Indian IT firms reviewing client profiles
By agencies   |   Tuesday, 10 May 2005, 19:30 IST
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NEW DELHI: Faced with intensifying margin pressure as a result of rising wages and increasing competition, top tier Indian IT companies are evaluating the profitability of client relationships and are extricating themselves from those that are not profitable or strategic enough and that are unlikely to grow or improve profitability, according to a latest Forrester report. “The Indian IT industry continues to post record growth numbers. Top tier Indian vendors are growing at a rate of about 49 percent per year. At the same time these vendors are under intensifying margin pressure. Today, some tier 1 Indian vendors-many of whom have more business than they can successfully accommodate- are shedding clients that are too small or not profitable enough. As they go through vendor selection and the contracts and negotiation process, clients must be aware of this trend and protect themselves from being abandoned,” the Forrester Research report claimed. The report says that while the wages have been rising in response to demand for qualified IT professionals-recruiting and retention costs are skyrocketing-intense competition in the Indian market prevents vendors from increasing rates to offset the increased cost. It also said “Up until 18 months ago, rates were actually declining due to competition.” As the IT outsourcing industry grew and matured, customers became savvier in dealing with vendors, the report said. “Companies have trained or hired experienced vendor management and outsourcing experts. The result: Some companies, particularly between late 2001 and early 2004, were able to negotiate very favorable terms with their vendors. Now, as vendor margins continue to shrink and demand continues to grow, vendors are looking for ways to grow the profitability of these low value relationships,” it said. The report also points out to a recent incident where a vendor allegedly insisted on increasing rates or threatened abandonment. It however did not identify the players who were involved. It recommended that to get high quality staff, and decent service levels, from top tier vendors, customers should expect to pay in the $24-30 per hour range for offshore work. “Vendor margins are under pressure, and many clients are willing to pay more than the industry average for the high quality staff. Clients that insist on very low hourly rates will likely get what they pay-low value staff. In master services agreement, companies must include minimum turnover or rotation levels to prevent bait and switch as much as possible. They also must include language that specifies the seniority and experience requirements for vendor staff. Companies must also include language in their contracts that prevents the vendor from declining individual work requests or statements of work, as well as from changing the rates for specific work requests,"it added.

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