Will Offshore IT Prices Rise? Yep!

If the major reason U.S. companies went offshore for IT services was to cut costs… then the latest news out of India may portend a change. Or not.

In this article today on the Economic Times India Web site, it was reported that Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies are beginning to see an uptick in pricing, which the article says is being driven by higher salary costs and an improved business environment. The bottom line: as much as a 5 percent price hike.

According to the article, “rising wages, inflation, and attrition of key staff” are pushing up the billing rates of outsourcing contracts. Moreover, the article says, many new contracts “now come with clauses that address the risks of future salary hikes, foreign currency fluctuations, and inflation in countries such as India.”

The article even cites portions of larger contracts outsourced by the American likes of Citibank , JPMorgan, Wal-Mart and others have rates that are at least 1-3 percent than three years ago. One senior executive at one of the (unnamed) top five Indian tech firms says higher rates are being driven by the fact that contracts are now being tied to business outcomes and are enabling the Indian firms to charge more. The executive also says his (unnamed firm) still has lower rates than IBM and Accenture.

The article also pulls in interesting stats from brokerage and investment firm CSLA that new contracts were being signed at the peak rates that services providers were able to command in 2007-08, and quotes CLSA analysts Nimish Joshi, Bhavtosh Vajpayee and Arati Mishra from CLSA, who said in a recent report from the firm that “pricing has been an elusive variable for Indian technology firms over the last 3 years. In the slowdown, it took just a few months for pricing to drop 3-5 percent, but it has taken over 18 months of strong volume growth for a shift in vendor outlook on pricing.

There’s no doubt in my mind that prices will rise. The Indian firms all reported healthy earnings recently, and the economy, and particularly the IT and tech sector, is starting to pick up. I heard a report on National Public Radio this morning that there’s a palpable optimism in Silicon Valley, which was not immune to the financial meltdown (despite early beliefs that technology was immune and existed in its own impenetrable economy).

Of course, I don’t for a minute believe that higher prices for Indian IT outsourcing services will curb the U.S. appetite for Indian IT outsourcing services. That’s mainly because the cost of those same IT services will tick up here in the United States, too.

What do you all think? Do you think these 5 percent increases for Indian IT outsourcing services will have any impact on offshoring? Let me know. Toss in your comment. Share your wisdom.