IT industry needs to start search for 'pricing power'

By SiliconIndia   |   Friday, 27 July 2007, 07:00 Hrs
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Mumbai: The hit on the cost side because of an increase in employee costs and on the revenue side because of a rise in the value of the rupee against other currencies has taken a toll on the IT industry. It needs to figure out if its clients need it enough to allow them to raise prices, reported The Economic Times.

Most companies whose contracts are up for renewal expect to increase price by at least 1-2 percent. But this is unlikely to nullify the 5-6 percent decline in profit margins. One stark indicator of the state of the industry is the return on incremental capital employed, essentially the additional profits generated by deploying additional capital in the business. On this criterion, most top firms have shown a decline over the last two years.

"IT companies have done a reasonable job till now but if the rupee and the wages keep rising then they will need to do a lot more," Partha Iyengar, Regional Research Director, Gartner told ET. Most industry experts feel that the IT companies may not be doing enough. The IT industry has always relied on external triggers to show the way. It was Y2K in 1999 and then the internet mania in 2000 that shaped the business model of the industry. And that was setting up a process to move work offshore quickly and delivered in a 'factory environment.'

For almost all companies the core of the strategy will really mean figuring out how they deliver their bread-and-butter service: the application development and maintenance or ADM business. Since the ADM business is close to 50 percent of the revenues, any strategic move has to deal with this chunk carefully. Hence TCS is talking about using much more automation while Cognizant has set up a software factory at Coimbatore.

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