Revenue leakages may dent IT firms’ top line

Deal cancellations are happening since last year and companies tend to announce them when those cancellations led to some impact on top line or some big deals were terminated.These things are likely to continue and we can’t say it is bottomed out without witnessing significant improvement in the demand environment - Pareekh Jain, Founder, Pareekh Consulting, tells Bizz Buzz

Bengaluru: Indian IT services firms are witnessing client-specific issues leading to revenue leakages, which is one of the major reasons for tepid growth of top line in FY24. Experts said that revenue leakages are real as despite winning record number of deals, the top lines didn’t see much improvement in the last three quarters.

“Deal cancellations are happening since last year and companies tend to announce themwhen those cancellations led to some impact on top line or some big deals were terminated.These things are likely to continue and we can’t say it is bottomed out without witnessing significant improvement in the demand environment,” Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting told BizzBuzz.

Large and mid-tier IT firms have seen many such deal cancellations in the last one year, but a few have been reported to the investors whenever the impact was deep on the top line. Sources in the say said that many such deal cancellations were not reported in the past as companies stayed away from revealing trade-related information.

In the last one year, some major deal cancellations have been announced or came to the fore from the client side. For instance, in June last year, insurance provider- Transamerica had ended its $2 billion 10-year deal with Tata Consultancy Services (TCS), two years ahead of schedule.

Similarly, Infosys in December announced that a global client had terminated $1.5 billion deal, which was signed earlier with 15-year duration.

During the announcement of fourth quarter results, Infosys also informed that it had to take a 100 basis point impact owing torenegotiation of contract with a large financial services client. Sources in the know said thatthis incident was linked to last year cyberbreach at Infosys McCamish, leading tounauthorized access of BoFA’s customer information.

Similarly, insourcing by clients also led to divestment of joint venture projects for some companies. Impact of such business loss would be felt in coming quarters, said experts.

For instance, Global financial institution State Street Corporation last year announced that it would acquire HCL’s 49 per cent equity stake held by Investments UK Ltd in their JV State Street HCL Services. Such divestment was done at $173 million by HCL Tech and the company had indicated that it might face headwinds in the BFSI business post such divestment.

Similarly, bankruptcy filing by clients had also been seen, leading to business loss for Indian IT firms. For instance, US-based medical equipment manufacturer Invacare’s bankruptcy filing had led to business loss for mid-tier firm Birlasoft last year.

“Revenue leakage is happening with existing clients giving less work or cancelling deals altogether. That is the reason, revenue growth is not happening despite such robust deal pipeline,” said a source familiar with the matter.