The Hindu Business Line : IT majors earning more from fixed price contracts

Bangalore, Feb. 7 Some of the major Indian Information Technology service providers have seen a rise in contribution to revenues from fixed price contracts in the third quarter. Accordingly, the proportion of revenues from time and material contracts has fallen.

Infosys, Tata Consultancy Services, HCL Technologies and Wipro have all recorded a rise in revenues from fixed price contracts as a percentage of total revenues.

Fixed price contracts help clients arrive at a fee they would pay the vendor for a project done within a deadline. If the vendor meets the deadline using, for example, 100 people instead of 1,000, that is to his advantage. If his team is inefficient, he loses out by using more people to meet the deadline. Contracts for which fees are based on time taken and manpower used are called time and material or T&M contracts.

Mr Azim Premji, Chairman of Wipro Technologies, said the company has seen a 200 basis points increase sequentially in the mix of revenues from fixed price contracts.

Skill indicator

Mr Sumit Sarawgi, an analyst with Everest Group, said increase in revenue from fixed price contracts is actually an indication of a company’s expertise in project management. He said a company would go for fixed contracts if it is confident of its project management skills.

Mr Balakrishnan V, Chief Financial Officer, Infosys, said: “It is our endeavour to increase the proportion of fixed price contracts in our overall portfolio. When we do projects under fixed price, the productivity gain accrues to us. Also, since the billings are not effort-based, it creates some kind of a non-linearity in the revenue productivity. As we move more and more into transformational deals, we could end up doing more of fixed priced deals.”

Higher pricing

Increase of revenue from fixed price contracts is also a sign of the company moving up the ladder as far as pricing is concerned, Mr Sarawgi said. He said for higher standard of prices, generally the fixed priced pattern is used, compared with the low-level pricing in the time and material projects.

Mr Sarawgi also said some companies would be looking at fixed price contracts to build up their books at a time when the slowdown in the US could affect the market. But he said this is only a very small part of the entire situation. He stressed that fixed price projects are not always bad.

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