Big IT companies in India are accepting tougher terms from clients in order to win major technology deals, Reuters news report said.
Industry experts and analysts note this strategic shift as a response to dwindling technology orders in an unpredictable global economy.
The $245-billion IT industry, which flourished during the pandemic’s digital service surge, now grapples with a decline in demand owing to inflationary pressures and apprehensions of a looming recession. This downturn has coerced industry giants like Tata Consultancy Services (TCS), Infosys, HCLTech, and Wipro into accepting altered contract terms, including ensuring minimum cost savings, billing based on goal achievements, and revising cost overruns.
The Reuters article did not mention about global IT companies such as Cognizant, IBM, Accenture, among others.
The global IT services market is expected to grow 10.4 percent to $1,547.349 billion in 2024 as compared with $1,401.038 billion (up 7.5 percent) in 2023, Gartner’s research report said.
Gartner predicts that Worldwide IT spending is projected to total $5.1 trillion in 2024, an increase of 8 percent from 2023.
“Organizations are shifting the emphasis of IT projects towards cost control, efficiencies and automation, while curtailing IT initiatives that will take longer to deliver returns,” said John-David Lovelock, Distinguished VP Analyst at Gartner.
Reports from IT research firm Everest Group reveal that over 80 percent of the 1,600+ IT and business process management deals tracked in 2023 incorporated committed-savings clauses, a stark increase from around 65 percent in 2019.
Peter Bendor-Samuel, CEO of Everest Group, highlighted that these clauses either intertwine with pricing or pose a risk of fee reduction if the stipulated savings aren’t met.
“During economic challenges, it’s a buyer’s market. Clients exert pressure by introducing clauses such as pricing caps and outcome-based deals, a trend observed during crises like the 2008 financial meltdown and the 2001 dot-com crash,” according to V Balakrishnan, former Infosys CFO.
However, representatives from Tata Consultancy Services and Infosys refrained from commenting on these altered terms, while HCLTech declined to divulge specifics regarding deal conditions.
Recent noteworthy deals, such as HCLTech’s $2.1 billion agreement with Verizon and Infosys’ $454 million deal with Danske Bank, reportedly include such clauses. These agreements entail digitization initiatives and operational takeover, reflecting the shift towards outcome-driven partnerships.
Amidst the economic strain, these tougher contract terms exert additional pressure on an industry already grappling with challenges. Infosys, for instance, anticipates its slowest annual sales expansion in a decade by the end of the current financial year.
Industry leaders classify contracts above $100 million as large deals and those surpassing $500 million as mega deals, commonly secured during periods of subdued demand.
While TCS, Infosys, and HCLTech secured seven mega deals since May, Wipro faced a drought in this category. Notably, Wipro’s Chief Growth Officer, Stephanie Trautman, overseeing large deals, resigned recently, signifying the mounting challenges.
Deal advisors perceive these stringent terms in large IT deals as a client strategy to mitigate global economic uncertainties. Avinash Baliga, a partner at deal advisor Avasant, emphasized, “Clients seek predictable outcomes and assurances in deals spanning over five years or more.”
Avinash Baliga added that the inclusion of committed-cost-saving clauses has surged to 50-60 percent, marking a significant rise from the past decade’s 20 percent.
Additionally, these clauses reflect an enhanced maturity among clients. Ashutosh Sharma, Vice President and Research Director at Forrester India, noted, “Clients now expect IT players to share risks and rewards, indicating a profound shift in customer perspectives during deal negotiations.”
