But with every round of quarterly announcements, there’s a keen interest in the factors that may impact the Indian players’ remarkable performance, such as attrition, utilization, labor costs, foreign exchange, and billing.
In the latest round of quarterly numbers, pricing was surely one of the hot topics. Despite an appreciation of the rupee, the top companies were able to maintain strong margins due to efficiency improvements, lower expenses, and what was generally considered a favorable billing environment.
TCS got the ball rolling late last year with the announcement that it would be upping its billing rates for contract renewals and new signings. After the company posted its Q3 numbers last month, global head of operations N. Chandra said TCS had secured pricing increases of 3% to 5% on its renewals, which are usually applications outsourcing contracts, and increases of 5% to 10% on new contracts compared with its average billing rates.
Several trends have contributed to the higher pricing, Chandra said. Worldwide demand is very positive across TCS’ offerings. Apart from the core offshore business of applications development and maintenance, there’s been a surge in infrastructure services, testing and quality assurance, knowledge processes (often thought of as the high end of the BPO market), and a range of solutions around IT governance and architecture. Plus the size of deals is increasing, not only in terms of the dollar values but also the scope of services delivered to its clients, Chandra said.
Offshore firms bill most of their work on a time and materials basis, but Chandra said TCS fixed-price projects are up and deal sizes are also increasing. These engagements are typically in the $15m-to-$30m range and above; Chandra cited recent deals such as an SAP transformation for a major financial services company and a single-instance SAP delivery for one of the world’s largest engineering firms.
Most of the other vendors reported similar increases in the 3% to 5% range, but no one could match TCS’ pricing hikes on new deals. Infosys, for example, posted increases of 3% to 4% on pricing for new contracts, and between 2% and 4% when renegotiating existing deals.
Pricing continues to remain stable with an upward bias, said SD Shibulal, head of worldwide delivery and sales for the company. This was one of the reasons that a rupee appreciation of 3.8% over the last quarter only knocked two percentage points of Infosys’ margins.
Deal size was also a key factor for Infosys, with more contracts coming in at $50m or above. Looking at the sequential numbers, revenue grew 10.1% from Q2 to Q3, but revenue from the company’s top 25 clients was up 12.4%. Average pricing increased 1.7% quarter-over-quarter for onsite delivery and 1.9% for offshore.
Wipro, however, was the only big Indian firm not to post an increase in pricing, as billing remained flat on the quarter, which was otherwise in the same ballpark as its rivals. In a call with analysts, the company said the pricing stability was primarily because of the lesser number of working days in Q3 compared to Q2.
But the company said that of the deals it renegotiated during the quarter, between 65% and 70% have seen price increases. For those, the average price increase has been between 3% and 5%. Wipro also said it that when it can get better rates, it’s seeing higher rate increases on new signings versus renewals. Still, despite some increases, the company didn’t record an across-the-board pricing increase.
Satyam and HCL Technologies were more in line with the general pricing trend. Satyam’s quarter was the softest of the five Indian majors, but the company reported a 3% to 4% pricing increase, with particular strength in new contract signings. HCL said it increased average pricing by 3% to 5% and saw even better rates for its engineering contracts.
The overall pricing trend is surely welcome news for the big Indian vendors, but it’s easy to forget that these numbers only represent what went on during a single quarter. There are many variables that figure into billing rates, and contracts differ in terms of how often they are negotiated, and what types of pricing adjustments are built into them.
TCS’ Chandra said the company was now signing longer contracts, such as four or five-year terms instead of the ormal three years. But he said the company will revisit pricing at certain intervals for longer deals. Another factor is that increases for renewals, since they are measured against a previous pricing environment, may be less telling than new contract rates, which are measured against average current rates.
