IT majors may take big hit as contract renewals drop

TE Raja Simhan | | | Updated on: Dec 05, 2021

Employees sit working at computers in the library of the Tata Consultancy Services Ltd. (TCS) campus in the State Industries Promotion Corporation of Tamil Nadu Ltd. (SIPCOT) IT Park in the Siruseri area of Chennai, India, on Thursday, Oct. 24, 2013. Tata Consultancy provides computer services and back office support to companies including Citigroup Inc. and Scandinavian Airlines System. The Indian software company also completed its acquisition of France’s Alti SA in July. Photographer: Dhiraj Singh/Bloomberg | Photo Credit: DHIRAJ SINGH

With re-orders seen dipping a third to $32 billion, vendors will have to go for new business in a difficult market

India’s IT vendors are likely to face strong headwinds as contract renewals are expected to dip and they may have to find new business. IT services and business process service contracts worth only $32 billion are expected to be renewed in the next two years down by over a third from last year’s renewal expectation worth $49 billion, according to a report by Everest Group, which tracks global ITS and BPS contracts.

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Indian service providers such as TCS, Infosys, Wipro, Cognizant, and HCL typically get 96-98 per cent of their business from existing clients, including renewals. With the renewal opportunity down this time, they have to hardsell to get new business to grow.

“Selling newer business is harder and, therefore, will need innovative and different practices. This will include building differentiated capabilities in highly commoditised markets where it is tough for service providers to stand out,” Yugal Joshi, Vice-President, Everest, told BusinessLine .

Digital transformation

Agrees Lakshmi Narayanan, former vice-chairman of Cognizant. Established IT players will face competition from mid-tier companies for new deals. This is particularly true when it comes to digital transformation, which most global clients are embracing. There is some amount of anti-incumbency, too, in the outsourcing space and established players are being forced to give way to new-comers, he added.

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Down last year, too

Evidence of this was already visible last fiscal year. Top Indian players struggled to ramp up new client addition. TCS, Infosys, Wipro and HCL Tech reported adding 115 new clients at the end of FY21, which is 67 per cent lower than the 347 new clients added the previous year, per data sourced exclusively by BusinessLine from CARE Ratings recently.

While TCS’ saw new client additions dip from 95 in FY20 to 15 in FY21, HCL Tech added just 30 new clients compared to 179 in FY20. Only Infosys managed to buck the trend, adding 81 new clients compared to 72 in FY20.

Deal value takes a beating

Not just the number of deals, even the value took a beating. In the first six months of FY21, most deals were below $1 million. Only in the second half did the companies manage to strike deals in the $50-million and $100-million band.

The industry is now hoping that as its major markets —the US and Europe — open, business sentiments will improve, and larger deals can be struck. “In terms of geography, the demand in the US and Europe is strong... So, overall, the demand is starting to improve in most of these places,” Infosys CEO & MD Salil Parekh had said during the fourth quarter results conference call.

As IT majors roll out their results this week, it will be interesting to see if this is indeed the case.

Published on July 13, 2021
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