Indian IT cos losing ground on pricing?

Bengaluru: Indian IT services companies are slowly losing their pricing power as global clients hold back spending decisions owing to recessionary fears.

Last week, HCL Tech in an investors' meet in the US hinted that price increases had become selective to certain pockets. This is in sharp contrast to the environment 6-7 months back when clients were ready to increase prices for compensating companies towards rising wage cost and other expenses. Even, many companies were able to get pricing premium on the back of sound demand. Industry experts said that pricing pressure has become an industry-wide phenomenon now for all IT firms and is likely to spill over to next financial year.

"This is sector wide (phenomena). All firms have either formally stated or will soon formally state they are seeing delays in client decision making. Pricing power is coming down for most firms and they are stuck in a double bind because they have also increased salary costs for mid-level employees," Siddharth Pai, an IT outsourcing advisor & Founder and Managing Partner of venture capital firm Siana Capital Management told Bizz Buzz.

Another industry expert said while the pricing power is still intact for on-demand project work, it is not the case for regular managed services.

"IT firms are facing pricing pressure because of competition, wage increases and limited pricing power. While pricing for in-demand project-based work is where providers can have some pricing power, there is limited increase in regular managed services. Only where providers have capabilities with visible proof points of delivering measurable business benefits through technologies in short duration, is where they can leverage some pricing power. Otherwise, there is a pressure on pricing," Global IT research firm ISG's principal analyst, Mrinal Rai told Bizz Buzz.

Meanwhile, the management commentary of HCL Tech has sparked debate over growth prospects of Indian IT firms in FY24. Shares of HCL Tech slumped 6.5 per cent last Friday, which was its biggest single day fall in six months, post the commentary. Not only, HCL Tech, the entire IT pack felt the heat with fall in share prices as market sensed it as a warning sign for all service providers."

Analysts at Nirmal Bang said, "it is not sure whether the IT industry will have great visibility about spending in 2023 as it expects budgeting to be delayed or short-term oriented (quarter by quarter), with the possibility of divergence between spending versus budget if economic conditions deteriorate." Despite the pricing pressure, IT firms have started winning large cost takeout deals, which are likely to provide some cushion against pricing pressure.