For instance, Infosys Technologies, with two $40-million and three $30-million clients in the fourth quarter of 2002-03, saw some of them come back for price re-negotiations this quarter. As the company with the highest billing rates in the industry, Infosys was exposed to greater pricing pressure than its peers Wipro and Satyam.

For the three software majors, repeat business in the past few years, accounted for 80-85 per cent of revenues

Going forward, the key questions are: Will the pressure on billing rates ease? And will the rates start improving? These depend on the following:

Economic recovery

All hopes are pinned on economic recovery in the US. But current trends suggest that any recovery seems at least 6-9 months away. And since IT spending will pick up only after a lag, application development initiatives may be even further away.

Second, the decision cycles (from the start of an RFP to the clinching of an order) will continue to be 6-9 months or even longer in the coming months. So, in all likelihood, as existing clients ramp-up (say, a $10-million client ramps up to $20 million), the clamour for incremental volume discounts would only increase. For instance, Infosys had nine $20-million, 16 $10-million and 41 $5-million clients as of March 31, 2003, with potential for ramp-up in the coming months. Similarly, Wipro had 27 customers with annual revenues of $5 million and above and with additional revenue-generating potential.

Cap on billing rates

Even if the US stages a slow recovery, there may not be considerable upside to the current billing rates for two reasons. First, over the last couple of years, most US and European corporations have improved their understanding of the business model (especially, the cost structure) of the Indian players quite well.

Combined with their drive for cost reduction and efficiencies, they have been driving a hard bargain by entering into long-term annuity contracts at low billing rates for multiple years and volume discounts on ramp-ups. Second, players such as Accenture and IBM Global have been aggressively ramping-up their Indian operations to compete with Indian outsourcing majors in the coming months or years. This is likely to cap billing rates.

Innovative business model

The ability of players to compete in offshore outsourcing will hinge on devising innovative business models for growth. And only players such as TCS, Infosys and Wipro have the capability to evolve these business models for the future.

For instance, the president and chief operating officer of Cognizant Technology Solutions, Mr N. Lakshmi Narayanan, favours developing end-to-end solutions capability in the near term and be vertically focussed to achieve this objective. Mr Phaneesh Murthy, Founder, Primentor, feels that Indian companies will have to go in for IT outsourcing deals involving people and asset transfers. These may bring in negative or flat margins for one or two years but higher margins down the line.

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