India's $245 bln IT sector swallows tougher terms amid scramble for contracts
19/12/2023 08:09
By Sai Ishwarbharath B
BENGALURU, Dec 19 - India's information technology firms
are accepting tougher contract terms to win large deals from
clients as they compete for fewer orders in an uncertain global
economy, industry insiders and analysts say.
The $245-billion sector, which gained immensely from the
pandemic-induced boom in digital services, has struggled in
recent quarters as clients slashed spending on discretionary
projects amid inflationary pressures and recession fears.
That is forcing companies including Tata Consultancy
Services TCS.NS , Infosys INFY.NS and HCLTech HCLT.NS to
accept contract conditions such as guaranteeing minimum cost
savings, billing the client only if certain goals are achieved
and reviewing cost overruns.
"Whenever economic challenges appear and demand recedes,
it becomes a buyer's market. The clients try to push more
clauses including capping the pricing and asking for
outcome-based deals," said former Infosys CFO V Balakrishnan.
"It was witnessed during 2008 when the global financial
crisis happened, and in 2001 during the dot-com crash," he said.
Tata Consultancy Services and Infosys did not respond to
Reuters' requests seeking comment. HCLTech declined to comment
on specific deal terms.
More than 80% of more than 1,600 IT and business process
management deals tracked in 2023 had some form of
committed-savings clause, versus around 65% in 2019, data from
IT research firm Everest Group showed.
Such cost-saving clauses are either baked into the pricing,
or companies risk a cut in fees if the savings are not achieved,
Everest Group CEO Peter Bendor-Samuel said.
Contracts with such clauses that were signed this year
include HCLTech's $2.1 billion deal with Verizon and a $454
million deal between Infosys and Danske Bank, a person familiar
with the deal terms said.
Under the Danske Bank deal, which runs for five years,
Infosys will digitise the lender's operations and take over its
delivery centre in India, while the Verizon deal, which runs for
six years, will see HCLTech become the U.S. firm's primary tech
partner for network deployments, according to exchange filings.
TOUGH TIMES
The tougher contracts are likely to add pressure on an
industry that is already struggling. India's second-biggest
software-services exporter by sales Infosys has already
predicted its slowest annual sales expansion in at least a
decade for the current financial year ending March 2024.
The big IT firms classify contracts worth $100 million or
above as large deals and those above $500 million as mega deals,
which are typically struck when demand is low.
TCS, Infosys and HCLTech have won seven mega deals since
May, company disclosures show, while Wipro WIPR.NS did not win
any mega deals. Its Chief Growth Officer Stephanie Trautman, who
was leading the large deals team, resigned earlier this month.
The tougher terms tied to the large IT deals are an attempt
by clients to hedge against the global economic uncertainty,
deal advisors said.
"Clients are increasingly seeking predictable business
outcomes and assurances to protect their interests in large
deals that often span five years or more," said Avinash Baliga,
partner at deal advisor Avasant.
The inclusion of committed-cost-savings clauses in deal
agreements has climbed to 50-60% presently versus 20% in the
last decade, Baliga added.
The clauses also reflect a rise in client maturity.
"Customers have become much more aware of the possibilities
and scenarios that could play out during a deal tenure," said
Ashutosh Sharma, vice-president and research director at
Forrester India. "Now, clients are asking IT players too to
share risks and rewards."
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Mega deals signed by top 3 Indian IT firms https://tmsnrt.rs/3v3JCqq
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Sai Ishwarbharath B; Editing by Dhanya Skariachan
and Miral Fahmy)
((saiishwarbharath.b@thomsonreuters.com))