IT majors sign new deals at a discount – offshore rates benchmark study
SOURCE: EconomicTimes
DATE: March 5th, 2009
Mohit Soapbox:
Rate negotiation and mostly a downward trends in rates is the call of the day in todays outsourcing arrangements. With pressure on IT budgets and everyone being asked to do more, asking vendors to reduce pricing is indeed happening very actively. We are benchmarking offshore rates and negotiating for our clients lower rates for IT, BPO activities across the spectrum. A concern which comes up in the negotiations is that will it reduce quality of people and deliverable if the vendors are forced to reduce the rates. Currently we are not seeing that with the vendors. Another trend which seems to be happening today is the extension of # of days for receivables. For smaller and mid size firms this is more of an issue. For the larger firms this results in really more a revenue recognition issue.
We are putting together an outsourcing benchmark study for a few of our clients and we find that a 12 to 20% rate discount seems to be the range in the IT outsourcing activities and 10 to 15% on the BPO side. For onshore component of the activities the rates are lower ( and given the exchange rate with Indian Rupees ) firms are willing to offer deeper discounts. Though the firms are reducing their onshore presence and moving the client engagement staff back to home base. Managed Services or transaction based pricing which is typically in longer term contracts has moved but not as significantly as the FTE rate cards.
There is an increase in the program cost for some of the outsourcing activities too, specially when it comes to compliance and operational due diligence. For firms which have a mature outsourcing relationship, managing compliance post- satyam and internal reporting needs have risen dramatically. Firms are brushing up on their risk management policies and procedures as it relates to outsourcing and offshoring and being more pro-active about managing operational and financial risks with their vendors.
Corrystone Global Partners is an outsourcing consulting firm providing benchmarking, operational risk compliance, operational audit and transition management services to companies with operations in US and India. We work with firms which are exploring India or low cost US locations for IT, Business Process work and or have established IT/operations in India and US and are looking at ways to further optimize cost and manage operational risk.
Top Indian tech firms such as TCS, Infosys, Wipro, and HCL are signing new outsourcing contracts at 15-20% lower billing rates than last year, as customers including BT, Bank of America and Citibank renegotiate existing contracts and award new projects at much lower rates.
Over the past two quarters, customers such as Visa, Best Buy, Applied Materials, Nissan, Citibank and Bank of America have been in discussions with India-based service providers, asking them to help these companies cope with lower information technology budgets.
“The biggest fall has happened for high-end services such as consulting, from over $60 per hour earlier to around $40-45 on an average,” said Sabyasachi S Sathyaparasad of Mindplex Consulting, an outsourcing advisory firm. “The rates could fall by up to 20% in the coming few months, but should get stabilised after that,” he added.
Outsourcing customers are using the downturn as an opportunity to question high margins of Indian service providers. Top five Indian software companies renegotiated almost $1.5 billion worth of outsourcing contracts since September last year at around 15% lower rates.
“Some customers are asking us to let go on our high margins and take offshore projects for as low as $15-20 hourly billing rates,” said an official of an India-based offshore provider.
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