It goes without saying what the Indian IT sector has done for the economy of India. From the time the economy opened up, Indian IT bellwethers put India on the world map. No wonder then that the IT / ITES sector continues to be one of the most significant contributors to Indian GDP.
Indian IT sector has for the most part has continued to grow at a healthy pace even during the financial crisis and economic crisis. However, things haven’t been rosy for the IT sector lately as the profit margins of these companies constantly face mounting pressures. The latest negative indicator for IT companies like TCS, Infosys, Wipro etc. seems to be coming in the form of billing rate reductions from some of the largest IT outsourcers in the United States.
Companies in the US are striving to negotiate for lower rates and are gunning to reduce the billing rates by as much as 15%. Mature outsourcers like Walmart, Cisco seem to have already started the trend with the likes of TCS, Infosys etc. expected to witness a 1-3% hit on the margins for the quarter.
The times are getting tougher for IT/BPO service providers for sure. Even as top companies continue to grow at 20-30% annually, a lot of factors are negatively impacting the profit margins for companies in the sector
- Operational costs are escalating for companies in the sector. For IT/BPO companies, cost of revenues is largely made up of employee salaries and the salaries have been rising consistently
- Regulators and Policy makers in the US especially don’t seem to like the outsourcing model especially as unemployment looms large in the nation. From offering incentives to companies to provide IT contracts to home companies to hiking Visa fees, IT companies are not only seeing reduced margins but also a bleak outlook for growth in the region.
- Issues on taxation have also been plaguing the Indian IT/ITES sector. Tax benefits for companies in the sector seem to have reduced and a few companies have recently come under the scanner for their tax payments
Will Indian IT/BPO Companies Be Able To Ensure Profitable Growth?
Well, growth is definitely not an issue because outsourcing as such is not going to go anywhere. However, revenue growth along with a healthy margin is going to be challenge going forward. Large companies in the sector are trying to get into high billing services like Consulting etc. and are also considering diversifying to newer markets beyond US.
I personally think the industry is going to reinvent itself incrementally if it needs to sustain in the challenging markets. As I pointed out in my Is The Indian BPO sector in trouble article, cost as a value proposition could have been the pillar of the IT/ITES sector but that alone is not going to suffice and companies in the sector will have to position themselves on quality and excellence along with cost.
What are your thoughts on the margin pressures for Indian IT giants? Will these companies be able to battle it out and find alternative ways to maintain profitability?