Will 2018 see the return of the IT mega deal?
On 22 December, Mint reported that Tata Consultancy Services Ltd (TCS) won a $2.25 billion outsourcing contract from television ratings measurement company Nielsen. The deal was a renewal of TCS’s earlier engagement with Nielsen, which first awarded a $1.2 billion, 10-year contract to the Mumbai-based company in 2007, and later expanded the contract in 2013. Nielsen’s outsourcing contract has now been extended for five years until 2025.
While multi-billion-dollar deals are an anachronism in today’s times, the seasonality shown by Nielsen’s awards in 2007, 2013 and 2018 presents an interesting picture. To make some sense of this, I turned to Michael P. Connors, once a president at Nielsen and now chairman and CEO of ISG Inc. which is the world’s largest sourcing adviser. For many years, I reported to Connors while I was a president at ISG, and he was kind enough to share data on the overall market (not just Nielsen and TCS) to shed light on the seasonality in IT sourcing. Since this is an analysis that necessarily includes a lot of numbers, I asked Connors (and Bret Breeding, ISG’s data czar) to try and provide context where possible to help the casual reader.
Connors said that every four to five years, the sourcing market would settle into a fairly stable range; however, when contract awards from a prior, slower period would eventually come up for renewal, the industry would experience a quick and sudden downturn (by about 5-10%) followed by a corresponding double-digit rebound the very next year.
With average contract durations shrinking from over five years to three years, market fluctuations will become more frequent. The market’s most recent dip was in 2016, so given a current three-year renewal cycle, Connors says that the next couple of years should be fairly healthy. Connors is emphatic that no matter how many times we hear that the “mega deal in IT is dying”, there will still be the occasional large contract award greater than $100 million per year, similar to what we have seen in the recent past with TCS and HCL Technologies Ltd.
Connors said the industry saw an acceleration after the economic downturn in 2008; in 2009, the market saw a double-digit (12%) increase in broader market annual contract value (ACV ). Bearing in mind the five-year cyclical nature of the market at that time, the market saw an expected dip in 2013 of about 16% as 2008 contracts came up for renewal. Shortly thereafter, the market rebounded again into a new phase of market consistency, increasing 22% in 2014. At about the same time, contract durations started to shrink to a record low of 3.2 years in 2017. Given this new “shorter deal” dynamic, three years after the 2013 pause in the market, 2016 once again tested the bottom.
Connors also says that the new normal for large deals has been redefined. $100 million in ACV is no longer the “mega deal”. However, deals that have an ACV of $40 million or more have remained in a fairly tight range. In seven of the last 10 years, the market has generated between 100 and 120 deals with an ACV of more than $40 million. Connors offered a few more observations:
• Eight of the past nine quarters have exceeded $9 billion in ACV. The economy seems to be improving worldwide.
• Disruption by digital competition is pushing a switch from traditional products to new technology.
• The shift to As-a-Service contracts (instead of traditional, full-time equivalent and billing hours-based contracts) continues to push the market higher.
• Meanwhile, traditional sourcing has not let up—its ACV actually rose slightly compared to last year. This continued spend indicates that As-a-Service is not replacing the traditional sourcing business. The pie is growing, rather than getting reallocated.
When all is said and done, this means that we can expect to see a strong market in 2018. The overall market remains singularly robust; it is only the nature of overall spending that has seen a change in its complexion. The race then is about getting this shift to new contracting methods and new services offerings right.
Out with the buggy whips and in with the accelerator pedals!
Siddharth Pai is a world-renowned technology consultant who has personally led over $20 billion in complex first-of-a-kind outsourcing transactions.
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