Long blamed for shying away from risk, India’s technology firms are now beginning to take on projects linked to future milestones and are even acquiring customer staff as part of large, complex outsourcing contracts.
Such projects will help local companies compete aggressively with multinational rivals. This risk-taking is beginning to show on the balance-sheets of software companies like Tata Consultancy Services , Wipro, Infosys and HCL Technologies in the form of ‘unbilled revenue’. Simply put, this pertains to work completed for which a bill has not yet been issued to clients.
Unbilled revenue has now grown from anywhere between 17% and 33% of total revenues for some leading IT firms. This coincides with a rise in fixed price contracts. “It’s a double edged sword-but with the kind of cash we have, it’s more likely to help us snatch share from established multinationals than be a drag on our balance sheets,” said the CEO at one of the top five technology firms.
He requested anonymity because his company is preparing to announce earnings later this month. Unbilled revenues are different from normal receivables as the bill is yet to be issued by software firms to clients for the work that is already completed.
They can create some pressure on cash flows. Cash flows are crucial for IT companies as monthly salary payouts account for more than 40% of revenue. Even if IT companies have no debt, a reduction in cash flow would mean revenue foregone-like interest earned from bank deposits or short term investments.
“The trend we see is that collection cycles (number of days it takes to collect money from customers) have gone up,” says Abhishek Shindakar, IT analyst with ICICI Direct. “Actually, there are a number of factors responsible for the increase in unbilled revenue but companies do not reveal any of them,” he adds.
Companies such as Infosys, the country’s second biggest exporter, say unbilled revenues creeping up are not a risk, but reflect the changing nature of the business.
“The first reason for unbilled revenue going up is fixed price contracts going up; maybe in some cases the milestones have not been reached yet. The second reason is that we are doing more transformational projects and those are also milestone based,” says V Balakrishnan, CFO of Infosys.
By moving more projects to fixed price model, tech firms like Infosys are moving beyond the traditional system wherein customers paid them based on the number of hours put in by each software engineer.
“It will not have an impact on working capital since we ensure that our milestones equate well with our costs. Fixed price contracts are beneficial because the productivity gains also come to us,” adds Balakrishnan.
Shindakar and his colleague Siddhartha Sethia have analysed unbilled revenue and receivables for the top four Indian companies since March 2009. Their conclusion ranks TCS at the top and Wipro at the bottom of the ladder.
TCS, the largest among the four with employee strength in excess of two lakh, succeeded in bringing down the share of unbilled revenue to total revenue by 6.5 percentage points between March 2009 and 2011. In contrast, for Wipro, this number worsened by more than 9 percentage points.
Source:http://economictimes.indiatimes.com/tech/ites/it-firms-focus-on-fixed-price-contracts-coincides-with-spike-in-unbilled-revenues/articleshow/9276986.cms
