The Hindu Business Line : IT vendors face severe pricing pressure

“Such conversations do happen,” said Mr S.D. Shibulal, Chief Operating Officer, Infosys Technologies, admitting that clients do negotiate pricing of contracts linked to vendors’ profitability.

Higher profit margins

Large Indian vendors have traditionally enjoyed higher profit margins than their global counterparts such as IBM and Accenture, as they deliver bulk of their services from low-cost, offshore destinations.

For quarter-ended March 2009, Infosys had an operating margin of 29.51 per cent, while TCS had 23.7 per cent. IBM for March quarter had an OPM of 13.61 per cent, while Accenture for quarter-ended February had 11.97 per cent.

“Our margins are a result of our model, the way we run our operations, the global delivery model, and the way in which the bench is managed, the much disciplined expense management and also the result of innovation,” Mr Shibulal said, adding “we have always enjoyed premium and we will continue to enjoy that”.

Lack of deals in the marketplace has created intense competition among the vendors thereby resulting in pricing pressure, said Mr Sudin Apte, head of Forrester Research in India. Also clients do seek higher discounts as the vendors earn high margins.

The Indian vendors are witnessing pricing pressure anywhere between 10-12 per cent, Mr Apte said. Infosys, which has projected a decline in its dollar earnings for the year-ahead, has factored in a pricing decline of 5.7-6 per cent in its forecast.

Mr Krishnakumar Natarajan, CEO of MindTree, said in the previous few months when the customers had not decided on budgets, they had to discuss something and the issue of pricing surfaced. In the last three to four weeks, there has been new pricing pressure building up.

He said there were certainly pricing pressure and in certain cases concessions had to be given. But what the company has been able to achieve is to link the pricing with certain level of volume and visibility commitment.

Infosys’ strategy

On Infosys’ strategy to handle such a pressure, Mr Shibulal said the conversation has to be moved from the price to value. “Move the conversation from price to total cost of ownership by shifting to fixed price deals,” he said.

Stating that high margins would not make the Indian vendors more vulnerable to pricing pressure than their global counterparts, Mr Shibulal said “everyone is facing severe pricing pressure. The world is going through pain. If you don’t have money to pay, then you don’t have money to pay. It does not matter if it is Indian vendor or global vendors.”

However, Mr Sid Pai, Managing Director of TPI’s India operations, said the focus is not on margins. “Questions are always asked about high profitability, but eventually the pricing is decided on the prevailing market conditions and what the competitors are quoting”.