Already working on thin margins, the information technology (IT) services industry in India will have to cut prices by 5-20 per cent over the next three quarters, say analysts.

Global clients continue to keep purse strings tight and very few deals are coming from traditionally large markets like the Americas and Europe, which account for almost 80 per cent of revenues of most Indian IT firms.

The billing rates of most Indian IT firms in the third quarter were either flat or were cut, compared with the second quarter of the current financial year. For instance, Infosys’ pricing in Q3 came down by about 1.8 per cent compared with the second quarter. The pricing for Mindtree in Q3 was almost flat when compared with Q2.

Most IT firms, say analysts, have already cut prices by 5-12 per cent for new contracts or while renegotiating the existing ones.

In many cases, to retain clients at the same price, IT vendors are offering additional services. They also agree to finish outsourcing projects ahead of schedule.

These measures are expected to be reflected in the balance sheets of the IT firms in the fourth quarter of the ongoing fiscal and the first three quarters of the next fiscal (2009-10).

Gartner says prices of IT services in outsourcing are anticipated to shrink 5-20 per cent in 2009 and 2010 due to an uncertain economic climate, IT budget constraints and general market consciousness. Further, cost-focused buying will be a key factor for IT infrastructure outsourcing services from 2009 to 2010, with much variability on each deal, it says.

“This is a tough environment and the only option before us is to manage costs optimally. With this in mind, we are expecting that the pricing (billing rate) may come down 4-5 per cent this (calendar) year. The industry can still sustain a cut, as the depreciation of rupee will help to a certain extent,” Phaneesh Murthy, CEO of Nasdaq-listed iGate, told Business Standard.

The financial services sector, traditionally a big client for the IT outsourcing industry, has been badly affected by the global slowdown. Sources say the slump in the sector may continue to stay for three more quarters. Many leading firms in financial services have already gone for a budget cut of about 25-30 per cent for the ongoing calendar.

“Pricing is challenging, as clients want to reduce their operating costs. The client today wants substantial savings. Definitely, there is going to be a price reduction, though I don’t know by what percentage," said a senior executive of one of the top five IT service companies.