Financial Daily from THE HINDU group of publications
Thursday, Aug 26, 2004
Info-Tech - Software
Fixed price project income pie shrinks for software cos
Vipin V. Nair
Kochi , Aug. 25
THE software industry continues to bag and execute projects more on the basis of `time and material' bids than fixed price-based contracts, indicating client preference for keeping control over the work they outsource.
A look at the financials of some of the top ranking as well as medium-sized firms in the April-June quarter shows that many companies had a decline in contribution of Fixed Price Projects (FPPs) to total revenues during the period and the proportion of revenues from time & material-based projects consequently increased.
In FPPs, the fee for a particular project would be decided in advance and a deadline is set for its completion. It is up to the software vendor to finish the project before the deadline using any number of people and resources.
As compared to this, in T&M based projects, clients will be billed on the basis of time taken and manpower used. Clients will have more leeway and control on such projects. In FPPs, vendors stand to benefit if they complete the project before the deadline using minimal resources. The client, on the other hand, will have a clearer idea about his technology spending.
During the April-June quarter, Infosy saw FPPs as a percentage to its revenue coming down to 29.7 per cent from 35.9 per cent in the same period a year ago. Sequentially too, the software major saw a marginal fall in FPPs.
Wipro's FPP also fell during the quarter to 22 per cent from 32 per cent in the same quarter last year. Compared to the previous quarter (22 per cent) too, FPPs in the quarter accounted for a lower percentage of Wipro's revenues.
According to Mr Mohandas Pai, Chief Financial Officer of Infosys, the decline was due to the kind of work Infosys had done and growth in certain areas. The company intends to make sure that "wherever there is need for greater client interaction or some fuzziness about the scope", work would be done on the basis of T&M.
Mr Lakshminarayan, Head of Investor Relations at Wipro, said the main reason for the decline of FPPs is because the company wants to ensure that such projects are "well scoped, boundaries well defined and they are commercially viable." "Further, in certain cases where the effort estimation and end-deliverables cannot be fully crystallised upfront, we prefer them to be T&M projects," he said.
A top official of Patni Computers, which has a very high share of FPPs in revenue in the industry, says that the share of FPPs indicates the maturity of a vendor in terms of his ability to deliver projects on time and at the desired quality.
"Increasingly, consumers are asking for more predictability in their (IT) budgets. For the vendor this means that you have to put the money where your mouth is," said Mr Deepak Khosla, General Manager, Marketing. However, Patni too had a drop in FPP revenues in the April-June quarter. But Satyam and Mastek saw FPP revenues increasing in the quarter.
Mr Pai of Infosys argues that though it is advantageous for clients to go for FPPs when the nature of work is very clear, they prefer T&M based projects in cases where they want to have control over the work, change the scope and engage in more interaction with vendors.
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