Rising wages, inflation, and attrition of key staff are some of the reasons driving up billing rates for outsourcing contracts. Most new contracts now come with clauses that address the risks of future salary hikes, foreign currency fluctuations, and inflation in countries such as India.
Some portions of larger contracts outsourced by customers, including Citibank , JPMorgan , Telstra, Wal-Mart and American Express, have come at least at 1-3% higher rates than three years ago, senior executives at vendor organisations serving these clients told ET.
"When you are linking work to business outcomes, the risks and rewards are higher," said a senior executive at one of the top five Indian tech firms. "Though still at lower rates than IBM or Accenture, we are now able to charge more for consulting projects, and all this is helping us get better rates," he added.
Though it has taken more than a year of improving demand for prices to start going up, companies are now being able to raise rates by 1-2%, brokerage firm CLSA said in a report earlier this month. According to CLSA analysts, new contracts were being signed at the peak rates that services providers were able to command in 2007-08. Pricing, usually calculated depending on the number of hours put in by each employee involved in the project, is expected to have gone up at least 8-10% for new projects.
"Pricing has been an elusive variable for Indian technology firms over the last 3 years. In the slowdown, it took just a few months for pricing to drop 3-5%, but it has taken over 18 months of strong volume growth for a shift in vendor outlook on pricing. Infosys had reported a 1.4% quarter-on-quarter increase in offshore pricing in the December quarter and there were doubts on sustainability of this pricing trajectory. However, discussions indicate that there are more legs to the pricing uptick," Nimish Joshi, Bhavtosh Vajpayee and Arati Mishra from CLSA said in a report.
IT contracts come with a clause that allows for fluctuations in pricing depending on the inflation and cost of living in the vendor's economy and buyers of IT services have also been taking India's high inflation into account to give price increase. According to CLSA, with 4-6% revenues in any year coming from new business, it should add 40-50 basis points year-on-year to portfolio pricing. Overall, IT players would be able to get a 1.5-2% year-on-year pricing increase in the next financial year.
Improving employment scenario and shortage of trained manpower is leading to higher wages in the technology sector in the US. As wage hikes lead to IT costs for companies rising internally they are more likely to increase prices for vendors.
In the past few years, Indian IT players have been striving to move away from the per employee, per hour billing model to a non-linear one where pricing is outcome based or fixed. This helps companies provide more high-end services like consulting and analysts say this is also helping companies command better prices.
"There has been a move away from the full time equivalent model to more transformational work and fixed cost pricing. All these moves will help pricing. In the coming financial year it is difficult to say how pricing will be but there is a much deeper pipeline and that should help," Siddharth Pai, MD of TPI India , said.
As momentum returns in the world economy and companies gear up for growth once again, the return of discretionary spends is also likely to lead to new contracts at higher prices. The top ten players are better positioned to take advantage of higher rates as they would have greater bargaining power due to the breadth of services and end-to-end capabilities.
