Squeeze Time

It’s squeeze time now. A buyer’s worst nightmare in what is already a seller’s market. Software vendors,

already suffering from long sales cycles, are now facing billing pressure. What began as a bit of nudge in the first quarter of this financial year had by quarter three become a downward shove that is forcing companies to take corrective action — not the least of which was a cutback in salaries and a freeze on new hires. 

During the announcement of first quarter results in July last year, Infosys president, MD and COO Nandan Nilekani had announced that blended billing rates (the average of offshore and onsite rates) had come down by 2.8%. Offshore billing rates had been hit harder, moving down 6% while onsite rates had fallen by 1.2%. There was some let-up during the second quarter, but third quarter results again showed a substantial fall in realization rates. Said Nilekani, “Software revenues in dollar terms grew by 0.2% for the third quarter as compared to the quarter ended September 30, 2001. Revenue growth comprised volume growth of 3.4% offset by a price decline of 3.2%.” 

Similarly, Satyam is believed to have one of the lowest blended billing rates among the top companies. The company’s offshore billing rates fell nearly 3.7 % between the first and third quarters (from $ 24.75 to $ 24.3 an hour), while onsite rates fell by about 1.8% from $ 59.46 to $ 61.72 an hour. The only company whose billing rates have gone up in the last three quarters is Wipro Technologies. Between the first and third quarters, on site billing rates rose from $10,361 per consultant per month to $ 10,996 per month. Offshore rates too rose from $ 4261 to

$ 4465 per consultant a month. Wipro doesn’t give out hourly figures, but at the standard of 22 working days at 8 hours a day, it works out to a growth in onsite rates from $ 59 dollars to $ 62.5 and from $ 24 to $ 25.4 an hour in the offsite rates.

Compounding woes



Barring exceptions like Wipro Technologies, which gets a lot of its revenues from high-end sectors like R&D and Telecom (which however saw a steep drop last quarter), most companies have been hit by a multiplicity of factors. 

Indian software companies have in any case, had the lowest billing rates to begin with. Even within that — their offshore rates (work done in India) have been nearly half of their onsite rates. Despite this, Indian companies have traditionally preferred offshore work because the margins here have been higher. 

However, in the last few quarters, offshore rates have been the hardest hit, squeezing those margins ever tighter. At the same time, the downturn has resulted in a drop in the number of customers as well. As a result, there is fierce competition between Indian software vendors to get the few contracts that are available. In July last year, for instance, Infosys is believed to have quoted $ 20 an hour offshore billing rates to outbid TCS for a Verizon order. Finally, as high-end jobs are more difficult to come by, most companies are in fierce competition for software maintenance orders, which are more stable, but also the least paying. 

High volumes, low prices



Going by the above facts, one can imply a few things. First, that there is price war of sorts going on that may be good for the customer, but cannot be very good for the Indian software industry in the long run as it already works at one of the lowest rates in the world. This has made the software business today a high volume, low price business–again–not a good sign for an industry that has been trying to move up the value chain. 

Secondly, it implies that the billing pressure from new customers will slowly trickle down to existing customers who will—some already are—insist on renegotiating old contracts at lower prices. And finally, it means that operating margins and profitability will be hit where companies have not moved quickly to either cut back salaries or freeze new recruitment. 

The good news at the end of all this is that the slowdown is over and that things are looking up. Billing rates remain a temporary concern, not a long term one. The bad news is—no one knows if the rates will ever go back to their original levels when the rebound comes. The industry will then be faced with the prospect of moving very quickly from low value and high volume projects to low volume but high value work. The big question that arises then is–Are Indian companies taking sufficient advantage of the lull due to the downturn to prepare for that?

Sarita Rani in Bangalore