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Margins squeezed as IT clients drive hard bargains

Sanjay K Pillai & Gagandeep Kaur in Bangalore

Indian software companies are facing new threats to their bottomline.

Their clients are now asking for more value per dollar even as it is becoming tougher for Indian companies to close a deal.

Additionally, though outsourcing will increase in line with US companies' drive to cut costs, the tenacity of the offshore model will come under close scrutiny.

"Though offshore billing rates will go up with onsite rates stagnating, the durability of the offshore model of software development will be put to severe test and margins will be under severe pressure", MAIT director Vinnie Mehta said.

Joseph Samuel, managing director of Nortel Networks India, told Business Standard, "Asking for more deliverables for the money is logical though we, as a company, have had no change in the relationships we enjoy with our partners like Wipro and Infosys. We do not see any change in existing outsourcing plans for the next eight months."

Managing director of e4e India, Sridhar Mitta, said, "The move to ask for more at the same rate is happening, but this is happening with respect to new projects and not the ongoing ones."

Sasken Technologies CEO, Rajiv Mody, admits: "Customers in the US are asking for more value per dollar. We are now looking at delivering more value through alliances with clients, implementing cost-control measures and generally telling our clients that we will weather the storm with them."

According to Shiv Prasad Krishnan, director, business integration service, Orbit-e, "Post-US slowdown, our experience is that sales cycles have increased. If it was four to six weeks earlier, now it is eight to ten weeks. There's a great amount of caution being exercised by CIOs of the companies now."

"Though companies have not started reducing their profit margin as of now, it'll happen soon. It's more of a motivation issue than money-related. Companies don't want their employees to sit idle - it is very demoralising. They would want their employees to be occupied and, to this end, might reduce their profits," he added.

Digital India marketing head, Ashish Basu, said, "We are definitely seeing our clients becoming more cautious and asking for stronger justifications for every dollar spent. But, as a company, we have been preparing for it and we are much better off because from the very first day of our operations we have had a global presence rather than just a regional presence."

Suresh Prabhu, service line manager, Cambridge Technology Partners, also admitted, "The pressure on margins is definitely there. The sales cycle has also increased. Companies have become more judicious and are cautious about spending a large amount of money. This is more of a rationalisation and consolidation phase."

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