The Hindu Business Line : Service providers may see pricing pressure

Bangalore, Oct. 2 After witnessing a steady increase in billing rates for the past few years, Indian IT service providers could face pressure on the pricing front as demand slows down amidst worsening financial crisis in the US, the largest IT services market.

Over the past three to four years, Indian vendors were able to get annual rate hikes ranging between two to six per cent for various firms. However, faced with increasing costs due to inflationary pressures and credit crisis, customers are now looking to pass on some of their burden to their Indian service providers.

“Definitely there’s pressure on rates and customers want to renegotiate contracts as the rupee has weakened further,” said Mr Pari Natarajan, CEO of the Bangalore-based Zinnov Management Consulting. Zinnov has created a new service offering on a subscription model to help clients renegotiate contracts starting January.

“Customers are seeking a share of the gains that Indian vendors are going to get due to a weakening rupee,” Mr Natarajan said. A weak rupee boosts the profitability of the Indian vendors. On Wednesday, the rupee dropped to 47.28 against the dollar, its lowest level since May 2003.

“The risk of losing a deal could put competitive pressure on service providers to keep their rates lower,” said Mr S. Sabyasachi, research director at neoIT, an offshore advisory firm.

Faced with slowing business from existing customers, Indian vendors are under pressure to add new clients to sustain their growth rates. As a result, companies are aggressively exploring inorganic growth options to add new customers and enter new markets.

The pricing pressure, analysts said, will see service providers switching over to different pricing models such as fixed price and gain share, from the traditional time and material projects, where the billing was done on a per person, per hour basis.

Admitting pricing pressure, Mr Vineet Nayar, CEO of HCL Technologies told Business Line recently that the company was trying to overcome that by signing more of fixed price contracts.

“I don’t think there is any pricing pressure. However, there’s pressure in volumes as there’s no work,” said Mr Phaneesh Murthy, CEO of iGATE Corp. It may be recalled that Indian vendors had faced pricing pressures in the aftermath of the dotcom burst post-2001. However, they were able to absorb the price pressure as increased volumes from clients had helped cushion the impact.