The Hindu Business Line : IT majors get more fixed price contracts

New Delhi/Chennai, Nov. 16 Three of the top five IT service providers - Infosys Technologies, Wipro and HCL Technologies - have posted a year-on-year as well as a sequential rise in the proportion of fixed price contracts for quarter ended September 2008.

Unlike Time and Material bids, where billing is based directly on the labour cost usually at specified hourly rates, fixed price contracts which allow for higher efficiencies can be an important lever for margin management given the tough business environment.

In a fixed price contract, a software vendor would price it such that he can afford to have 100 people work on it, but only employs 70 people. He increases efficiencies with the help of technology tools. That’s a 30-per cent savings on employee costs alone.

But, time & material contracts help when clients are unsure about exactly how much work they want done and for how long.

So, they bill as they go along. Such contracts also give clients the freedom to stop work should they need to.

“The high-reward albeit high-risk Fixed Price contracts allow us to apply quality processes, drive productivity, leverage automation and value addition, resulting thereby in improved margins,” Mr Suresh Vaswani, Joint CEO, IT business, Wipro, said.

The general bias towards fixed price model mirrors clients’ rising comfort with Indian IT vendors.

“Also given the global environment, even customers are opting for the fixed price, outcome-based models where the entire project management responsibility lies with the IT service provider,” he added.

For TCS, the share of fixed price contracts has improved by 60 basis points sequentially to 43.4 per cent in Q2, although compared to the corresponding period previous year, the proportion of fixed price contracts has gone down marginally.

In case of Satyam, the share of fixed price contracts to the overall revenue kitty has gone down in comparison to Q1 FY09 as well as Q2 FY08.

Mr Srinivas Vadlamani, Chief Financial Officer, Satyam Computer Services, told Business Line that factors that influence the increase in T&M contribution include increase in annuity contracts and ramp-ups in large deals that combine both types of contracts.

According to him, “An increase in contribution from application and maintenance services primarily due to transformational engagements that focus on efficiency and cost optimisation, and a natural closure of some fixed bid contracts, have influenced the trend this quarter,” he said. According to him, the company has been focusing on increasing its contribution from fixed bid contracts.

However, industry experts point out that it may be too early to read a trend into fixed price contract movement.

“If the scope of a fixed price bid is unclear, it can lead to cost overruns. The mix for Infosys will not change in the short term; but in long term, we see the proportion of fixed price bids going up,” adds Mr V. Balakrishnan, CFO, Infosys.