IT revenues to get fixed-price contract support

Indian IT services firms with a higher percentage of fixed-price contracts are likely to see less contraction in revenue over the next few quarters.

Analysts say the impact of furloughs and project rampdowns will not have much of an adverse impact on IT firms with higher fixed-price contracts, as against those drawing more revenue from time and material (T&M) contracts.

Clients have increasingly started asking IT companies for deep price discounts against the backdrop of an industry-wide slowdown. An analysis of the top four IT services firms showed HCL Technologies (HCL) drew 68 per cent of its revenue from fixed-price contracts (according to the last reported data) — the highest among its peer group, while for Wipro it was around 60 per cent.

For the latter, the share of revenue from fixed-price contracts stood at 53 per cent at the end of FY19. Tata Consultancy Services (TCS) discontinued the practice of giving this break-up four years ago, but market analysts peg the figure at 50 per cent.

Among mid-tier firms, Hexaware Technologies derives above half its revenues from fixed-price contracts, while for Bengaluru-headquartered Mindtree it stands at 58 per cent.

“When a firm has a higher share of fixed-price contracts, the impact of furloughs being seen due to the Covid-caused crisis will be less, given these contracts provide revenue assurance. Even the profile of

UB PRAVIN RAO, COO, Infosys customers in fixed-price contracts is better,” said Parikh Jain, founder of Parikh Consulting.

JATIN DALAL,

CFO, Wipro

Unlike T&M — in which clients are billed based on the number of hours spent by each employee — fixed-price contracts give service providers the flexibility to decide the number of people to be deployed. This aids the profitability of the firm.

In the March quarter, managements of IT services firms also said that higher fixed-price contracts provided them with a leverage in protecting operating margin over the medium term.

“What has changed from the global financial crisis is that a large portion of our business has now become fixed-price,” Jatin Dalal, CFO of Wipro, had said in an analyst call last month.

However, Infosys has dismissed some concerns relating to T&M contracts, saying clients are more focused on business continuity at present. “I do not see any distinction between T&M or fixed-price,” said U B Pravin Rao, COO of Infosys.

I don’t see any distinction between T&M or fixed price. Initially, clients were worried about business continuity & safety of their employees. T&M, fixed price, or managed services – these are more of commercial terms”

We will have to take a reduction in both top line and profitability, but when you are able to lock in a business on a fixed-price basis, you are better at controlling your automation plans, pyramid and onsite/offshore mix”