Friday, September 11, 2009

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Billing rate cuts may not lower delivery costs: Forrester

In a blow to mid- and small-size IT services vendors, technology research firm Forrester has said while these providers may offer lower billing rates than large offshore providers such as Tata Consultancy Services or Infosys Technologies, it does not necessarily translate into lower costs for the customer.

“The lowest hourly billing rates don’t always result in the lowest cost of delivery,” Forrester has said in its latest report.

Lower costs and greater flexibility are the most important reasons for many organisations to choose smaller providers over the tier-I providers, and Forrester’s report may have significant ramifications on future buying patterns. “But this does not mean tier-II providers should be avoided completely,” Sudin Apte, senior analyst, Forrester, and the report’s lead author, told ET.

Of the 300 or so tier-II firms, 10-15% provide value addition through specialisation around a line of service or technology, specialisation around an industry and business process, or a unique client experience, he said. The report mentions providers such as AppLabs (testing services), Microland (infrastructure services) and others such as Syntel and Kale Consultants among the mid-sized specialists. Sourcing teams in companies need to evaluate mid-sized specialists, depending on the needs and objectives of the relationship in terms of the value and duration, according to the report.

Apart from lower billing rates, the other reason for companies to opt for tier-II vendors is because they are flexible and easy to work with. Quoting the example of an European insurance firm that was adding two tier vendors, the report said this firm found its tier-I supplier not agile enough and demanding compensation for variation.

However, Forrester said the line-dividing flexibility and chaotic strategy was very fine. “Small providers often end up accepting work outside their comfort zone to defend the current revenue in an account. Then they start building capability, resources, and often effectively pilot the first project at client cost,” said Mr Apte.

The most common grouse against tier-I players was that they were becoming more like Accenture and IBM, and were no longer interested in small deals. They were pushy about volume ramp-up and no longer had the personal touch. Mr Apte said, tier-I players need to articulate their investments in building IP (intellectual property), innovation and manpower better to clients. “Clients are still looking at them as Indian companies with customer centricity, as being easy to deal with and as being transparent,” he said.

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