Larger outsourcing contracts may boost IT revenues in FY193 min read . Updated: 02 Jan 2019, 01:30 AM IST
Tech firms, including TCS, Infosys and Wipro, generated more revenue than ever before from standalone outsourcing deals signed in 2018
New Delhi: The twin trends of outsourcing larger technology contracts and Fortune 1000 companies awarding work that was earlier done internally to its vendors have led analysts and information technology executives to suggest that the sector could grow faster in the year starting 1 April.
These trends are the third positive development for India’s $167 billion information technology (IT) outsourcing sector, after the first six months of the current fiscal saw IT firms adding more employees and raising salaries of some of them by as much as 40%.
“Digital spend is industrializing a little bit, moving from pilots and PoC (proof of concepts) to big spends. That should look well overall for the industry, so I am quite optimistic," Nasscom chairman Rishad Premji said in an interaction with Mint last month. “The other interesting and exciting thing is, again at broad basis, the return of larger deals."
The ability of IT companies to offer solutions through mobility and data crunching platforms that allows their clients, from Citigroup Inc. to Walmart Inc., to do their business more efficiently saw the technology vendors generating more revenue from stand-alone deals signed in 2018 than ever before.
This development is one reason for improved growth at some of the largest companies, including Tata Consultancy Services Ltd (TCS).
The largest IT services companies, including TCS, Cognizant Technology Solutions Corp., Infosys Ltd and Wipro Ltd, shared this optimism when they briefed analysts at an event organized by outsourcing research firm HFS Research in New York on 12 and 13 December.
“[M]anagement shared that 50% of the value of new deals are coming from 25% of the new signings, which implies that contracts are longer in duration with increasing complexity," Keith Bachman, an analyst with BMO Capital Markets, wrote in a 17 December note.
Bachman made the observation after speaking with the management of Genpact, the New York-based business process and technology management firm, at the HFS event.
For close to a decade, outsourcing deals shrank as tech work became commoditized. An added challenge for IT firms was the rise of in-sourcing, which saw several large clients setting up their own technology units or captives to do the tech work.
However, 2018 saw this change, according to three executives from TCS, Cognizant and Wipro.
“Several service providers discussed clients that have taken work in-house out of frustration with service providers, but have experienced difficulty in implementing new technologies without external help. As a result, clients are returning to service providers with more realistic expectations," Bachman wrote in the note.
“I do not see a huge rush to captives—the big issue is talent shortages in higher value areas, such as digital, AI (artificial intelligence), analytics, machine learning, etc. No one wants to hire those internally—the talent is too expensive and hard to retain," said Phil Fersht, chief executive officer of HFS Research. “Hence, we are witnessing a resurgence in services based on higher-value services and deeper, more consultative partnering."
“In a nutshell what we are witnessing is the shift from ‘outsourcing’ to ‘real value partnering’ and the winning providers are those who can convert to the latter with smart talent and operating model investments," said Fersht.
TCS, Infosys and Wipro declined to comment as all three are in a quiet period ahead of declaring their December quarter results.
Since December last year, Mumbai-based TCS and Bengaluru-based Wipro have won four multi-year mega deals, which will together generate over $7.2 billion in revenue.
“A lot of deals, beyond the four mega deals, have seen integrated traditional offerings like infrastructure maintenance and BPO, along with deployment of data analytics platforms and some level of automation. This means that a resulting contract is of larger value than a pure-play traditional work," an executive at TCS said on the condition of anonymity.