Indian IT firms hope to hold price levels steady, unlike 2001

Indian IT firms hope to hold price levels steady, unlike 2001

Bangalore: Indian software vendors such as Infosys Technologies Ltd, Wipro Ltd and MindTree Consulting Ltd say they expect to maintain prices for customers in the US, the largest market for IT services, where a potential economic slowdown looms large.

These vendors say they are more mature now than during the 2001 meltdown, when firms lowered prices to retain or win customers.

Also, they expect to turn more aggressive in acquiring skills and assets, which may come cheap when, and if, the slowdown unfolds.

“We would like to be more cautious with our pricing strategy this time," says K.R. Lakshminarayana, chief financial officer of Wipro Technologies.

So far this year, neither Indian IT vendors nor their US customers have admitted to any slowdown. Uncertainty, however, looms large and it is widely perceived that pricing could come under pressure as 2008 IT budgets are expected to stay flat.

Forrester Research last week declared that IT spending in the US next year would only grow by 5% compared with 8% it had forecast. A clearer picture is expected to emerge over the next two to three months.

During the 2001 slowdown, Indian vendors, under pressure to sustain growth, experienced a steep fall in prices as customers used the situation to negotiate hard.

“Hopefully, as an industry, we will not fall prey to the pricing pressure," Lakshminarayana said. “We don’t want to lock ourselves into bad contracts with customers this time."

Typically, slowdowns have lasted for a few quarters, but “the rebound is in the form of huge volume growth. During good times, prices went up by 3-4% per annum, but we saw a decline of 10-12% in 2001. Volume is easier thing to catch up than price," adds Lakshminarayana. In a bid to sustain its growth, Wipro has been focusing on verticals and geographies that were less immune to a slowdown such as the non-financial services sector in Europe and manufacturing sector in the US.

Sabyasachi Satyaprasad, director-research at neoIT, an offshore advisory firm, said he also didn’t foresee a steep price cut like the one witnessed in 2001.

This is primarily because the industry has seen a sequential price increase over the past five to six quarters. The 3-9% year-on-year price increase is not sustainable. “Pricing may stay flat, while pressures for reduction could mount," he said.

In 2001, Indian vendors earned bulk of their revenues by offering services such as application, development and maintenance (ADM).

Now they have a more diversified revenue base, largely coming from services such as package implementation, infrastructure management, business process outsourcing (BPO) and consulting. The addressable market has grown, thereby reducing the risk.

“This diversified revenue base could have given the confidence to the Indian vendors to protect their pricing. But eventually the market conditions would decide," Satyaprasad said.

Chief executive of Wipro Technologies’ telecom and product engineering solutions business, Sudip Nandy, said the looming slowdown induced by consumer spending slowing could take some time to percolate to companies themselves and in turn affect the IT services sector. “The resilience of the Indian IT industry is several fold better now compared to earlier," adds Nandy.

Unlike 2001, when slowdown was triggered by the burst of the Internet bubble followed by 9/11, this time it is not too sudden. “There is enough data for a long time and vendors have had enough time to prepare now," Sabyasachi said.

Customers are now well prepared and have better balance sheets. “The ability of customers to take a hit is slightly higher now," said a senior official at Infosys, who didn’t want to be quoted because the company is in a silent period prior to declaring its quarterly results.

Mid-size firms such as MindTree have already reduced their dependence on the US market by earning higher revenues from other regions, said CEO N. Krishna Kumar. MindTree, which offers services to automotive and semiconductor companies, has not seen any signs of a slowdown, he added.

Indian firms expect to manage their expenses better after having introduced variable pay structure after 2001, wherein certain portion of the employee pay is directly linked to the company’s performance.

Hema Ravichandar, an independent human resources consultant and a former HR head at Infosys, says Indian firms should make their human capital management process more sophisticated so that there is a clear synergy between hiring projections, recruitment and promotion of their employees.

“Companies could reduce their lead time between recruitment and the joining dates from 12 months to about six to eight months," she said.

Indian vendors have realized that slowdown was the best time to invest in acquiring new skills and assets as they would cost less. “We would be keeping our eyes open this time," says Lakshminarayana.