The Hindu Business Line : Of deal sizes and offshore billing rates

There is no way an Indian IT vendor can pitch in for a $2-3 billion size deal. Even deal sizes of $100-200 million could be considered to be at the high end of the scale at which Indian companies have typically operated.

Partha Iyengar

Partha Iyengar is vice-president (India) of Gartner India Research & Advisory Services, based in Pune. He has over 17 years experience in IT, primarily in the US where he has held senior technical and managerial positions at major US corporations.

In his current role, he covers the areas of applications development and offshore applications outsourcing. In a chat with eWorld he talks of the way forward for Indian IT companies. Excerpts:

There are many conflicting reports on deal sizes coming the way of Indian IT/BPO companies. De-risking of deals (breaking a large deal into a couple of smaller deals and outsourcing it to different vendors) seems to be on the rise. How are Indian IT companies benefiting from this new trend?

Indian IT/BPO companies are benefiting big time as de-risking is happening in the context of mega deals that were written 5-10 years ago. A lot of these deals will come up for renewal in the next two-three years. Another major proponent of de-risking is the recognition (by the clients) that they tend to lose control over these mega deals down the years.

Instead of the client managing the vendor, the reverse happens in the final years of the deal. Clients have thus realised that mega deals lock them into an uncompetitive position, even vis-à-vis the vendor, let alone the competitors (in the clients' own industry).

Hence the trend is to outsource different aspects of the business to niche competent players who can deliver in a very competitive manner.

There is no way an Indian IT vendor can pitch in for a $2-3 billion size deal. Even deal sizes of $100-200 million could be still considered to be at the high end of the scale at which Indian companies have typically operated. However, clients are willing to believe that a company, say TCS, can scale up to deliver on a $300 million dollar deal. Indian companies stand to gain the most from all these factors. In the next three years, we will witness an explosion of say $50-$100 million kinds of deals and this will contribute to a healthy 40-50 per cent growth more than what we have seen in the past.

What is the average ticket size of the larger deals coming India's way?

As far as ticket sizes are concerned, it would be fair to say that in the next two years we would see magnitude in the range of $200-300 million, with probably 5-6 vendors spreading that kind of a quantum. However, each deal is going to be different with diverse spreads and clauses attached to it. Currently, there is not enough data to conclude on the average ticket size; it will become clearer in the next two years when larger deals will be broken down.

How stable have been the offshore billing rates across the spectrum?

Billing rates were stable in the previous year, but in the last six months there has been a noticeable upward trend. This is true for both new deals as well as existing deals coming up for renegotiation. Vendors have acted smart in indicating to clients about their people costs, which have risen 25-30 per cent year-on-year. Overall costs are going up, so clients have also reconciled to paying higher rates. Ranges at the moment are pretty broad, as billing range at the programmer level is $17-$28 per hour, depending on a host of other factors. The average billing rate increase in the last 6-8 months is between 2-5 per cent. In some cases, rates are going up as high as 7-8 per cent.

Do you think that the Indian vendors' reluctance to take up the assets of their clients is coming in the way of their getting large deals?

Many Indian IT companies have had to walk away from deals wherein asset takeover is in-built. Managing the client's assets is not feasible for most vendors, as it is a departure from their fundamental business model. However, they are trying to address the issue by setting up alliances with hosting providers, in which the hosting partner takes over the assets, owns them, maintains them and hosts the data centre. Going forward, this would be the kind of consortium or alliance that the space will see. It is very improbable that there will be a sudden shift in the strategy of the Indian players to take over client assets.

Generally, in an asset takeover deal, what kind of revenue sharing patterns do we see between the client and the vendor?

Outsourcing deals are pretty complex in the way they are written. Most of these asset takeover deals are back-loaded in terms of where the vendor makes his money. The vendor has to make substantial investments in the front end; it is in the final years of the deal that the vendor makes his money. Profit sharing will be very much a deal-by-deal arrangement, especially with the Indian vendors, as this is a new territory for them. Global models won't work in India as our vendors do not have the financial strength to bear three years of investments before profits start rolling in.

Globally, IT clients are pushing for integrated solutions (BPO solutions and software solutions), according to major Indian IT firms. But pure play BPOs insist that such a trend neither exists nor will benefit them.

The practice of providing integrated solutions currently is limited to a handful of Indian companies Our projection is that it will take another 3-5 years for this trend to set in. However, it is imperative for companies to start positioning themselves as clients are increasingly looking at vendors to provide them with integrated offerings. So pure play BPOs can say there is nothing happening on this front, but when it happens there is nothing they would be able to do about it. It is easier for IT companies to either acquire BPO capabilities or organically grow them. But for a BPO company integrating back the other way will be a major challenge. If they don't manage this transition, they will be potential candidates for acquisitions.

What new trends do you see in the pricing strategy of the Indian IT-BPO companies?

As IT/BPO companies move up the value chain, companies are moving towards either value-based or transaction-based pricing. So you can see more `share risk/share rewards types of arrangements going forward. More innovative pricing models, moving away from dollars per hour, are bound to emerge in the time to come.

adith@thehindu.co.in

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