The rise in unbilled revenue that Indian outsourcers are obtaining need not be of major concern, providing these firms watch their cash flows carefully, says one financial analyst. This steady increase in trade receivables (amounts owed a vendor after completing a service) and unbilled revenue simply reflects changes in business practises, he says, with the market shifting toward fixed-price contracts.
“Unbilled revenue is basically revenue for the work you’ve done for a client for which you’ve not yet billed,” says IT Analyst Abhishek Shindadkar with financial services firm ICICI Direct.
The gap between receivables and revenue growth has widened for a few quarters now, with unbilled revenue currently accounting for 17% to 33% of total revenue at some of India’s leading IT firms.
The growth in receivables and unbilled revenue is a consequence of the increasing market preference for fixed-price contracts. With clients tightening their IT budgets, more large-scale transformational projects are being launched, with billings based on milestone achievements instead of traditional time and material based contracts, in which customers paid based on the number of hours worked by each staff member. These more complex contracts generally take longer to be billed, with the revenue often not appearing until the next quarter.
For India’s traditionally risk-averse IT firms these large, milestone-based contracts represent a significant policy shift. Fixed-price contracts can be mutually beneficial, but raise the risk clients could delay payments if they believe the milestones have not been reached.
But in general the rise in unbilled revenue does not mean outsourcers are missing their delivery targets, says Shindadkar, only an inevitable lag between the work performed and the billing, which would not occur in more straightforward BPO or “billed-for-time” projects.
Unbilled revenue typically increases in a recession or times of uncertainty
Although Shindadkar believes “it’s not anything specific to India,” he agrees this rise could be taken as evidence that the country’s firms are moving up the value chain to higher level work.
Seeing a rise in unbilled revenue for an outsourcer should not warn customers away from considering such a firm, he says, provided that there are no untoward impacts on its cash flow and its accounts are being managed carefully.
Unbilled revenue typically increases in a recession or times of uncertainty, as customers ask for more credit or more time to pay.
The growth in unbilled revenue has also seen an increase in the average debtor days. Debtor days, or collection cycles, are the number of days it takes for a company to receive payments. Longer debtor days can put added pressure on cash flows, which are crucial for IT companies, as monthly salary payouts account for more than 40% of revenue. A reduction in cash flow would mean a further loss in revenue, as outsourcers also lose the interest normally earned from bank deposits or short-term investments.
“Unbilled revenues are bound to be there in the system,” he adds, “but as long as they go in line with revenue or below revenue then that’s fine. If revenues go through at a slower rate than unbilled revenues and receivables then that’s a sign for concern.”
This post first appeared in Global Delivery Report