For tier-I tech firms, value-add is mantra to ease pricing pressure

Venkatesh Ganesh Mumbai October 14 | Updated on October 14, 2020

New-age services are increasingly part of outsourcing services bundle

With the offer of new value-added services, top IT services firms have managed to stabilise the pricing of multi-year IT outsourcing deals. Earlier, there had been rising pressure on them to renegotiate such deals.

“The large companies have begun to provide more value-added work in some of their traditional outsourcing deals,” said an outsourcing advisory consultant. “Additionally, as their clients begin to increase digital adoption in areas which they had not done in the past, tier-I companies are offering new-age services as a part of the bundle.” New-age services include moving legacy applications to the cloud, new app interfaces and business analytics solutions.

Anuj Sethi, Senior Director, Crisil Ratings, is of the view that pricing pressures are felt more in business areas where value addition is less.

In April, Crisil had pointed out that IT firms face the spectre of price renegotiations by US clients, which would add to the cost pressure emanating from investments in digital capabilities and limited incremental cost-saving avenues. Consequently, operating profitability could also moderate 200-250 basis points to 20 per cent.

Flash forward to Q2 and IT companies seem have found the pricing mantra for traditional deals as well as new ones.

Digital competition

Across all sectors, companies are facing enormous challenges from digital competitors offering newer and more compelling solutions to their customers.

“The response of many traditional companies is to invest more in digital initiatives and elevate the significance of these programmes,” said Peter Schumacher, President and CEO, Value Leadership Group. “This fundamental shift is providing enormous growth opportunities to Indian IT services firms.”

Focus on savings

Also, customers are looking for savings rather than better pricing. “They are looking at the big picture — of taking cost out of legacy (traditional IT) and accelerating investment in digital, which is benefiting all tier-1 companies,” said Pareekh Jain, founder and lead analyst of EIIRTrend and Pareekh Consulting.

Recently, V Ramakrishnan, CFO of TCS, told BusinessLine that earlier this year some of its clients looked for (pricing) accommodations. “That phase is behind us. Customers see the relevancy of services we offer and pricing is based on that,” he said.

What this means is that companies have managed to hold on to, or even increase, their operating margins, which were under stress earlier this year.

In Q2, TCS had margins of 26.2 per cent (up 260 basis points) and Infosys, 25.3 per cent (up 270 basis points).

According to Ganesh Natarajan, Chairman, 5F World and former CEO of Zensar, the bright side of the tough market has been the ability of the tier-I firms to command good pricing and expand the scope of engagements in digital programmes.

The Europe story

In Europe, the script is different. “As the outsourcing world is witnessing vendor consolidation (reducing the number of companies engaged by clients), many large companies are willing to bag deals at lower prices, so that they can get a foot into the door,” said Crisil’s Sethi.

This could explain some deal wins by IT majors.

TCS had total contract value of deals worth $8.6 billion for the quarter and Infosys had large deal wins of $3.1 billion.

Published on October 14, 2020

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