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Market is hot as ever: Forrester
By agencies
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Tuesday, 07 June 2005, 19:30 IST
BANGALORE: With a majority of top tier Indian vendors posting healthy results for the fourth quarter and year ended March 2005, a Forrester report has said that while the market is as hot as ever rapid growth could cause problems with customer service and quality of staff and deliverables.
These vendors continue to grow at very high rates and their profit margins continue to dwarf those of their U.S. and Europe based competitors. Indian investors were surprised by results from two of their tier 1 vendors and this dragged the stock markets down and created some negative press for the Indian markets in general but the fact remains that this market is as hot as it has ever been and buyers need to be aware of the dangers that this growth represents for them, the recent Forrester report said.
It added that between the third and fourth quarters of the previous fiscal, TCS showed a decline of between five percent and 34 percent in net profits from the previous quarter, depending on how the firm accounted for the decline.
TCS was able to reduce this to a five percent profit decline after adding back investments from the performance based incentive plans for the fourth quarter and subtracting an exceptional foreign exchange gain from the third quarter, it said.
In addition, Infosys issued lower than expected earnings guidance for 2005-06. Buyers should not be concerned about the viability of these vendors or this market as it is still booming. Clients should be concerned, however about the way the vendors rapid growth affects their service delivery.
The report also mentioned that all of the tier one vendors were growing and growing fast.
For instance, during the last fiscal Satyam grew by 28 percent and CTS, which has a fiscal year that runs from January 1to December 31, grew by a remarkable 59 percent. Such rapid growth can cause problems with customer service, quality of staff, project/staff turnover and quality of deliverables. The vendors are simply not able to hire and train enough qualified staff in such a short timeframe, nor are they able to effectively retain staff in such a competitive environment, Forrester added.
It cautioned that clients needed to protect themselves by undertaking measures such as auditing the HR practices and policies of candidate vendors; asking for minimum turnover clauses in contracts to prevent vendors from replacing qualified staff with new hires or less qualified staff; specifying seniority requirements for projects teams; and interviewing key staff and project managers.
Understand that negotiating low vendor rates make one susceptible to poor service. Today, one result of being a strong negotiator is that the vendor populates your project teams with low cost, junior staff, it said.
Another result is that the vendor tries to extricate itself from the project because it is not profitable enough. When negotiating, weigh the risks and benefits of negotiating to a price point at which the vendor no longer regards business as important or worthwhile.