Big local tech buyers push IT vendors for rate cuts

MUMBAI: Indian companies are asking their information technology vendors to pass on the benefits of automation and improving technology in the form of rate cuts and outcome-based pricing, highlighting the need for Indian IT players to speed their move away from the labour-based model.

State Bank of India, the largest spender on IT services in the country, is already asking for price cuts in contracts that have come up for renewal. The entire State Bank group, which includes the associate banks, spends Rs 3,000 crore a year on IT, and is leveraging its buying volumes and brand name to get better terms from vendors.

“During the past ten years, IT vendors have used improvements in technology and automation tools to reduce their servicing costs and improve operating margins. We are just requesting them to pass on some of the benefits as lower prices to us. This will accelerate going forward,” DS Mishra, deputy general manager for vendor management at the bank, told ET.

In some cases, the bank has managed to get a cut in service contract value on renewals, from a general rise in the past. Overall the bank says it has managed to buy hardware, software and IT consumables at prices lower by as much as 30% in some cases.

The State Bank group’s vendors include companies such as Infosys, Tata Consultancy Services, Wipro, IBM and Tech Mahindra.

Executives at software services companies declined to participate or comment for this story .

Spending on IT services is expected to rise about 16% to $13.2 billion in 2015, according to technology research firm Gartner. And even as spending increases, companies are looking more closely on how to improve their spending as contracts comes up for renewal. “When the first wave of outsourcing happened 6-7 years ago, people didn’t have much experience. Now that they’ve been through that process, they know where to tweak spending – and which parts of contracts to put on fixed price and which parts to ask for on outcome-based pricing and where the automation is happening,” Sanchit Vir Gogia, CEO and chief analyst at Greyhound Research, said.

Gogia added the banking and telecom sectors were increasingly looking at automation, as they are furthest down the outsourcing path. But other sectors are also looking at deriving the benefits.

“I think the expectation is that with automation, the service providers will be able to do more with less human capital. We expect that improvement in quality , better empowerment to the customers as well as benefits in terms of reduced timelines and costs,” Girish Rao, head – IT and business analytics at Marico, said.

But experts feel that the true benefits of automation will still take time to hit the markets. Indian IT companies have recently begun investing in automation technologies -by creating partnerships, building capabilities in-house and even going down the acquisition route. Earlier this week, Infosys acquired Israeli automation company Panaya in a deal that is valued at $200 million.

“These will benefit customers, albeit in the medium and long-term. In the short-term, the first movers will see margin improvement from these initiatives and the benefits will not move to customers till the return-on investment is achieved,” Ramnath Iyer, chief technology officer at rating agency Crisil, said.

But technology buyers at Indian firms agree that the improvements in technology and processes will help them optimise their spending.”The days aren’t far where CIOs can do reverse auction for services like they do for standard products like PCs and Tablets,” TG Dhandapani, CIO, TVS Motors said.