Technology firms are banking on higher contributions from fixed price contracts to guard against flagging demand from clients in key outsourcing markets, say analysts.
According to brokerage and analyst firm Prabhudas Lilladher, fixed price contracts and the off-campus talent surplus created by weak hiring between fiscals 2011 and 2013 will provide IT firms the latency time required to respond to any eventuality – while utilisation rates continue to be low, it is the market recovery which should take centrestage, Lilladher said.
Over the last two years, faced by billing pressures from cost-conscious clients in the key markets of US and Europe, the IT industry has been forced to morph into settling for fixed-priced, outcome-based contracts from the earlier time-and-material method of billing for projects, according to ICICI Securities.
"Indian IT companies have successfully adapted their business model in the changing business environment. We believe that higher utilization and spiralling attrition along with anaemic net employee addition is a matter of concern. It could impact the business momentum if we see acceleration in growth momentum. We are seeing improvement in sales cycle. Moreover, clients are not pushing for the quick ramp-up of projects," Lilladher said.
Indian IT companies have managed to migrate their business model more towards fixed price contracts from 30.9 per cent of overall revenues in the fourth quarter of 2007-08 to 48.2 per cent in the first quarter of the current fiscal. Analysts believe that the higher contribution of such contracts gives more manoeuvrability to the hiring process. Moreover, weaker hiring in 2012-13 resulted in latency of freshers in the job market, providing an opportunity for the companies to hire freshers off-campus as well.
Fixed-price contracts are negotiated on the basis of the outcome or the quantum of work completed on a project based on the cost of effort put in actual result of these efforts. This has increased the pressure on Indian IT companies to deliver on projects within deadline keeping the cost of delivery low and optimising operational costs at the minimum. Currency volatility continues to be a major pressure point as most IT companies bill in dollars, adding to client pressure to get the project delivered at the minimum billing points.
Analysts say that such a direction also implies lesser headcounts and recruitment drives by companies who are pushing better utilisation of employee numbers and “benches” — the number of employees in an IT company who have not been assigned any project at a particular point in time.
While TCS, Wipro and Infosys have maintained that the business environment has stabilised and confidence is back among global CEOs, all three are still banking on employee numbers to prop up their operating margins, analysts note.
Wipro has been pushing fixed price contracts actively in the BFSI segment, says HDFC Securities. While, Infosys and Cognizant are restructuring their financial services divisions in the US in a bid to streamline decision-making and increase productivity through fixed price contracts.
Looking at the attrition, net hiring and utilisation of the Top 5 Indian IT companies — TCS, Cognizant, Infosys, Wipro and HCL Technologies — in the April-June 2013 quarter, Lilladher said that the situation is similar to the second half of fiscal 2010 when companies were slow on hiring despite improving demand outlook and rising utilization.
The Top 5 companies have witnessed an attrition spike in the first quarter of 2013-14. “Despite seasonality, we see the attrition of 19.5 per cent (highest in Q1, excluding Q1 of fiscal 2011) as higher than usual average,” Lilladher said.
Utilisation (including trainees) for the Top 5 is currently 72.3 per cent. Nevertheless, net hiring continues to remain weak since the first quarter of 2009-10, analysts noted.