Bangalore: Indian information technology (IT) firms such as Infosys Technologies Ltd, Wipro Ltd and HCL Technologies Ltd are gradually moving away from billing customers by the hour and are billing them for entire projects or parts of them.
The move to so-called fixed price contracts is prompted by a desire to maintain profitability, said an analyst. “In fixed price contracts, you have the flexibility to drive productivity and maintain margins,” said Nimesh Mistry, an analyst at Man Financials Ltd, a Mumbai brokerage.
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In the quarter ended September, fixed price contracts accounted for 33.9% of the combined business of the three IT firms. That compares with 28.9% in the corresponding quarter last year and 30.6% for 2007-08 (ended March for Wipro and Infosys, and June for HCL Technologies).
Infosys would definitely like to grow this proportion, said an executive. “We cannot push customers. We would like to have more (fixed price) contracts,” said V. Balakrishnan, chief financial officer of Infosys.
Billing by the hour, through so-called time and materials contracts, could prove counterproductive given the current economic environment, Mistry added. “When you are doing time and material (contracts), it is vulnerable to the events that are (currently) happening, (customers) may go for price cuts.”
India’s largest software services firm Tata Consultancy Services Ltd (TCS) has traditionally earned a significant portion of revenue from fixed price contracts. In the quarter ended September, such contracts accounted for 43.7% of the company’s revenue, the highest among Indian IT firms.
Unlike traditional time and material contracts, where companies bill customers for the number of people deployed on a project, in fixed price contracts, they promise to deliver a contract within an agreed time frame at a specified price. The company typically enhances profitability by re-using technology components it has developed for other customers.
Global firms are holding back on technology spending due to the current economic crisis and researchers have warned of slower growth in spending on software and hardware next year.
On 13 October, technology researcher Gartner Inc. said IT spending in 2009 would grow by just 2.3%, less than half its earlier projection of 5.8%.
India’s software lobby, the National Association of Software and Services Companies, or Nasscom, has said that it may revise downwards in December its July growth estimates of 21-24% growth for Indian IT services firms in 2008-09.
Fixed price contracts could also involve a variable component, said one executive. “Customers typically would want to take a risk-reward model. Nobody will pay you higher just because you are promising benefits through transformation—as the benefits kick in, the amount that you get goes (up),” said T.K. Kurien, president, Wipro Consulting Services.
An analyst said that profit margins of IT services firms using fixed price contracts depend on their ability to stick to deadlines and the quality of their delivery.
“Margins depend on how well you execute. You have the levers to manage productivity and keep costs (in control),” said Anurag Purohit, equity analyst with Religare Securities Ltd, a Mumbai brokerage.
TCS said the firm will maintain the proportion of fixed price contracts between 40% and 50% of its revenues and it continues to maintain that band.
“Customers are willing to look at fixed price contracts, but this depends on the how far customers have reached in the maturity cycle when it comes to outsourcing and off-shoring,” a TCS spokeswoman said.
Satyam Computer Services Ltd saw the share of fixed price contracts in its revenue pie falling to 30.9% in the September quarter from 33.28% in the year-ago period.
In an analysts call on 17 October, Ram Mynampati, president for commercial and health care businesses of Satyam, said, while referring to this fall, that “some fixed price projects come to a natural close and new project(s) starts... (We) continue (to) focus (on) as many projects in the fixed price (mode) in a creditable fashion as we can.”