TOP Indian tech firms, such as TCS, Infosys, Wipro, and HCL, are
signing new outsourcing contracts at 15-20% lower billing rates than
last year, as customers including BT, Bank of America and Citibank
renegotiate existing contracts and award new projects at much lower
Over the past two quarters, customers such as Visa, Best Buy, Applied Materials, Nissan, Citibank and Bank of America have been in discussions with India-based service providers, asking them to help these companies cope with lower information technology budgets.
“The steepest fall has happened for high-end services, such as consulting, from over $60 per hour earlier to around $40-45,” said Sabyasachi S Sathyaparasad of Mindplex Consulting, an outsourcing advisory firm. “The rates could fall by up to 20% in the coming few months, but should get stabilised after that,” he added.
Outsourcing customers are using the downturn as an opportunity to question high margins of Indian service providers. Top five Indian software companies renegotiated almost $1.5 billion worth of outsourcing contracts since September last year at around 15% lower rates.
“Some customers are asking us to let go on our high margins and take offshore projects for as low as $15-20 hourly billing rates,” a senior official of an India-based offshore provider said on conditions of anonymity. He recently negotiated contracts with clients such as Pfizer and Novartis.
Top Indian tech firms will see their EBITDA margins, a measure of operating profit, decline by upto half over the next three years, as these companies move more information technology projects to India in order to bring down the cost of projects.
While HCL Technologies is expected to see its EBITDA decline by half from 22.2% in 2008 to 11.2% in 2011, country’s biggest software company TCS could see its margins go down from around 26% last year to 18.2% over next three years, according to Anand Rathi Research. Wipro, the country’s third biggest tech firm, is also expected to see its EBITDA decline from around 20.1% last year to 13.5% by 2011.
Meanwhile, customers of scandal-hit Satyam Computer Services are also bringing the rates down by negotiating hard with suppliers such as TCS, Infosys, Wipro and HCL. “In some cases, vendors are ready to accept contracts from Satyam customers at less than 25% rates, including transition costs,” Mr Sathyaparasad added. Semiconductor firm Applied Materials and automaker Nissan are among top Satyam customers in discussions with TCS and others for awarding new contracts, according to a person familiar with the discussions who requested anonymity.
“Things have really turned bad, this week we came across almost $15 per hour rate for an Oracle implementation project for an engineering customer,” said a senior official at a leading tech firm who also requested anonymity.
At a time when Indian tech firms are preparing for lower IT spend by their customers in the US and Europe, they are expected to offer very aggressive rates in order to sustain the revenue growth. “Fierce competition and price pressure will be the name of the game in the next 12 months, and vendors will do their best to keep the business with their key clients ongoing,” research firm IDC said recently. “India-based vendors are expected to be particularly aggressive, as they have been strongly hit by the crisis in the U.S. and are exposed to the financial sector,” IDC added.
Telecom customers have brought down the rates by almost 15-20%. “Manufacturing vertical is still showing growth, while retail customers continue to be stable so far,” he added.
In order to mitigate these pricing pressures, Indian tech firms have started signing more contracts under fixed price arrangements. While TCS delivers almost half of its projects under fixed price, “other companies are expected to have around 40% of their contracts under fixed price agreements in the coming few months,” said Mr Sathyaparasad.
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