Splitting Up Mega IT Projects Bodes Well For Small IT Firms

Mid-cap IT firms’ participation in vendor consolidation and winning disproportionately over large caps are also enabling them to post better revenue growth, observes brokerage firm Prabhudas Lilladher in a report

Bengaluru: Global clients are dividing large IT projects into smaller ones and awarding those to many IT services companies, which is benefitting the mid-tier Indian IT services companies. According to analysts and brokerage firms, in an uncertain demand environment, global enterprises are not willing to award big projects to a single vendor as they seek to diversify risks. This, in turn, is helping mid-tier IT firms to win new deals.

“Enterprise deal sizes become more fragmented and benefiting mid-caps versus one-shot large mega deal awarding to a single large vendor, in a bid to de-risk vendor dependency,” brokerage firm, Prabhudas Lilladher wrote in a note.

“Mid-cap IT firms’ participation in vendor consolidation and winning disproportionately over large caps (are also enabling them to post better revenue growth),” the report noted.

According to sources in the know, as technology spending environment is likely to improve in the coming quarters, mid-tier IT firms will be the first ones to benefit from such trend.

“Although enterprises have pushed savings-led transformation deals of late, versus limiting their spends to cost-focused earlier, the improvement in macro environment is likely to boost sentiment and help resume long-deferred discretionary programmes by late FY25 or early FY26,” the report said.

As far as demand environment is concerned, most analysts are expecting higher technology spend towards the second half of the year. However, this growth acceleration will be linear in nature than showing a sudden surge.

Analysts also said that the demand will be mostly driven by traditional technologies like cloud than emerging technologies like generative AI.

“Although the industry is exploring benefits through newly emerging technology, it is yet to make a potential breakthrough before enterprises accelerate or reprioritize funding towards GenAI. Unlike GenAI, digital services and cloud programmes have been for a long while (tested & verified) with availability of right talent pool and scalable digital asserts to complement Covid urgency. However, similar scale of infrastructure, computation assets, proven concepts, and talents has not been achieved to address the surging demand for GenAI,” the brokerage firm said.

Meanwhile, many mid-tier IT firms are not only building capabilities internally but also have been on an acquisition spree to boost inorganic growth prospects.

While Persistent Systems has announced the acquisition of the US-based Starfish Associates for around $20.7 million in July, Coforge has acquired 54 per centin ER&D firm, Cigniti Technologies for about $220 million. Similarly, other mid-tier IT firms are also undertaking acquisitions in order to build capacity in specific technology areas.