IT firms charging premium for digital deals with niche skills

Indian IT services companies have typically played the pricing card to win traditional outsourcing contracts against global players like International Business Machines (IBM) Corp. and Accenture but the demand-supply gap in digital has changed the game.  They have now begun charging a premium for digital deals that involve niche skills which potentially add greater value to clients. 

Infosys Ltd indicated during its third quarter earnings that pricing has seen some level of stability compared to the previous quarter. “We have put in place a very focused effort on communicating the value that we are helping create with our clients through the digital programs,” chief executive Salil Parekh said during the Q3 analyst call.  

Digital revenue continued to grow for Infosys at 42.6% year-on-year in constant currency and accounted for 58.5% of the total revenue in the December quarter, up from just about 50% in the year-ago period.  

As the share of digital deals rises, Infosys sees an opportunity to garner price increases in the long term. “On the pricing, as the digital work will increase…the value creation through digital will give us a larger opportunity for that (price increase) because the revenue will be larger,” Parekh added.  

“Within digital, cloud is growing much faster as Infosys’s cobalt cloud capabilities are resonating well with clients. With signs of improving pricing, Infosys is likely to benefit more with increasing share of digital revenue,” said Aniket Pande, research analyst at Prabhudas Lilladher. 

For Mindtree Ltd, the demand environment for digital transformation services and capabilities continues to be robust and broad-based. As a result, “the pricing continues to be stable with an upward bias in deals reliant on premium digital skills,” said Debashis Chatterjee, CEO & MD, Mindtree.  

The management of Tata Consultancy Services Ltd (TCS) also indicated that the pricing environment is stable with an upward bias. “We are seeing a slight uptick in pricing in the current quarter. And we should be able to get some of it, but keep it balanced by the fact that in long-term existing customer relationships, we will need to be more nuanced about it. But overall, there is definitely an expectation of a rising pricing environment,” Rajesh Gopinathan, CEO & MD, TCS said during the analyst call.  

Experts believe the pandemic has led to a spike in demand for digital talent across sectors which has resulted in an experienced talent supply shortage relative to demand. “Therefore, IT companies are able to charge a premium for niche technology skills for which talent is not widely available. However, they have also realized that this is not sustainable, so everyone is increasing their fresher hiring which is the cheapest trainable talent available,” said David D’Lima, an independent IT consultant.      

To be sure, higher pricing translates to increased margins for these companies. However, margins remained stable during the third quarter amid continued pressure due to supply side challenges and higher talent retention costs. 

For the December quarter, the operating margins of Infosys stood at 23.5% compared with 23.6% in the September quarter while that of TCS contracted to 25% from 25.6% in the preceding three months.