Industry experts say that milestone-related payments have become a norm in the IT industry, while, bank guarantees that the vendors need to provide upon winning projects, have increased to as much as 20 percent of the deal value from the earlier 5 percent. Their strategies include coughing up money upfront to sweeten the deal and win large contracts.
T Umakanth Rao, director, Zarlina Systems, said, “India’s top IT outsourcers, including the traditionally conservative Infosys and Wipro, are becoming increasingly risk-taking as they chase commoditised contracts. While cut-throat competition is giving more bang for the buck for customers, technology vendors are risking future cash flow and locking up resources.”
Commenting upon the risk on fees or milestone related payments, Rao said, “While bank guarantees have increased to as much as a fifth of the deal value, the aggressive pricing strategies being adopted by the IT companies in the locale and their promise of value-added offerings to win contracts have made customers cautious and they want to see results before paying up.”
“In the last year and half, we have seen customers holding back the risk-on-fees which we normally get upon completion of certain milestones,” said a bid manager working with a large IT company based out of Bengaluru. The bid manager went on to add, “Across industries, we have seen customers holding back this money which they normally give more in a staggered manner than at the time when payments are due.”
Naved Ahmed, director, MN Associates said, “Indian firms play the pricing card often these days as they battle with global majors like IBM and Accenture to win bread-and-butter outsourcing deals.” He said that in earlier years, the top Indian IT services firms in Koramangala generally avoided heated price competition with their professional brethrens both in domestic market and in global merchandise. “However, the IT services industry has definitely become more competitive, and today, we as an industry observer, see certain IT firms actively pursuing price-to-win strategies,” said Ahmed.
Giving credit to the sizeable improvement in the operating margins of the local IT outsourcing companies Sushanth K Nair, proprietor, Innova Team Software, a Koramangala-based IT company which has base in New York as well said, “Operating margins of the home grown IT outsourcers have significantly improved over the past two years. One of the biggest cost components for IT companies, is manpower, and technologies like artificial intelligence and automation for completing repetitive low-end work have helped them cut down on this cost.”
Giving caution upon the upfront payment for wining a big ticket contract, Nair said, “Delayed payment by customers and upfront spending could prove to be an issue in the event of turbulence in the markets these companies operate in, or if the customers face financial troubles. Promising tough-to-achieve milestones is another problem that could affect expected cash flow.”
“A pricing trend I’ve seen is Indian firms taking on more risk by tying more fees to contractual milestones – milestones that in a number of cases are tough to predict and achieve, especially as work assignments get more complex,” he added and continued, “This trend tends to occur on deals in which the client is large and experienced with outsourcing contracts and on deals in which an outsourcing adviser is helping the client with vendor selection and pricing.”
However, a large number of IT professionals in the locale who avoided being named confirmed the trend and said that it was more a function of maturity of the deal and depends on how effectively a customer was able to negotiate with an IT vendor. “Agreed! More customers nowadays are holding back fees in some industries but then this is more a function of what kind of contract it is. As more customers mature in their use of outsourcing and are able to manage their IT vendors, they will explore different models,” the professionals said.