Bangalore: India’s top tech firms Infosys Ltd and Wipro Ltd are now offering upfront cash payments while bidding for large outsourcing contracts that promise assured revenues, a departure from their traditional strategy in the past of staying away from such transactions.
The country’s second biggest software services firm Infosys, which has been facing a backlash from investors and analysts for being not aggressive enough, said it would use its cash pile of nearly $4 billion (around Rs.21,240 crore) to chase outsourcing contracts that require upfront payment.
“When you are looking at $500 million and billion dollar deals, you see it as a unique opportunity. We are not averse to any opportunity which will give us growth,” S.D. Shibulal, chief executive officer of Infosys, said in an interview last week. In the quarter ended 30 September, Infosys acquired motorcycle maker Harley Davidson Inc.’s assets, including a development centre and in-house information technology (IT) staff in exchange for an outsourcing contract of over $200 million.
Unlike usual outsourcing contracts for managing computer systems and applications, deals asking for upfront cash are much bigger—at least $1 billion and more—and involve the sale of a customer’s assets that could include a computer data centre, and the transfer of in-house staff or a patented software application. In some cases, customers even ask for a portion of future savings to be achieved from the contract—upfront.
Earlier this year, both Infosys and Wipro offered $100 million and $60 million, respectively, for a $1 billion contract from Mexico’s biggest cement firm Cemex SAB de CV, executives involved in bidding for the deal said, requesting anonymity because they are not authorized by their companies to speak to the media.
Without offering specific comments on the Cemex deal, Shibulal said his company will now seek out such deals in competition with established multinational rivals such as International Business Machines Corp. (IBM).
“There are different solutions to different problems. The question of payment comes up when it’s a billion dollar deal. In business, you can never say never because as you grow, you do different things,” Shibulal said.
IBM finally outbid Indian firms by offering a higher upfront payment, but this renewed aggression reflects a growing hunger for market share that could dent profit margins by 2-3 percentage points in one-two years, brokerage analysts tracking the sector said.
Officials at IBM and Cemex didn’t respond to an email sent last week. Wipro would not comment before the so-called silent period ahead of its earnings announcement.
To be sure, offering cash as part of a multi-year outsourcing contract is nothing new globally. IBM has been using it as a strategy to win long-term deals for many years. IBM’s Global Financing, a division that offers credit and cash to customers promising assured future business, has helped Big Blue win several large contracts.
Experts, including Sridhar Vedala of outsourcing consulting firm QS Advisory, said there is renewed aggression among Indian service providers. Still, he added, he isn’t “sure yet if Indian providers can catch up in the near future, as they are still quite selective”.
Shibulal of Infosys said bidding for complex outsourcing contracts that require payment upfront reflects the maturity of the Indian IT industry.
“The point I am trying to make is that it’s a natural progression for an organization. We can now go after more complex and differently structured deals. Where people transfer is not involved, there are other assets. You have to use balance sheet transactions—you can never say never,” he added.
Outsourcing expert Chirajeet Sengupta, who is a research director at Everest Group, said Wipro and HCL Technologies Ltd are chasing deals that need cash upfront more aggressively. He gave examples of recent deals won by Indian tech firms from customers including Walt Disney Co.—the world’s biggest entertainment firm (HCL Tech won the deal)—and AstraZeneca Plc (won by Wipro and HCL Tech). HCL Tech declined to comment ahead of its earnings announcement.
“Coupled with a bureaucratic, risk-averse approach of some traditional incumbents, the flexible approach of Indian providers has provided clients with a viable alternative,” Sengupta said.
The biggest risk in such contracts is ensuring they don’t turn unprofitable. Already, such business comes at a lower profit margin than traditional business chased by companies such as Infosys, Shibulal said.