Big-ticket IT deals get rarer for outsourcers

Bengaluru: Information technology deals are getting smaller and scarcer by the year. Not a single order exceeding $1 billion has been awarded since January, compared with one such deal in the year-ago period and five in 2013, according to consulting firm Everest Group.

Outsourcing deals are getting shrunk both in value and duration, as companies ranging from banks to retailers cut their budgets to maintain the back-end technology and plough the savings in work that can help them improve their business operations.

The shift has prompted IT vendors, including Tata Consultancy Services Ltd, Infosys Ltd and Wipro Ltd, to invest in automation, design thinking and intelligent technology platforms, to help clients and generate more business.

“Deals, in general, are smaller,” said Joe Frampus, partner at Avasant, a US-based technology advisory firm. “Automation and digital strategies are beginning to rise and it will cost a client less. Several years ago, the cost may have been over $1 billion but because of improved technologies the spend is not there.”

“Revenue growth will not correlate to FTE (revenue generated by the employees working on a project) growth and a higher percentage of revenues will be based on the application of automation, process improvement and analytics,” said Bill Huber, managing director at Alsbridge, a US-based outsourcing advisory firm.

IT outsourcing advisory firms do not sub-categorize technology deals but take $1 billion contracts as a proxy to reflect the deal activity in the industry. Everest Group estimates that seven deals exceeding $1 billion each in value were awarded in 2014 and 10 in 2013. At least three advisory firms estimate that in the coming 12-18 months many of the 1,200 other deals, each more than $50 million in annual revenue, which come up for rebidding, are likely to get split between multiple vendors with smaller deal duration and value.

“Buyers now have greater flexibility to switch vendors and don’t want to get locked with a single provider for all their requirements. Larger deals (both in terms of total contract value and deal duration) have been, therefore, broken down into smaller deals with multiple service providers,” said Ritika Dhingra, an analyst at Everest Group.

Huber of Alsbridge said that deal terms are becoming shorter because of an expectation that new technologies will continue to emerge throughout the life of a long-term agreement, and it is difficult to anticipate specific contractual parameters to define how processes will be affected by these new technologies.

Both Frampus and Alsbridge said smaller outsourcing deals do not imply that IT vendors’ margins will take a hit as most companies have already started investing in tools that can do away with an army of engineers engaged in traditional low-end work.

“The use of automation is really playing havoc on labour arbitrage. (But) I do not believe margins are being affected. So the IT vendors may be sacrificing the topline but they are opening up more opportunities as they get to work more inside the businesses of the companies they support,” said Frampus.

Understandably, Infosys CEO Vishal Sikka is trying to bring a “cultural mindset change” in the way the country’s second largest software exporter has emerged to become an $8.7 billion firm since it was set up in 1981. Design thinking, a user-centric approach to enable the firm’s 180,000 employees to write simple codes, is one such initiative. Wipro, too, is banking on its artificial intelligence platform, Holmes, while India’s largest IT firm, TCS, showcased its first AI-powered technology platform, Ignio, earlier this month in New York.

“It is the best time to be a buyer…it’s a buyer’s market,” Wipro CEO T.K. Kurien said earlier this year, referring to how IT companies’ clients are in a “sweet spot” as they are able to dictate prices. “There is pressure in commoditized deals… There are fewer large deals and the only way you can grow is if you invest in automation and in other technology areas,” said Kurien, whose firm won a $1.2-billion outsourcing contract from a Canadian utility—its biggest order—last July.

“Overall, we are not seeing any increase in the spend,” Infosys chief operating officer U.B. Pravin Rao said in a Morgan Stanley-sponsored analyst event on 11 June. “There is tremendous cutting cost in some part of the business and reinvesting back in the discretionary spend…we are doing multiple things to get a larger share of this spending.”