IT sees no signs of pricing pressure

Global macroeconomic conditions are expected to deteriorate over the next many months, but cuts in software contracts pricing of significant size, as seen in 2008, are unlikely, say analysts.

“During the 2008 global financial crisis, pricing declined by 5%-10% across Tier-I vendors. We do not expect the same to happen this time around,” said Pinku Pappan, analyst with Nomura Securities.

That’s after it had risen around 5% across all vendors prior to the meltdown.

But later, a majority of clients stuck to the same rates, so vendors are less likely to agree to cuts this time around, is the refrain.
Tier-I players would not like to lower prices and open the doors to smaller players, Pappan said.

According to advisory firm TPI, which tracks large outsourcing deals, almost 75% of the total contract value (TCV) of deals is won by the top 15 vendors comprising multinationals such as Accenture, IBM and the top Indian companies.

“Both these groups have much to lose if they engage in pricing disruption. They are likely to behave like a group or cartel by maintaining status quo in pricing,” said Pappan.

Ankita Somani, analyst with Angel Broking, said unless there is a huge cut in volumes, pricing is unlikely to head south.

“The IT players are enjoying a volume growth of 15% year-on-year. The macroeconomic conditions so far has had little effect on volumes,” she said adding that during these times most clients even avoid getting into a ‘Cola’ (short for cost of living adjustment) with vendors.

For multinationals, cutting price offshore would be a double-edged sword as it would lead to lower revenues and margins.

“When compared to Indian heritage players, multinationals employ more experienced staff. If they get into a price war,
the impact on their profitability is likely to be more severe than on their Indian counterparts,” another report by Nomura said.

In India, the IT firms make EBIT margins of anything between 20% and 30% compared with 12-15% for US firms in India and it comes down to single digits for European players.

However, some firms may look at passing on the rupee
depreciation benefits to their clients, though on a selective basis, the Nomura report said.

“If bulk of business provided is large, the companies might think of giving concession to the client. Also, if a vendor is interested in tapping a particular geography, some benefits might be given to clients who operate there. But such scenarios are rare,” said Somani.

Even if a pricing cut were to occur, it would be limited to a few clients that contribute the bulk of business, such as the top-20 clients of software firms, analysts said.