Leading IT companies are moving in to shore up their bottom line against further losses of contracts and blunt the effect of the plummeting rupee by increasing their share of fixed contracts as opposed to man-hour based billing.
Industry sources said that while man-hour based billing has been resorted to by Tier-II and -III outsourcing companies into the third quarter of the current financial year, the larger players are chasing fixed contracts even more in the face of deteriorating global economic conditions.
"They have to think long term by locking in key clients, because demand conditions in the US market are expected to be dismal into the next two quarters or so," an industry source said.
TCS, Wipro and Infosys have foreseen uncertainties in the American markets, which fetches roughly half of their revenues, much of it from banking, financial and insurance support services. Infosys Chief Executive Officer Kris Gopalakrishnan reportedly expects the economic slowdown to last between 12-18 months.
Infosys Chief Operating Officer and member of the Board, S D Shibulal, noted that fixed contracts are desirable both from a client's perspective as well as for the company. "For the clients, in these times of cost and competitiveness pressures, fixed-price contracts allow them to firm up their commitments and help bring in predictability into their IT spends....For us, it allows us to extract internal efficiencies and share the benefits with the clients without impacting the rates."
Manish Dugar, chief financial officer of Wipro Technologies, said that as a concept, fixed priced contracts provide the comfort of a fixed fee for defined outcome. "To Wipro, it provides an ability to optimise delivery and resources," he said.
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Noting that there is no perfect mix between fixed- contract versus per man-hour billing, Shibulal said, "Ability to make a project fixed price depends on the type of project, maturity of the service, concreteness of the requirements as well as the strength of relationships."
Over the last five quarters, Wipro has improved its proportion of revenues from fixed-price contracts from 24.6 per cent in the first quarter of 2007-08 to 31.6 per cent in the second quarter of 2008-09.
Wipro currently has 31.6 per cent of its revenues coming from fixed-price contracts, and sees significant headroom to increase it further, Dugar said. He added that the Bangalore-based outsourcing company stands by its guidance for the third quarter of the current financial year based on exchange rates prevailing at the end of the September quarter.
The current downturn is intensifying the search for non-linear growth, say industry watchers. Leading IT companies have deepened their focus on emerging industries like the music, media and entertainment, which hold forth new growth opportunities in digitisation and archiving, print publishing, pre-press services, online information services and digital advertising. Products will be another growth lever.
"Increasing our non-linear revenues is one of our key strategies and products form an important part of this strategy," said Shibulal, referring to Infosys' bestselling banking product Finacle which brings in just about 3.6 per cent of the services giant's current revenues, compared to 17 per cent for Wipro.
Dugar said that Wipro's system integration and total outsourcing contracts in global markets involve a good proportion of the company's products business. "Products are central to our overall growth strategy and not necessarily driven by economic environment,” he said.
In any case, the US financial services sector has been temporarily knocked out as the engine of growth for Indian IT services companies. But the impending consolidation in this sector will throw up ample process re-engineering opportunities. Herein lies the big opportunity for India to tap in the last two quarters of FY 2009, industry experts said.