IT Vendors Face Price Squeeze

By M H Ahssan

Indian IT services vendors are set to feel pricing pressures and headaches related to supplier consolidation strategies by global enterprises in the aftermath of the global financial meltdown. While the big six Indian IT providers — TCS, Infosys, Wipro, HCL, Satyam and Cognizant — can tide over the crisis, smaller firms are definitely heading for rough times, a survey conducted to capture ‘buy-side’ sentiments following the crisis, implied.

US companies, nevertheless, would continue implementing their current strategies for sourcing some functions offshore, the study, part of an ongoing research at the Center for International Business Education and Research’s Offshoring Research Network at Duke University and PricewaterhouseCoopers, found. Conducted during the first two weeks of November, the study surveyed 100 firms from the US and Europe.

The findings are largely similar to what the vendors themselves have been declaring: discretionary spending in new projects and expansion plans are going down while there is a short-term decision-making paralysis. "The Indian big six seem well-protected since their revenue portfolio is heavily weighed in favour of non-discretionary spend, mainly application development maintenance work. However, mid-tier firms will be impacted on multiple fronts — while the cost of new business acquisition will rise, vendor consolidation by customers may mean that the smaller players can get consolidated out," executive director of PWC Hari Rajagopalachari said.

When customers ask for lower prices, larger IT suppliers bargain for higher volumes in return. The increase in volumes can come from consolidation, mostly at the cost of the smaller vendor. But there is some good news, too, from the survey: Some of the traditional drivers of offshoring are being reinforced by the recession: 74 per cent of the survey’s respondents said labour cost arbitrage has become more important now than it was before the economic crisis came to the fore. About 51 per cent felt enhancing efficiency through business process redesign would be important, implying greater thrust on contract enforcement.

Given the liquidity crunch, an interesting finding on financing options said that IT service providers are now opening up to finance customers' projects — bear the customer’s upfront cost of investment. In the survey, some 31 per cent of the respondents were looking to delay projects, 23 per cent said they would spread the implementation of projects over a longer period. Only 25 per cent wanted to continue project financing as it is. The report does touch on emerging competition, particularly in the BPO space, from countries like Egypt that has an under-utilised workforce. However, Rajagopalachari said India will continue to bag the major chunk of the offshoring pie since there is maturity of processes and unmatched English language skills in the country.

India’s share of offshored product and software development in terms of implementations, however, is likely to go down to 40 per cent over the next five years from 50 per cent currently, the survey found.