
Q3 throws focus on deal cycle, tenure for India's biggest IT service providers

Summary
- A second analyst attributed the reduction in deal tenures to an uncertain business environment.
Bengaluru: Shorter deal tenures, more frequent renewals—that is the scenario India’s top software services companies are likely to face going forward. Independent experts said the shorter tenures are a result of economic uncertainty in advanced markets and the fast-changing nature of modern technologies, and could pose challenges to the IT services companies.
Mumbai-based Tata Consultancy Services Ltd, the country’s largest IT services company, even saw some clients taking lesser time in awarding contracts, with its top executive remarking that the company has seen deal cycles falling by a few weeks.
“We looked at deals that are more than $20 million and above, there is a deal cycle reduction also, which also shows that the decision-making is also improving largely," K. Krithivasan, the company’s CEO and managing director, said in a post-earnings interaction with analysts on 9 January.
Pointing out that TCS reported deal cycles shortening in the December quarter compared to the September quarter, Keith Bachman, analyst at BMO Capital Markets, said, “We think this is encouraging with regard to CY25 growth improvement vs CY24." CY refers to calendar year (January-December).
Also read | Mid-sized Indian IT companies lead AI charge with new investments
TCS’s total contract value or TCV expanded 18.6% sequentially to $10.2 billion for the quarter ended December 2024. This includes existing contracts and new projects.
According to the management of HCL Technologies Ltd and Wipro Ltd—India’s third-largest and fourth-largest IT services companies, respectively—several Fortune 500 companies are awarding them work of much shorter tenures.
“We are also noticing the average duration of signed deals getting shorter," C. Vijayakumar, CEO and managing director of HCL Tech, said in a post-earnings interaction with analysts on 13 January. He added that the shift towards shorter tenured deals naturally leads to moderated TCV (total contract value), “but the more important metric in this context is ACV (annual contract value) and it is quite good (grown 9% sequentially)".
“If I look at the pipeline, it seems to be very similar to what it has been in the last few quarters, but bookings in Q3 are definitively the deal tenure has come down," said Aparna Iyer, chief financial officer of Wipro, in response to a question during the company’s post-earnings interaction with analysts on 17 January.
Also read | Why IT services firms don’t offer full-year guidance but set lofty goals
To be sure, second-largest Infosys Ltd, also based in Bengaluru, did not see any material change in the deal cycle, its CEO and MD Salil Parekh said in response to a question from Mint at the company’s post-earnings press conference on 16 January. He added that deals awarded by financial institutions and retailers are quicker to wrap up as non-essential spending in these sectors have picked up.
The company’s large deal TCV, which it defines as contracts worth more than $50 million, went up 4.2% sequentially to $2.5 billion.
On the other hand, fifth-largest Tech Mahindra Ltd did not comment on deal cycles or tenures.
To be sure, none of the country’s top five IT services companies call out annual contract values.
Expert views
While the managements of these companies did not specify the reasons behind the shortening of deal tenures, a Mumbai-based analyst working at a global investment bank said that customers of IT services companies are not awarding larger tenure contracts because they are not sure of their spending. “Clients might be uncertain regarding the macroeconomic impacts and are ambiguous of their spending patterns," this analyst said on condition of anonymity.
A second analyst, too, attributed the reduction in deal tenures to an uncertain business environment.
Also read: Mint Primer | IT services: When will the tide turn?
“Deal tenures are shortening because every time we go through a transitory phase in technology, clients become more cautious. Today, the transition is towards AI," said Ashutosh Sharma, vice-president and research director at Forrester Research, a Massachusetts-based research advisory firm.
“Clients don’t want to make long-term business plans when they are not sure of the business environment. They are more keen to take different spending approaches as business conditions change and hence are committing to short-term contracts," said Sharma.
A third analyst said clients are waiting to award long-term contracts to IT services companies because of automation.
“They (clients) think they can achieve a better deal if they wait for AI and automation to become more mainstream, which would ultimately end up saving their costs as lesser people would be billed," said R. ‘Ray’ Wang, founder of Constellation Research.
Forrester’s Sharma added that reduction of deal timelines could pose a challenge to IT outsourcing companies. IT services companies would now have to not just execute better but also offer more to clients as more deals come up for renewals each year.
Performance details
HCL Tech, which is the country’s third-largest software services company, grew the fastest of each of the top five IT services companies in the three months through December 2024. Its revenue grew 2.6% sequentially to $3.53 billion.
Unlike its peers, which experienced a weak third quarter due to holidays that result in lesser working days, the third quarter is strong for HCL Tech because of software licence renewals in that period. The company gets 11% of its revenue from its software products arm.
Also read | Lessons for Indian IT services firms as Accenture, IBM lead GenAI charge
In contrast to HCL, Bengaluru-based Wipro fared the worst of the country’s top five IT services companies. Its revenue fell 2% sequentially to $2.61 billion for the October-December 2024 period.
While there are differences between the two companies’ revenue performance, the value of contracts has come down for both, making them the only two companies of the country’s top five to report a sequential drop in contract value.
HCL Tech’s contract value of new deal wins was down 5.5% sequentially to $2.1 billion at the end of the three months through December 2024. On the brighter side, this was still an 8.7% increase from the year-ago period.
Wipro’s total contract value, which it defines as the value of all orders booked during the period, fell 1.3% sequentially and 7.3% on a yearly basis to $3.51 billion in the October-December 2024 period.
Tech Mahindra, like HCL Tech, calls out net new deal wins but only those valued at more than $5 million. Its contract value of new deal wins rose 23.5% sequentially to $745 million as of the third quarter.