`Sync'ing with the tide

Chitra Phadnis

That the US slowdown has triggered a game of undercutting in the domestic industry is no longer news. But companies are waking up from instinctive reflex reactions to crafting long-term blueprints for survival. Big and small players are still surfing hard to hook deals but the strategies are more deliberate, more player-specific. Recovering in the immediate future is just not enough.

In this game of survival where the stakes are high, some have no choice but to go for short-term price cuts, some say a cautious no. Some don't want to play the volume game, some chant the fixed-time, fixed-project mantra. But naturally, all are agreed on one strategy -- staying afloat till the storm passes.

To cut or not to cut

The most obvious area where the impact of the US slowdown has been felt is pricing. The Indian software industry has been jolted out of its comfort zone to rethink its pricing strategies. Every company has theories of its own, but the first quarter of the year 2001-02 seems to have created a sharp segmentation -- between companies who are cutting prices and those which are looking at hiking them.

The very small companies have no go but to cut rates. Prices have dropped to just above cost levels, says Avinash Vasisht, Chief, NeoIT, an online software services exchange. The small companies are the ones who had no offshore facilities, no strategies in place and are desperate to keep afloat. The medium guys are dropping prices anywhere between 10 and 20 per cent and even the larger ones are ``open to negotiations.''

Large companies are not lowering rates in their initial proposals but once the customer has shortlisted 2-3 companies, they are willing to talk prices, something unheard of in better days.

Across all segments, undercutting by peers is one of the biggest challenges facing the industry right now. For instance, before news of the slowdown stormed in, offshore billing rates hovered between $25 and $30 per person per hour. Now, there are companies that consistently quote at $18. Some even drop rates to $10 if an account promises further business. This is not a healthy trend for the industry, say others. The Wipro Vice-Chairman, Vivek Paul, has made a telling comment that the competition among Indian companies will finally result in maintaining the equilibrium throughout the industry at the same levels, but at lower price points.

No to volume game

The larger players, notably Wipro and now Mascot, have a different strategy up their sleeves. Wipro itself has taken a conscious decision to maintain price levels, even at the cost of volumes. This quarter, in fact, saw a fall of four per cent in offshore and five per cent in onsite manhours billed.

Others have seen a fall in volume too, mainly because of the longer sales cycle.

100-day magic gone

Customers are simply taking longer to make decisions.

Longer sales cycles don't just mean disappointing balance sheets for vendors. It also means that the customer has 6-9 months in which to scrutinise the vendor and ask that many more questions, instead of the 100-day cycle earlier, says the Planetasia Co-CEO, Anand Sudarshan.

The accountability to customers is increasing. Measurement criteria are changing and even the good old time and management projects come with a cap on time, with penalty clauses if the project is not delivered on time.

Planetasia is gearing for the challenge by changing processes, quality, the work culture, the pricing strategy and the kind of projects to meet it.

Dollars are not the major criterion now, quality is, and confidence in the company is, says Gerhardt Watzinger, CEO, Mascot.

The silver lining

The projects may be taking a lot longer coming in, but when they finally do, they are huge. The six-month quickie projects are out. What's in? -- Projects involving outsourcing 500 people, with a time-frame of 5-10 years, entire applications that could keep companies in business over the next decade. While the number of projects may be down from last year, their sizes are anywhere between 10 and 100 times larger, says Vasisht.

Besides, the projects are also the ``non-discretionary'' kind, of greater strategic value to the customer, who is wiling to pay more for them, he says. The good part about it is that the quality of work will also go up accordingly.

Planetasia is going in for what it calls ``value-added maintenance.'' Mascot is looking at maintenance of high-tech applications and outsourcing complete IT services for customers. ``We expect premium pricing in these areas,'' says Watzinger of Mascot. IT services and maintenance are also long-term projects, giving better returns. ``Premiums could be as high as 30-40 per cent on these.''

Long-term projects also mean an improvement in utilisation rates, which reflects on the bottomline. They would mean that customers no longer start hunting for vendors who offer better rates once a project is over.

Singing the fixed price tune

Fixed price is the other new tune that software companies are singing. Fixed price, fixed-time projects will bring in better revenues. Wipro announced a shift to a greater percentage of fixed-price projects in its annual report.

To the customer, this model means a lot less monitoring to do, besides the assurance that the project will be delivered on time. The vendor has the flexibility to do it onsite or offshore, can bill higher, exploit expertise to replicate parts of the project, but at the risk of penalty for not delivering as promised.

Predictions coming true?

Indian companies have been clinging to the hope that the US slowdown will drive businesses to outsource more as part of cost-cutting efforts.

In what could be an indication of things to come, GE reportedly has announced a 70-70-70 strategy. The group plans to outsource 70 per cent of its IT services. Of this, 70 per cent will be to preferred vendors and 70 per cent of the business outsourced will be done offshore, a share that Mascot is eying with interest.

NeoIT's Vasisht also believes that this will be the trend of the future. ``Our business is four times that it was last year, though not all of it is because of the slowdown,'' he qualifies.

Europe-US difference

Ironically, the current caution about outsourcing, the long sales cycles, the bigger projects with higher returns and longer term commitments are typical of the European market, the same that India had shunned till now.

With the US model going the same way, at least cultural differences will not hamper entry into Europe. Indian companies are moving into Europe and the Asia-Pacific region more aggressively to derisk business.

In the Asia-Pacific region, except in Japan, onsite billing rates are similar to offshore rates, and the economics work out differently.

Offshore advantage

Now, more than ever before, the industry is aware of the advantages of offshore. Mascot has turned from a subsidiary of its parent in the US, developing software exclusively for it, to an offshore development centre with customers of its own. Companies are moving more people and more projects offshore. More companies are setting up contact and call centres, again clutching at the pluses of offshore.