Variable pricing

SMARTSHARE

The other day I had the privilege of being a fly on the wall as the CEO of an Indian retail chain negotiated with various IT companies in search of an end-to-end solution.

The retailer needs to control and monitor functions ranging from warehousing/inventor/supply chain management to CRM (customer relationship management) and HR.

One of the fascinating aspects for me was the sheer range of the quotes. The lower-end ballpark estimates worked out to Rs 80 lakh and the high-end went upwards of Rs 4 crore.

It is understandable that there will be a huge range to the quotes when, for example, ONGC wants a customised online archive of its prospecting data or an airport wants a full IT-solution.

The sheer scale of work in each case is massive; also, the solution may need to be designed from scratch to fit unique needs; the downtime has to be zero etc.

But here, it was about vanilla customisation "" retail is retail, whether the solution tracks clothes, perfumes or sex-toys.

Every solution-provider was pitching to customise and link versions of existing modules. The ballpark estimates in terms of the number of man-hours required for customisation and implementation were much the same across all the IT-solutions firms.

Therefore, the key pricing variables must have been (a) the original cost of the solution package, (b) each solution-provider's estimate of what its own time was worth in terms of man-hours. The price warriors were offering 70-80 per cent discounts to the top end quotes.

India is a price-sensitive market and it's also an immature IT-market with an entire range of industries just waking up to the possibilities of productivity gains through leveraged IT. Once the market settles down, so will the pricing variations "" probably close to the lower end of the spectrum.

But observing these negotiations offered an insight as to the sort of creative destruction Indian IT companies have caused in the US and the EU markets.

If an IT price warrior in a price-sensitive Indian market can offer 70 per cent discount to the top-end quote (by another Indian outfit), it could probably shave 90 per cent off the top quote in the US/EU and still keep a nice margin.

One reason why Indian IT companies have been reluctant to enter the domestic market is because margins are lower. But in the next year or two, the size of the Indian market will expand significantly. Infrastructure and logistic management, retail, even mid-range manufacturing, state governments; these are all new IT-solution adopters.

Every access-controlled road is designed with smart tolling booths, every airport modernisation project involves massive IT induction, competing retail chains will live or die by their ability to manage supply and inventories.

Unbundled power utilities and national grids will need IT. And CRM is a catchphrase in fast-growth industries such as insurance and healthcare. Domestic outsourcing is also an increasingly popular trend. We could be very close to an inflection point in domestic growth.

There are two ways to try and benefit from this growth as an investor. One is to drill down and do deep research trying to discover who bags which contract.

The other is to buy IT-specific funds and let the managers do that work. Technology funds returned an average of 41 percent over the last five years.