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N. Bashkaran

Once you sign the deal...

Adith Charlie

Given that e-governance deals come in all sizes and shapes, as it were, what are the models operational in this space?

For mission-mode projects, deal sizes are in the Rs 200-Rs 300 crore range; they would generally be projects spread over three-seven years, says Malladi of Ernst & Young.

In the Indian context, the typical capital procurement model of awarding IT contracts (by the different government arms) is on the wane.

The PPP (public-private sector partnership) or BOOT (Build, own, operate, transfer) model is one of the popular models, especially for large engagements (such as the mission mode ones), says Prabhakaran of 3i Infotech.

Under BOT contracts, outsourcing firms build teams and competencies to handle the business functions of their clients, who eventually take over those operations, according to Sourabh Kaushal, Industry Manager (ICT Practice), Frost & Sullivan.

In any e-governance project that services masses, technological upgrades are key, as the number of people using those services will always increase in a developing country. Technological upgrades can only be factored in a BOT model of engagement and not if it’s a capital procurement model.

“With the BOT model, the government can tell the vendor ‘if you are part of the project, you must provide me at least two technological upgrades during the life of the project’,” says Malladi of Ernst & Young.

Prabahkaran of 3i Infotech feels that smaller projects, specifically in the consulting space, are on an outright basis. In such projects, the payments generally happen on completion of milestones or on completion of the entire project itself.

BOOR (Build own operate and run) and QGR (Quarterly Guaranteed Revenue) are the other models of doing business in this space. Both are typically employed for long-term projects (three-five years); and for turnkey solutions, wherein a single provider manages all aspects of the project, says Gaonkar of Blue Star Infotech.

The BOOR model is a 100 per cent outsourcing model, wherein the entire infrastructure, including hardware, software and even the manpower to process the data, is outsourced to the vendor. This is least risky for the government and involves a great degree of commitment and effort from the vendor or group of vendors.

QGR is a staggered payment method. In this, the entire investment for the project is taken care of by the vendor. The government organisation releases the payments in equated instalments at the end of each quarter, adds Gaonkar.

However, engaging with the government has its own set of challenges. Generally, the mission-mode kinds of projects are fixed price projects that tend to stretch for five to seven years. This is very different from the time and material kind of contracts that Indian IT firms are accustomed to.

In time and material and long-term contracts, IT companies generally manage to have a clause in the agreement that provides for inflationary adjustments. These adjustments are revisited at different points in time, says Malladi of Ernst & Young.

However, that luxury is not available in government contracts; here IT firms have to be speculative in putting a price on the services that they will render seven years later.

Thus after signing on the dotted line, the contract practically becomes non-negotiable. Margins too are on the lower side compared to other domestic deals, largely due to the rigid tendering process that is followed by most government and quasi government entities.

Gross margins typically vary from 15 per cent to 25 per cent, says Gaonkar of Blue Star Infotech.

In spite of having a contractual obligation, IT companies find it difficult to recover money from the government. Debtor delays that IT companies have to face in their associations with government arms are horrendously long.

“Nobody talks about days but months,” says an e-governance specialist with an IT company, adding that “it does extend to more than six months in many cases.”

Thus, only those companies that have deep pockets can sustain irregularities in the cash flow, says Malladi of Ernst & Young.

Chakrabarty of TCS is of the view that debtor delays are more common in smaller-sized projects. “The only way to work around this is not to wake up on the billing date. We have put the responsibility of collection on the Project Delivery team as well as the sales team. They build close ties while delivering the project and ensure that all bills are cleared within the stipulated time frame,” he says.

adith@thehindu.co.in

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