Offshoot of slowdown woes yet to become the trend.

Shamik Paul

Bangalore, Jan. 2 The economic downturn has forced a section of customers in the US to seek finance for project starts from their IT service providers.

Generally, such initial investments pertaining to technology platforms, tools and methodologies are absorbed by the customers themselves. Though it is too early to call it a trend in the Indian IT services sector, some large Indian companies have seen such financing of projects in the recent past.

“It may be in one or two instances, but there is not a well-defined trend,” said a senior official at a large Bangalore- based firm quoting anonymity.

Consulting firm PricewaterhouseCoopers and the Duke University in a study conducted jointly revealed that about 9 per cent of the 100 companies they surveyed said they would have service providers finance projects, while a third of the companies were delaying the projects altogether.

The study completed on November 10, 2008 was to determine what options and changes companies are considering or are already implementing in their outsourcing strategy because of the changed business environment after the September meltdown.

Indian IT vendors are witnessing a slowdown in their business momentum in the past year as customers have held back spends on deploying new technologies applications.

However, not all companies have seen this trend. “No, not at all. I have not seen like that in MindTree,” the company’s Chief Financial Officer, Mr Rostow Ravanan, said. Mr Ravanan pointed out the company was providing discounts or doing pilots free of costs depending on the volumes.

Upfront payments

Recent trends suggest that clients have also insisted on upfront payment on assured cost savings while handing out a deal to the service provider. Tech Mahindra had made upfront payment of Rs 525 crore and Rs 440 crore to British Telecom for bagging two large deals in last three years.

“It looks like there is a growing tendency for companies to ask suppliers for upfront payment,” Mr Vinu S.Kartha, Principal at Tholons Inc, an advisory firm said. The supplier paying upfront cost savings also prevents competitors from getting into the deal and that the scope of the engagement could be maximised.

“It is nothing new,” sourcing advisory firm, TPI’s India Operations’ Managing Director, Mr Siddarth Pai, said. He said that such payments were part of long-term annuity contracts. This is a kind of financial engineering, where in service providers making upfront payment guarantees them certain amount of business.

(This article was published in the Business Line print edition dated January 3, 2009)
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