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IT firms trading margins for big deals: Forrester

K Giriprakash in Bangalore

Large Indian information technology companies are compromising on margins as they chase bigger deals, leading research firm, Forrester Research said.

"The contracts are getting larger but at the same time margins are getting squeezed," Forrester Research Inc group director John C McCarthy said.

One of the recent mega deals bagged by Indian IT firm is the up-to-$70 million order from global investment banker Lehman Brothers to TCS and Wipro. The contract is related to application and infrastructure management.

Forrester Research identifies and analyses emerging trends in technology and their impact on business.

McCarthy said users initially get smaller projects done by several vendors and shortlist a few from them to bid for a bigger contract and those who get them are the ones who have bid the least.

"This way they are getting another round of savings," McCarthy said. Indian IT companies may be bagging bigger deals but they need to ask themselves whether their bottomlines are improving, McCarthy said.

"Right now the market is valuing these big deals but in the long term it isn't helping them," he said.

McCarthy who focuses on offshore outsourcing is currently on a visit to India to conduct research on industry trends and off shore models.

McCarthy said another worrisome factor in the Indian IT industry is that bigger players are bagging most of the contracts while the second tier players are getting squeezed out.

"It is not a healthy trend. The top 10 have more than 50 per cent of the business," he said.

McCarthy said in the event of the US going to war with Iraq, number of client visits may decrease but there will be increasing pressure on the US-based companies to outsource more of their work.

"You have got six to 12 months and depending on how the US economy shapes up, one can say whether the IT industry has stabilised or not," he said.

He said in some ways, slow recovery of the US economy is good for the Indian software companies as more work will be outsourced.

"As long as there is off again, on again situation in the US, it is better for the Indian software companies," McCarthy said.

McCarthy said Indian IT companies are increasingly getting business more from existing players than from newer ones, which is a cause for worry.

"If they don't get business from newer players, they always run the risk of losing the existing ones to others," McCarthy said.

He said there are several companies based in the US which are outsourcing work and these should be targeted by the Indian companies.

"The marketing challenge lies in getting Fortune 200 to Fortune 1,000 companies to outsource work to them," McCarthy said.

He said there are several others who may not be managing their IT work properly and there is a potential in getting them to do business with Indian IT companies.

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