As India’s top tech firms chase nearly $15 billion worth of outsourcing contracts to be renewed this year by global customers, they face increased competition from multinational rivals offering price discounts.

Around 422 outsourcing contracts, worth nearly $15 billion, are set to expire this year, providing an opportunity to Tata Consultancy Services (TCS), Infosys and Wipro, according to outsourcing experts.

“The time when Indian companies had a price advantage over non-Indian ones is gone,” said Siddharth (Sid) A Pai, partner & managing director at outsourcing advisory firm TPI India. “Global players have lower operating margin expectation and thus greater flexibility to offer discounts,” he added.

Multinational rivals IBM, Accenture, and Capgemini have increased their India presence to offer lower prices to clients by offshoring more projects to the country. At the peak of the economic downturn, global majors offered 35-50 percent discounts on high-end services, and continue to offer 8-10 percent discount till date, said Arup Roy, senior research analyst at Gartner.

Operating margin, or profitability, of Tata Consultancy Services, Infosys, and Wipro are between 17-30 percent, compared with 11-16 percent for Accenture and IBM. “Their Indian counterparts have an established reputation in financial markets of delivering higher margins, which will make it harder for them to offer lower billing rates, Mr Pai added.

TPI estimates that nearly two-thirds of the $15-billion deals are currently with companies from US and Western Europe. Around 89 percent of renegotiated deals are awarded to the incumbent outsourcing partner, Mr Pai added.

As an aftermath of the global slowdown, most of the remaining deals will go to larger, established Indian companies. An analyst with a domestic brokerage said India’s top-five IT outsourcing companies can easily expect $3.5 billion worth of new deals this year.

Large deals are being broken down and customers are outsourcing to multiple vendors where earlier there was only one. Accenture’s percentage of revenue from contracts, in which it is the only partner, has fallen from 60 percent to 50 percent in one year, said an analyst with an MNC brokerage who asked not to be named. Indian companies stand to gain from this, he added.

Volume of business outsourced to India, including to MNC operations in the country, is expected to rise to 40 percent of total outsourcing by the end of 2010 from 23 percent last year, he said.

“Outsourcing revenue from India will double.” Yet these new contracts will come at around 5 percent lower billing rates, according to an average estimate of five analysts. New business would account for around 20 percent of total business, given faster client addition affecting realised billing rates by 1 percent if all else remains constant.

Indian companies may also need to forgo some margins as clients aim for better service, which vendors have to commit to at the start of the contract, said Mr Pai of TPI.

“Companies will change services mix and billing models to absorb this hit,” the MNC brokerage analyst said.

Clients are also beginning to pay a premium for more onsite presence and alternate locations to India for some functions, which puts Indian players at a disadvantage, Mr Pai of TPI, that helps clients negotiate outsourcing deals, said.

Mr Roy of Gartner added: “Indian companies have several challenges to cope with like linearity in business model, high dependence on few countries and regions and high business volume from low end services such as application management.”

Source:http://www.tradingmarkets.com/news/stock-alert/tacsf_wit_mncs-local-cos-slug-it-out-for-tech-deals-886873.html