Software industry margins to be under pressure

MUMBAI: Software industry volumes are expected to grow annually around 20-25 per cent over the next three years. While pricing is expected to decline by 3-4 per cent in FY 2004 it is expected to stabilize by FY 2005. With higher investments required in marketing to win deals salaries are expected to rise in the range of 5-10 per cent over the next three years and will put pressure on the margins.

Existing clients are renegotiating contracts at 2-5 per cent discounts. However, the magnitude of reduction is small compared to the price reduction of 10-20 per cent witnessed last year. Besides, there is drop in new contract signing by clients on account of uncertain economic outlook. This implies delays/cuts in incremental IT spending by US companies which is major export destination.

Deals with new clients are being signed at a price discount of 14-22 per cent in case of offshore projects, while onsite rates have remain stable. Offshore projects are expected to suffer a setback on account of political backlash from the US and Europe over the movement of jobs to lower cost locations such as India.

However, volume growth for the industry majors is a non-issue as it continues to see the steady addition of new large customers and ability to provide multiple services. New projects are mainly coming from manufacturing and entertainment verticals. Financial services continues to remain a key industrial vertical.

Small Indian companies are targeting projects for development and maintenance work. The onsite proportion is likely to increase further due to package implementation and outsourcing contracts. This is further expected to hurt the margins.

Source: IRIS