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Moumita Bakshi

The rapid growth posted by vendors can cause problems with customer service, quality of staff, project/staff turnover, and quality of deliverables. The vendors are simply not able to hire and train enough qualified staff in such a short timeframe.

New Delhi , June 6

WITH a majority of top-tier Indian vendors posting healthy results for the fourth quarter and the year ended March 2005, a Forrester report has said that while the market is "as hot as ever", rapid growth could cause problems with customer service, and quality of staff and deliverables.

"These vendors continue to grow at very high rates, and their profit margins continue to dwarf those of their US- and Europe-based competitors. Indian investors were surprised by results from two of the tier 1 vendors, and this dragged the stock market down and created some negative press for the Indian market in general, but the fact remains that this market is as hot as it has ever been, and buyers need to beware of the dangers that this growth represents for them," the recent Forrester report said.

It added that between the third and fourth quarters of the previous fiscal, TCS showed a decline of between five per cent and 34 per cent in net profit from the previous quarter, depending on how the firm accounted for the decline.

TCS was able to reduce this to a five per cent profit decline after adding back investments from performance-based incentive plans for the fourth quarter and subtracting an exceptional foreign exchange gain from the third quarter, it said.

"In addition, Infosys issued lower than expected earnings guidance for 2005-06. Buyers should not be concerned about the viability of these vendors or this marketas it is still booming. Clients should be concerned, however, about the way the vendors' rapid growth affects their service delivery."

The report said that all of the tier-one vendors were growing - and growing fast.

"For instance, during the last fiscal Satyam grew by 28 per cent and Wipro by 39 per cent, and CTS, which has a fiscal year that runs from January 1 to December 31, grew by a remarkable 59 per cent. Such rapid growth can cause problems with customer service, quality of staff, project/staff turnover, and quality of deliverables. The vendors are simply not able to hire and train enough qualified staff in such a short timeframe, nor are they able to effectively retain staff in such a competitive environment," Forrester added.

It cautioned that clients needed to protect themselves by undertaking measures such as auditing the HR practices and policies of candidate vendors; asking for minimum turnover clauses in contracts to prevent vendors from replacing qualified staff with new hires or less qualified staff; specifying seniority requirement for projects teams; and interviewing key staff and project managers.

"Understand that negotiating low vendor rates make one susceptible to poor service. Today, one result of being a strong negotiator is that the vendor populates your project teams with low-cost, junior staff," it said.

"Another result is that the vendor tries to extricate itself from the project because it is not profitable enough. When negotiating, weigh the risks and benefits of negotiating to a price point at which the vendor no longer regards business as important or worthwhile."

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