IT firms offer flexible pricing to stay afloat
Bargaining power over pricing fell substantially owing to low IT spending by clients
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Usually, clients prefer to do cost takeout deals, in which they want IT vendors to take over people or buy assets or structure it for a longer term. So, deviation from standard pricing methods happens during the downturn - V Balakrishnan, Chairman, Exfinity Ventures & former CFO of Infosys, tells Bizz Buzz
Pressure On IT Budget:
- IT cos providing transaction-based pricing options to clients
- Portion of fixed-price contracts rose as compared to T&M ones
- IT firms also providing varied pricing models to win new biz
Bengaluru: Indian IT services companies are following flexible pricing strategies to provide clients’ incentives for continuing business with their technology vendors amid a tough demand environment.
According to industry experts, such pricing strategies deviate from the standard methods, indicating adaptability of IT firms to the current demand scenario.
“Usually, clients prefer to do cost takeout deals, in which they want IT vendors to take over people or buy assets or structure it for a longer term. So, deviation from standard pricing methods happens during the downturn,” V Balakrishnan, Chairman, Exfinity Ventures & former CFO of Infosys, told Bizz Buzz.
“When the environment is bad, clients come and say that they have a fixed budget and ask the vendor to find a way for providing a solution. This is because clients want certainty on the cost aspect. While it is beneficial for the clients, this is a problem for companies as it may hit the operating margin,” he added.
Since the last fiscal year, demand environment in the IT industry remains subdued. The overall growth rate of Indian IT industry has come down significantly in FY24. This has prompted IT companies to follow new pricing strategies like providing option of payment as they use, and deferred payment options among others.
In its recently released annual report, Infosys pointed out that it has entered into transaction-based pricing methods with clients.
“Pressure on the IT budgets of our clients has led us to deviate from our standard pricing policies and to offer varied pricing models to our clients in certain situations in order to remain competitive. For example, we enter into transaction-based pricing contracts with certain clients, who were not historically offered such terms in order to give them the flexibility to pay as they use our services,” Infosys said in its annual report for FY24. The risk of entering into fixed-price, fixed-timeframe arrangements and transaction-based pricing arrangements is that if we fail to properly estimate the appropriate pricing for a project, we may earn lower profits or incur losses as a result of being unable to execute projects on the timeframe and with the amount of labour we expected,” it pointed out.
According to the company, the portion of fixed price contracts for Infosys stood at 53 per cent in FY24, showing higher portion of such contracts as compared to traditional time & material (T&M) contracts. According to sources in the know, IT firms are providing such flexibility for quite some time now as the bargaining power over pricing has reduced substantially owing to low IT spending by clients. They, however, pointed out that discounts and deferred payments have been low this time around as compared to previous slowdowns.
