The Hindu Business Line : ‘IT service providers raising embedded prices’

New Delhi, March 26 Faced with rising costs and rupee appreciation, Indian IT service providers are struggling to maintain margins by injecting price hikes through measures such as increase in the hours charged and placing currency fluctuation risks on clients, according Forrester Research.

“As costs in India rise and the rupee appreciates against the dollar, the pound and the Euro, Indian service providers are struggling to maintain profit margins…While the hourly rates have gone up only slightly, important price increases are often embedded elsewhere,” Forrester’s recent report `Understanding Indian Providers’ Margin Defense Tactics’ said.

The report claims that in the past Indian providers often charged a set number of hours per week, regardless of the number of hours their billable staff worked. “However, providers are now beginning to either increase the number of hours charged on a weekly basis or simply charge for the actual total hours that staff are working,” it said.

It said while providers were trying to present their rates as being relatively stable, clients may see big annual increases masquerading as `Cost of Living Adjustments’. In additions, they were attempting to place currency fluctuation risk on clients.

“Recent competitive bid situations highlight the fact that there has been a larger increase in on-site rates and extreme variability in these rates. In a competitive bid situation, Forrester has seen them range from $55 per hour to $100 per hour for the same service. Providers are trying to put some of their cost increases into this rate category, which seems to be scrutinised much less than the offshore rates. However, onsite staff is a significant expense – even if the client’s engagement uses only 80 per cent offshore and 20 per cent onsite ratio, the bulk of actual spend is for the much more expensive on-site resources,” it added.

Forrester noted that the providers were trying to minimise the impact of inflationary pressures by using tools to make resources more effective and efficient, improving training, building solution accelerators and reusable code, delivering services from less well-known Indian cities, and moving clients into more outcome-based relationships.

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