price cut might happen.”

The drop in pricing is now being reflected in the revenue per employee. A study by Mindplex Consulting, an offshore advisory firm, says this figure in most Indian IT firms should come down by 2-3 per cent in the fourth quarter of the current fiscal, though all companies are trying to utilise resources optimally.

Currently, Cognizant tops the list in annualised revenue per full time employee (FTE), with about $49,000-50,000, followed by TCS with about $47,000. The revenue per FTE in Infosys is about $46,000 and Wipro about $45,000. At HCL, the figure is about $40,000, according to the study.

“The price reduction could be another way to mitigate lower utilisation. This is why companies are seen agreeing to a relatively less price in the short term, rather than having a bigger bench. We are already seeing a pricing reduction of 5-7 per cent in many of the newer contracts,” said Sabyasachi Satpathy, director and co-founder of Mindplex Consulting.

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First Published: Wed, March 25 2009. 00:16 IST