IT cos on edge as major deals come up for renewal

Sixteen major contracts worth nearly $14 billion to be renewed by June 2018 but uncertainty looms large.

By June next year, information technology services firms in the country will have to renew 16 major deals, worth nearly $14 billion, with key clients -- but the deal sizes are likely to grow smaller.

While Tata Consultancy Services, Infosys, Wipro, HCL Technologies and Tech Mahindra will most likely take a hit, IBM and Accenture -- which have an edge with digital and cloud -- might also see a reduction in the duration of contracts.

Some of the major firms with which deals might be signed are Scandinavian Airlines, Ford and Toyota Motor Europe, said Information Services Group (ISG), a global technology research and advisory firm.

Traditionally, large Indian IT firms have signed outsourcing contracts, yielding them annual revenues of about $200 million.

But, clients are now looking to cut IT costs due to technology shifts and business uncertainty.

With increasing automation; customers shifting their technology budgets to digital --  making their application work on smartphones with better user interfaces; and shifting their IT infrastructures to cloud, clients are not making large investments any more.

On April 11, technology researcher Gartner reduced its growth forecast for global IT spending to 1.4 per cent or $3.5 billion in 2017, due to a strong dollar. In January, the forecast was 2.7 per cent.

“The overall scope of the work will go down. For example, a contract worth $200 million for five years can now become worth $50 million. Renewals will, however, be based on the service delivery, after three years with specific clauses,” said Pareekh Jain, analyst at HfS Research India.

He added, “Businesses will seek flexible contracts, given the pace of change in technology. While there will be a cut in values, some companies will use cloud platforms developed internally.”

Software export lobby, the National Association of Software and Services Companies (Nasscom), has shied away from forecasting the growth of the software exports sector for the year ahead, citing business uncertainty in traditional markets such as the US and Europe.

In 2016-17, the sector grew between 8 and 10 per cent, against the projected 10-12 per cent.

Firms such as Infosys and Cognizant began the year optimistically but found growth slowing, and cut their forecast.

Infosys grew 7.6 per cent against its forecast of 11.5 to 13.5 per cent. Last week, Infosys said it would grow 6.5 to 8.5 per cent in FY18.

“We are seeing a trend of 60 to 40 focus on traditional and digital technology services. While the value of these contracts may go down marginally, most of the companies are likely to go for short-term deals,” said Rajesh Gupta, India partner at ISG. “In areas such as engineering services, many companies are planning to in-source as well.”

Jain of HfS said software-as-a-service platforms developed by Indian firms might take longer to become products.

“Indian IT vendors will have to look for new clients and focus on expansion of digital technology-based services. This time, the focus of clients will be on services such as cyber security, engineering and automation. Artificial intelligence platforms such as Mana and Holmes for companies such as Infosys and Wipro, respectively, will benefit in some way, but developing a pure product will take longer.”

Photograph: Reuters.