Given the financial turmoil in Europe and its lingering cascading effects on other developed economies, including USA, it is generally believed that the outlook for India’s $70 billion information technology (IT) and business process outsourcing (BPO) industry is not very optimistic.
The perception is that, lower revenue and profits will make large global corporations, typical clients of Indian IT industry, cut IT spending to save cost.
An in-depth analysis of the IT market scenario by the research team of Standard Chartered Bank, however, reveals that in reality Indian IT companies, specially the big ones like TCS, Infosys, Wipro and HCL Technologies, stand to gain a lot in the next couple of years.
The major reasons behind this optimism, the research report pointed out, is the fact that a large number of IT annuity deals (these are multi year maintenance contracts with predictable revenue streams) of large global clients are coming up for renewal in the next couple of years and Indian companies have an edge in grabbing many of them.
“In our view, the next leg of growth for Indian offshore players will be driven by market share grab from global players in existing contracts coming for renewals, as clients strive to optimise their spend on operational expenses,” said the Standard Chartered report. Its analysis indicated a pipeline of 1,095 contracts that are now with non-Indian vendors with a combined total contract value (TCV) of $207billion due for renewal over the next five years. This could translate into a $25bn opportunity for Indian offshore players, the report added.
IT industry veteran and Nasscom President Som Mittal also thinks that there are great opportunities for India-based IT work. “Uncertainty in the global market is certainly an opportunity for India,” he told Deccan Herald. “When growth slows down people will have to find out ways to cut cost, enhance manpower utilisation and outsource non-core activities. So India stands to gain,” he said.
Blended outsourcing
One of the two major factors that will help Indian IT companies is that IT clients are increasingly going for blended outsourcing model in annuity deals. There is a shift in corporate outsourcing pattern over the past few years from a total outsourcing model, where the entire/bulk of non-discretionary IT services is handed over to a single system integrator (such as EDS, IBM GS or CSC), to a blended outsourcing model, where large deals are broken into smaller sizes and are distributed to multiple vendors to optimise the total cost of ownership.
HCL Vice Chairman & CEO Vineet Nayar, also thinks that this trend is very clear and getting stronger. “Many large client organisations who were locked in with deals having high billing rates during the recession time, are now restructuring such deals by opening them up for competitive bidding,” Nayar told Deccan Herald. “We are seeing that the deal sizes are getting smaller and vendor-churn is happening in 30 per cent of the deals as against only the earlier 5 per cent,” he said.
Emergence of niche players is also because of the growing realisation among IT clients that large all-inclusive deals have not achieved the expected cost savings or operational efficiencies. A US-based senior marketing official with one of the large four India IT companies said: “The flavour of the day is to go for ‘specialists,’ with smaller deal sizes, to get more flexibility in terms of delivery, pricing and tweaking, as per the clients’ need.”
Besides, typical contracts by global system integrators have a high degree of rigidity and lock-ins with severe termination penalties. We expect this has fed a trend towards smaller outsourcing agreements with specific business goals, said the report.
Some of the large deals coming up for renewal in 2012 are, Empire Blue Cross (TCV $1,000m), Commonwealth Bank ($669m), Deutsche Bank ($675m), Rolls Royce Plc ($2,100m), etc.
Another favourable factor for Indian IT companies is the large offshoring capability of Indian vendors, resulting in savings for the clients. Since most of the existing large deals coming up for renewal have small offshore component, new contracts will favour those who can bring down cost by moving work to low-cost geographies.
“We expect Indian vendors to continue to benefit from the ongoing shift in annuity deals towards multi-vendor, smaller size and shorter duration, as clients increasingly look to fund incremental discretionary IT investments through savings in run-the-business operations,” the report said. It is expected that TCV deal size of $50-250m would be the sweet spot for Indian offshore vendors and the average contract period will be five years.
An analysis of how the deals moved in the recession-hit years of 2008 to 2010, also shows that Indian vendors gained in difficult times too. The Standard Chartered analysis of the 2008-09 period suggests that while macroeconomic concerns did affect the decision-making cycle, the impact was restricted primarily to larger TCV deals of $300m and above.
However, Indian vendors, catering to much smaller $25-200m TCV band, were net gainers, as the smaller deals pipeline was unaffected and possibly gained from rescaling and re-scoping, during this period. The fact, that in the nine months of 2010-11, top four Indian IT vendors have won 80 odd deals worth $ 8 billion is another indicator of our might.
Source:http://www.deccanherald.com/content/213461/indian-biz-gain-despite-difficult.html
