IT cos go extra mile to renew contracts

Information technology companies are doing that much extra as huge contracts come up for renewal amid global uncertainty, tightening of IT budgets and clients bargaining for more with less.

Close to $12 billion of contracts were renewed in the last quarter, according to the TPI Index which tracks such deals.

Industry analysts believe the fourth quarter would see a similar amount or more of such renewal deals.

With an increased need to maintain turf, many IT services vendors, both Indian and multinational companies, are negotiating hard with clients to retain and increase their share of existing contracts.

Some are renegotiating much ahead of time, so as not to lose deals to competition. On the other hand, analysts say clients are ready to push work offshore but are equally vocal on hiring locals.

They are also increasingly benchmarking offerings, and are keen to work with players where the risk appetite capability is high.

The concern among IT vendors is valid.

According to a recent Ovum research, the number of suppliers per client since 2010 (3.1 on average, down from 3.6 in 2009) has been going down.

The drop has made many contracts unviable, especially for larger  suppliers, given the cost of sale and overhead contributions required to chase, win and deliver such engagements.

This highlights the reduced average revenues per contract available per supplier.

"In many instances, players like Accenture, IBM, CSC and HP have approached clients as early as two to three years before the contract ends.

"They are also ready to reduce the pricing up to 10-15 per cent, with a condition to extend the contract period by a few years," said an analyst who recently helped a US client renegotiate a contract.

"But clients are not ready for yet another long-term contract period; they are pushing back.

"For clients, the sweet spot for a deal period is between three and five years," says Partha Iyengar, vice-president at Gartner and head of its India research.

This is becoming prominent as some of the mega-outsourcing deals signed eight to 10 years earlier are all coming up for renewal in the next two to three years.

Mega-sized deals are clearly drying.

Compared to 10 such deals in 2007, only three deals were signed in 2011, of a little over $2 billion each.

These include Aegis' $2-bn deal with Saudi Telecom, Tata Consultancy Services' $2.2-bn deal with UK's Friends Pension and SAIC's deal with the US Department of State.

What clients want

P R Chandrasekar, vice-chairman and CEO, Hexaware Technologies, who recently signed one of the largest of deals for the company, says clients are looking at value add.

"In some of the deals we have won, especially the large one, we initiated the process.

"In some cases, clients were not ready to talk but we proposed bundled offerings, new solutions that convinced them of the benefits," he said.

Hexaware recently signed a $250-million deal with an existing UK-based client for a period of five years.

Clients are appreciating greater flexibility, responsiveness, customer-mindedness and appetite for risk from vendors.

A recent study by Value Leadership Group, a Europe-based analyst firm, along with Deutsche Bank, found most banks complained that in the last financial crisis, despite the service agreements, MNCs like Accenture and IBM saw resource issues offshore and used a greater proportion of their onsite headcount while implementing application development projects.

This increased the overall cost of execution.

Add to this the fact that clients are getting extremely conscious about vendors' capability.

Peter Schumacher, president and CEO, Value Leadership Group, said: "This is evident in some of the growth figures of the top four Indian IT services firms. Some of them are not growing as fast as others in Europe.

"While TCS and Cognizant have been growing extremely fast, Infosys' market momentum and growth has fallen behind significantly.

"It is clearly missing out on opportunities. Buyers across Europe have told us that Infosys delivers well and precisely.

"However, they are also seen as being less pro-active and more rigid, e.g, getting the initial contract signed takes much longer.

"Additionally, their premium price positioning has been costing them business," he added.

Offshoring issues

Increasing offshoring need not always mean good news.

In many cases, a dearth of the right talent and expertise to shift large work offshore is creating problems.

Says Sudin Apte, principal analyst and CEO, Offshore Insights: "With increased work being offshored, the complexity of work increases.

"The problem here is getting talent in the 10-15 year experience zone. While visa is a issue, it is also expensive. Firms which can manage this kind of talent shift will make the most of this situation."

The Ovum study says enterprises are more willing to engage with multiple suppliers but the control is consolidating under a 'prime' vendor in a large number of contracts.

"In essence, what we are seeing is that control is gradually being centred around the provider with the largest proportion of contract spend, and increasingly so, i.e. the multisourcing trend is dissolving into a more controlled environment.

"So, the other players need to be prepared to engage more closely with the 'prime' provider," said Jens Butler, principal analyst, IT services, Ovum.