The Hindu Business Line : Price-wise

The pricing of IT software services is an interesting exercise. Why, one might ask, should IT companies price their services differently, viz, fixed price, or pricing based on time and material (here, ‘material’ refers to the manpower that services clients).

Fixed price contracts are typically those where the client has near-absolute clarity on what he wants from the vendor and how quickly he wants it.

These ‘fixed price and time’ contracts are done on the basis of the proportion of work completed. This often involves mission critical, end-to-end engagements.

When that clarity is not possible and the client is more comfortable paying the vendor by the number of hours the latter’s manpower puts in, the ‘time and material’ concept comes into play. It does not matter to the vendor whether the contract lasts six months or 12.

eWorld recently caught up with TCS to understand the comfort levels of an IT company with regard to the proportion of revenues from fixed price contracts as opposed to time and material.

In the July-September quarter, 56.3 per cent of the contracts for TCS were time and material and 43.7 per cent fixed price and time contracts. TCS reported revenues of $1.4 billion in the said quarter, a 45 per cent increase year-on-year.

Ravi Viswanathan, Vice-President, Chennai Operations, TCS, spoke on the company’s pricing strategy and other issues. Excerpts:

In your early days, TCS had more than 50 per cent of revenues coming from fixed price contracts. It went right down a bit and is coming back up now. Where do you see the trend going?

I do not think it will go significantly back to 50 per cent.

The fluctuation is because fixed price is typically project-based. For instance, last year, we did a slew of fixed price projects for British Telecom, which kind of ramped down.

We think it would be around 40-45 per cent, and that’s where we would like to be.

Why is that?

Well, fixed price is definitely very high on margins. It also does not mean annuity business.

You want to make sure there is a balance between annuity and projects. If there is more of annuity business, it gives you flow of revenue through multiple quarters. A project-based organisation suffers cyclical trend. Even 42 per cent is significant for any company.

When you say your project is going to be ramped down, to its natural end, you need to bring in other projects to show growth. How are you involved in the process of planning for new customers?

If you look at how we work with some of the large relationships, there is a huge value in doing fixed price for customers — the plus or minus is the key. The client says his spend is X million plus or minus 5 per cent. For the company, it is an incredible uncertainty. We drive large accounts with a mix of fixed pricing and annuity.

If you take a telecom company account as an example, we are now doing a number of projects and it is a good opportunity to balance between fixed pricing and annuity. Fixed price, we drive the accounts and say ‘why do you want to do time and material? We will do this, but the value is in the fixed price.’

And, customers typically like that, because it is pro-active. You go back to customers and say, ‘we can do it better this way’ (fixed price), and it gives us the opportunity to do things more effectively.

The entire management (for clients) is ours and we manage it holistically.

A time and material project has different dynamics because there are a lot of external agencies doing different activities. Fixed price is something that is not difficult to sell to customers and people see huge value in that.

Any reason you see that not many projects come under fixed price?

Not all of them are amenable. Let’s say we are doing a large transformational programme for a customer. The scope may not be very clear, and we discover as we go by. It has to be done on a continuous basis. We tend to put a limit on the spend; else it will be difficult to put a business case to the customer.

But, then you cannot say I will do for X million, because I don’t know the scope. There is no containment. If you take projects, that’s how it evolves.

Given a choice, we would like to do fixed pricing. Then it is a good opportunity for us to showcase value more than what we could otherwise do.

Talking about verticals, we hear manufacturing is down a bit in the US. Is it due to the slowdown in the automobile industry in the US or was it by choice — you want telecom to go up?

Manufacturing has always been on 17-18 per cent for TCS. We have always been around in that range.

I do not think manufacturing slipped significantly. Our large manufacturing customer is a combination of aircraft manufacturers and hardcore cement manufacturers. The automobile slowdown in the US will have an impact. But the opportunity will be immense.

And, in the telecom company space?

Not really. Take BT, for instance, they are doing the 21C network programme (an advanced communication network). They have invested significantly in equipment and the opportunity is to put services on the new network. Typically, in a network, after the rollout, it has a longer timeframe before you go and upgrade that technology.

In the past, you installed a DMS 10 (digital multiplex system) network, and forgot about it for 10-15 years. But, today it is three-four years before you need to upgrade to the next set of technologies.

For example, both BT and Verizon are significantly enhancing their intellectual property (IP) and betting heavily on IP, which everybody says is the future.

raja@thehindu.co.in

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