TCS has maintained that it is seeing far fewer instances of outsourcing contracts getting renegotiated, as its clients grapple with the continued onslaught of Covid-19 pandemic.

“Typically contracts are multi-year ranging from 18 months to 7 years and the value is ascertained over the years. We are not seeing any contracts getting cancelled, renegotiated or pricing cuts,” N Ganapathy Subramaniam, Chief Operating Officer, TCS, told BusinessLine .

Subramaniam’s comments need to be seen in the light of increased concerns emerging regarding the decimation of certain business segments in the developed markets due to Covid-19. In Q1, India’s largest IT services firm reported a dip in revenues, profitability and margins as a result of the pandemic impact.

Already, many retail stores in the US have filed for bankruptcies, in addition to sectors such as travel, hospitality, manufacturing, and BFSI have taken a hit.

This has raised the alarm bells amongst analysts and industry watchers, who have pointed to elongated deal-bagging cycles, cancellations, reduction in pricing and deferral of several projects. Recently, outsourcing advisory firm ISG in its study said that requests for price discounts, adding scope of project and the extension of payment terms, are all factors playing out in deals, which is elongating deal finalisation process.

Also read: TCS: Cost control and large deals bode well for the future

Outsourcing deals, which in the early 2000s were multi-year, multi-million dollars, have in the last several years become smaller in size. Till 2022, IT outsourcing growth is expected to be around 2 per cent CAGR, compared to 5 per cent CAGR over the previous 5 years, according to industry watchers.

Deal activity

Also, ISG, in its study has said that deals with an Annual Contract Value (ACV) of $50 million and above has declined by 75 per cent on a yearly basis, as clients sector were looking to modify and add to the scope of existing deals. “Deal activity in the second quarter was largely skewed toward small deals and 90 per cent of the deals were in the $5-10 million bucket,” it added. In April this year, Crisil had pointed out that IT firms also face price renegotiations, which would add to the cost pressure emanating from investments in digital capabilities and limited incremental cost-saving avenues.

ACV is a metric used to capture the value of subscription revenue from each contracted customer, normalised across a year. For example, if a customer signs a 5-year deal for $10,000 — normalising this to a single year means that the ACV is $2,000.

Subramaniam is of the point of view that TCS with its ACV of $6.9 billion in the June-ended quarter, following the $8.9 billion worth of contracts it bagged in the March-ended quarter, it is well positioned for growth. “We need that kind of contract closure to keep the engine running and registering growth,” he said.

However, in segments that have got hit, many large deals take 6-12 months to get shaped and go through the process of closure, stated Subramaniam. Requests for price discounts, adding scope of project and the extension of payment terms, are all factors playing out in deals, which is elongating deal finalisation process.

In Q1, retail and CPG was down 12.9 per cent, BFSI declined 4.9 per cent, manufacturing fell 7.1 per cent, communications and media by 3.6 per cent and technology and services by 4 per cent.

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