By Varun Sood & Indu Nandakumar, ET Bureau | 15 May, 2014, 04.17AM IST
BANGALORE: Delayed payments and lower profit margins are discouraging Indian software providers from actively bidding for large government contracts in the domestic market, in a sign of growing disenchantment with the once favourite outsourcing projects.
Top software providers, such as Infosys, HCL TechnologiesBSE -0.18 % and MindtreeBSE -0.54 %, have in the past provided technology outsourcing services for flagship government contracts, including Aadhaar and modernising India's postal department.
But now these companies would rather bid for just private-sector deals in the country, put off by slow decision-making and policy challenges in government projects, further shrinking the size of an already small market.
Ajit Kumar, president at India's fourth-largest software outsourcer HCL Technologies, said it has become increasingly "tough to make money out of technology services in India" as a large chunk of the spending is by government. "We have learnt lessons from government contracts," he said.
The decision to stay away from government contracts is also driven by non-payment of dues by various departments. While this could have a short-term impact on revenues from the domestic market, senior executives said it would help IT companies avoid losses and long-waits.
Government spending accounts for about one-third of the overall spending in the domestic IT market, which industry body Nasscom expects to grow 9-12% during fiscal .. during fiscal 2014-15.
Infosys, which gets 2.6% of its revenue from India, said in April it approached the government IT department through Nasscom to discuss ways to grow the domestic software market. "Most of the problems arise due to government's resistance to change," said CN Raghupati, head of InfosysBSE 0.10 % India business, adding that the Bangalore-based software provider plans to focus more on winning contracts from private sector companies in India.
He said Infosys is being particularly "careful" while working on integrated deals where the service provider has to provide software, hardware and other services. "The new government will need time at least until next March to settle in. We don't expect any major government projects until then."
While most Indian software providers operate at a 20% profit margin in large markets such as the United States and Europe, they say profit margins in India fall in the single digits due to late payments and delays.
"The irritating part is that government procurements are not based on quality but who can do it at the lowest cost," said Rostow Ravanan, chief financial officer at Bangalore-based Mindtree. "And then you have to spend a lot of time in getting your requests approved; all of which cause delays."
In fiscal year 2013-14, the government spent close to Rs 20,000-crore on IT, according to Nasscom.
Last year, Infosys faced over a sixmonth delay in receiving payments for its Rs 700-crore contract to modernise India's postal department, while the roll out of digitised public distribution systems in several Northern states have been delayed by over a year, experts said.
Milan Sheth, partner and technology sector lead at consulting firm Ernst & Young, said lack of profitability in government contracts is not limited to India and that working with private sector alone could impact revenues.
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