India's information technology sector limps out a slump, there is concern that companies may be taking shortcuts to preserve margins which have come under pressure because of increasing competitive intensity.
Indian companies, which have earned a reputation for delivering quality services at affordable rates and built a $100- billion ( Rs 5.3 lakh crore) sector, could be risking their image in pursuit of short-term gains, analysts and industry observers said.
The method they are adopting is quite simple - deploying less experienced and hence less expensive but more error-prone engineers where earlier they would put the best available resource on the job. And the main reason they are doing so is because the proportion of fixed-rate contracts in their revenue mix is rising - nearly 50% for some. At the same time, contracts where companies get paid for the number of hours an engineer works are on the decline.
From profit margins of over 30% during the outsourcing boom years that followed the Y2K crisis, profitability has now fallen to around 20% and is expected to be further dragged down by rising costs and competition. Revenue growth, too, is down substantially and will barely cross 10% in the year to March 2013.
"Service providers are left with little choice but to try and do everything to keep costs to a minimum so that they can squeeze margins out," said Sid Pai, president for Asia Pacific at outsourcing advisory ISG Information Services Group.
The changing nature of contracts is being driven by intense competition among service providers who are mainly now fighting for market share as the size of the pie is not increasing by much. New deals are mostly renewals of contracts that were signed about a decade ago and corporations in the United States and Europe are reluctant to raise spending on technology in an uncertain economic environment.
Following a recent client survey, technology analysts at BNP Paribas noted that "the quality of resources staffed by offshore India vendors on projects has significantly deteriorated recently because of margin pressures". "Some vendors appeared too eager to win business in a tough environment and may be over-committing on what they can deliver," they wrote.
Infosys and HCL Technologies, India's second and fourth-largest software companies, did not reply to emailed questions seeking their views. Wipro, the third-biggest software exporter, denied knowledge of such an issue.
The resulting fall in quality of services is raising dissatisfaction levels among large corporations, some of whom, according to industry insiders, have taken projects away from erring service providers and handed them over to a competing vendor.
"A lot of times, IT companies get the estimate wrong and are tempted to cut corners which may in turn impact the project quality," said Sanjay Dhawan , executive director at PricewaterhouseCoopers. "Repeated failed delivery by the IT vendor partner could force the client to evaluate other options."
In the recent past, a few clients have switched their IT vendors citing dissatisfaction over slow delivery or low-quality work. Aircel, for example, is believed to have discontinued its data centre services deal with Wipro while insurance firm Max New York Life parted ways with IBM for similar reasons.
Sharat Kumar, senior vice president and group delivery head for continental Europe at Mahindra Satyam, said that European clients are especially particular about quality.