Firms see increase in revenue from fixed-price contracts

New Delhi: Over the past three years IT vendors in the country have seen a major jump in their earnings from fixed-price contracts, according to a report by Vishwanath Kulkarni and Moumita Bakshi Chatterjee of Business Line.

Fixed-price contracts, which help companies to derive better profit margins, now account somewhere between 38 and 48 percent of their total revenues for the top four IT vendors. Three years ago, the share of revenue from fixed price contracts was limited to between 22 and 44 percent for these vendors.
Usually, the Indian vendors had followed the time and material (T&M) pricing model, where in the billing was done on an hourly basis for the number of people deployed on particular project. Such a model supported the linearity in revenue growth where the topline grew in sync with the headcount growth. Now companies are increasingly going after fixed price contracts as they have diversified their offerings into areas such as managed services and infrastructure management among others.

Compounded by the pricing pressure and reduced IT budgets during recent downturn, the focus on fixed priced contracts became more pronounced and is likely to stay going forward. "It is a non-reversible trend," said S. Sabyasachi, Managing Director, Tholons, an offshore advisory firm.

"Fixed price projects are a mixed bag as the service provider has to assess and structure the pricing before hand," said Siddharth Pai, Partner and Managing Director, TPI India. Such fixed price deals place a higher risk on the service provider and not the buyer of services, he added. If service providers are not able to properly estimate the appropriate pricing model for the project, they may end up incurring losses on the project.

The focus on fixed price has forced the service providers to increasingly use their software engineering methodologies and leverage experience to reduce the risk element that comes with executing such deals.