IT cos settle for short-term deals

At this time, we are seeing some clients sign one-year extensions and kicking the can down the road. We are also seeing others sign lower ACV, but higher total contract value. In these cases, clients are signing on for less work, but longer terms with the service providers - Peter Bendor Samuel, CEO, Everest Group, tells Bizz Buzz

Deal Pipeline

• Many clients renewing contracts only for 1 yr
• Clients committing low volume of work for 2024 despite large deal value
• Large deals signed in 2023 may not see much revenue accretion in H1/2024

Bengaluru: Amid a tough demand environment, Indian IT firms are witnessing deal renewal for shorter period by clients with low volume of work being committed by enterprises. This raises fear of less revenue addition in 2024, just like the ongoing calendar year when annual contract value (ACV) remained significantly lower for most IT firms despite winning several large deals.

Notably, December-January is the period when many IT outsourcing contracts come for renewal every year. This is also the time when enterprises in the US and Europe finalise their IT spending budgets. It makes the period very significant to gauge the overall sentiment in the industry.

“At this time, we are seeing some clients sign one-year extensions and kicking the can down the road. We are also seeing others sign lower ACV (annual contract value), but higher TCV (total contract value). In these cases, clients are signing on for less work, but longer terms (with the service providers),” Peter Bendor Samuel, CEO of global consultancy firm Everest Group, told Bizz Buzz.

In 2023, this phenomenon has played out distinctly over the first two quarters. Market leader Tata Consultancy Services (TCS) had a total order book of $11.2 billion in the second quarter as many cost takeout deals got bagged by the company. Infosys bagged its highest ever large deal worth $7.7 billion during the second quarter out of which 48 per cent was net new. Deal pipeline of Wipro remained robust as it won deals worth $3.8 billion, up by six per cent YoY, while its large deal bookings was at $1.3 billion, up by 79 per cent YoY.

Despite such large deal bookings, all these companies are expecting revenue growth rate to be in low single digit in the current financial year. Meanwhile, brokerage firms have started flagging up growth concerns for the next year, at least in the first six months of 2024.

“We note downside risks to June quarter estimates given that enterprise focus on cost reductions will likely continue in the first half of the calendar year 2024 (till June end of 2024). A growth beat in the second half of the financial year 2025 (H2 of FY25) is possible in case of a strong pick-up in discretionary spending but will not lead to significant improvement in FY25 earnings estimates for IT companies,” brokerage firm Kotak Institutional Equities said in a note. Experts said that any significant recovery in the IT demand will hinge on continued momentum in large and mega deal signings, recovery in discretionary spending, especially in verticals like financial services and hi-tech.