IT companies now generate higher revenue from fixed price contracts

The $120-billion information technology industry now generates almost half of its revenue from fixed price contracts. While this indicates the rising comfort of overseas clients in dealing with Indian software providers, industry watchers feel that the trend may result in thinner margins and fewer job additions in India.

 According to industry body Nasscom, fixed price contracts now account for 48 per cent of industry revenue as against 38 per cent in fiscal 2009. Time and material contracts (T&M) now account for 52 per cent of industry revenue from 62 per cent five years ago.

 “The trend towards fixed price contracts indicates the growing maturity of Indian IT companies and the offshoring model in general. In the next 2-3 years, about that 70-75 per cent of industry revenue come from fixed price contracts,” said Ganesh Natarajan, Vice-Chairman and Chief Executive Officer of Zensar Technologies.

In T&M bids, the total project cost is determined by the amount of time and resources expended and the actual effort towards the software development. Under the fixed price model, the client and the vendor agree on the quality of the product to be delivered within a pre-scheduled timeframe.

The vendor gets a mutually agreed price for the project irrespective of the number of man-hours spent in the development. Thus, it is more beneficial for a vendor to have 70 resources work on a project instead of 100 (in the case of T&M) with technology tools taking care of the repetitive tasks.

“It makes sense to do fixed price projects if you can apply pre-designed templates in the verticals that you specialise in. It’s a win-win for both the client and the vendor,” Natarajan added. Alok Shende, Founder and Principal Analyst at Ascentius Consulting, believes that the growing dependence on fixed priced contracts shows that clients are confident of the reusable codes, reusable modules and the overall project management skills that Indian providers have at their disposal.

“With fixed price contracts, vendors are taking the risk of the contract onto their books. Since vendors will get paid only as per what is specified in the contract, the onus is now on them to ensure that delays and cost overruns are avoided,” said Shende.

The rising preference for fixed price contracts is further giving credence to the theory that the industry days of big-bang hiring may be over. 

Sanchit Vir Gogia, founder CEO at advisory firm Greyhound Research, believes that fixed price contracts will have a direct bearing on hiring trends.

“Many fixed price contracts are in fact managed service deals. They do not require as many human resources as compared to the traditional IT outsourcing model.”

As companies deal with increased automation internally and integrate emerging platforms such as social, mobile, analytics and cloud, they require fewer hands.

“Revenue generation need not be proportional to the number of jobs being added. Incremental addition of people will only be 75 per cent of incremental revenue generation going forward,” said Natarajan.

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