For IT majors, the pricing power of 2007 is back

After resisting price re-negotiations for over two years now, customers of information technology (IT) services companies are finally coming around to hiking prices as the demand environment in major markets improves and there is greater awareness on vendors’ rising operating costs on account of soaring wage inflation.

So much so, pricing for new business deals in the IT sector could soon return to peak levels of 2007, when local players commanded very high pricing power, CLSA analysts Nimish Joshi, Bhavtosh Vajpayee and Arati Misra would have us believe.

“Across the industry, some pricing power seems to be coming back. New business is likely coming at 2007 pricing (10% higher than current pricing),” the CLSA analysts wrote in a note to their clients last week.

The regained pricing power of the service providers though is restricted to only a few customers and specific skill sets as of now, and is largely happening in new business deals.

Kish Gopalakrishnan, chief executive officer of Infosys Technologies, confirmed the trend saying the second-largest domestic software services company has been able to extract better pricing from customers in the recent past. “There have been some upward revisions in our pricing with some customers. It is across the board. We are now able to increase prices in some (new) projects and re-negotiate for projects (coming up for renewal),” he said.

The Infy chief, however, did not reveal the percentage of increase in prices and in which verticals they were happening. “It’s very complicated and depends on the ramp-up and growth of customers. So, it is very customer specific.”

According to Gopalakrishnan, one of the reasons for customers agreeing to price increases was better awareness amongst them on the trend of soaring salaries of Indian techies, which is eroding the profitability of IT services exporters.

“Everybody (customers) knows that compensations have gone up and so are more open to price increases than before,” he said. For Infosys, he said, higher pricing power was more pronounced in consulting and package implementation projects.

Wipro, Infosys’ smaller rival, has also been able to bargain for better pricing in some of its new deals.

“With the demand environment stabilising in North America and Europe, we are able to get better pricing. In general, better (price) realisation is conducive in an environment, where demand has picked up and companies have increased outsourcing,” a senior Wipro executive said, requesting anonymity.    

He said, over the last few months, Wipro has been able to increase pricing up to 6% in some projects. 

And as pricing improves, tech companies will be able to protect their margins, which was threatened with higher operating cost.
Gopalakishnan said any outcome of better pricing would be visible only in a few quarters from now. “Its (pricing increase) impact will not be seen now. It will take some time,” he said.

The CLSA analysts said even though they do not expect a big uptick in pricing, it could be tailwind that could aid margin defence, “Given that 5-7% of business in a year comes from new clients, a case for 50-70 basis points (bps) year-on-year increase in like-to-like pricing in FY12 does exist. With a 1% price hike on a like to like basis helping margins by about 70 bps,” wrote Joshi, Vajpayee and Mishra in their report.