In the quarter to December,
, and saw attrition at their highest in three years, driven by increased competition for talent between rivals as well as multinational companies and startups who are looking at people with similar digital skills for their business.
Wipro and Infosys indicated that clients seeking digital transformation, especially in areas related to Banking, Financial Services and Insurance are comfortable with the pricing environment.
Infosys CFO Nilanjan Roy stated that the company has started pricing new deals better although it will take time and they expect the entire industry to introduce similar changes.
“As digital talent starts getting pricing, we are able to show value to our clients in terms of the business transformation. Now, again, this is something we have started recently. It will take time to kick-in and we’ve talked about in the last quarter as well. But really that is the focus. If we can start getting into more that cost side and also making sure that we are not leaving any $0.03 and dollars on the table as part of our pricing negotiation,” said Roy during the Q3 earnings call, expecting that the price premium will be adopted across the market.
Similarly Wipro CFO Jatin Dalal observed that the company is witnessing a positive step on pricing. “ (Clients are seeing) The sort of scarcity of certain skill sets in the marketplace and Wipro’s ability to bring on board at the right time, at the point of impact to our customers. This has created a slight positive step in the pricing in the last few months,” said Dalal.
Discover the stories of your interest
Companies reported stable but continuing margin pressure due to increased subcontracting costs as well as multiple wage hikes and increments during recent quarters in order to meet client demand. Wipro reported 17.6% operating margin following salary hikes and increased lateral hiring. Infosys reported operating margin of 23.5% while balancing increased compensation structure for employees. However, the company remained confident about its supply management capabilities and even increased its revenue guidance above street expectations for the fiscal year.
TCS CFO Samir Seksaria added that pricing has been “ stable with an upward bias”. “We don’t look for short term variations to be discussed with the customer. Having said that, if you look at our business, our traditional services are differently priced, whereas the new age services have more pricing resilience,” he added.
But while new digital deals offer scope to improve costs, companies are also bound to continue servicing existing clients at pre-negotiated rates. TCS noted that long term customer relationships require a stable pricing mechanism.
“We are very conscious of our long term relationships with customers and the current situation in which they are in. The value 360 degree basis is more important for us and that determines the price that we charge and the price that they pay,” said N Ganapathy Subramaniam, chief operating officer, TCS.
Despite the October-December quarter being a traditionally weak period for the businesses, the three IT majors reported strong numbers led by increased digital spending in segments like BFSI, retail and manufacturing. The companies reported increasing pressure from supply side due to talent scarcity which is also leading to higher talent cost. This led the companies to report margin contraction in the range of 10-60 basis points, according to ICICI Securities. TCS stated that subcontracting costs have gone up from an average of 7% revenue to around 9.5% in Q3 adding to the cost pressure. However, analysts noted that companies are passing on the talent costs to clients leading to better cost management.
According to Mrinal Rai, principal analyst, ISG, the growth in pricing has been minimal even for new contracts within digital solutions for managed IT services. “IT solution providers are spending heavily on training and upskilling their employees and they have clients who are now ready to pay for specific skills. We have seen about a 4-7% increase in pricing for T&M (time and material) type of projects,” said Rai.
According to Ashis Das, research analyst at Sharekhan by BNP Paribas, IT companies are taking advantage of price increase given a large number of short duration programs as enterprises have to sign a new contract with IT vendors every time at the subsequent phase of transformation initiatives.
