AI Hits Mega Outsourcing Deals At IT Cos

This was primarily due to the absence of large-scale deals, delays in deal closures, and lower discretionary spending. However, analysts are also predicting that deal conversion ratio to im-prove from next year as discretionary spend comes back

Bengaluru: Mega deals in the IT services industry are missing in recent quarters, impacting the total con-tract value (TCV) of several large and mid-tier IT firms. Analysts are of the view that rising adoption of AI (artificial intelligence) and GenAI (generative AI) is leading to such a phe-nomenon.

“Technology is the driving force with AI technology taking centre stage. This has led to deal sizes declining and a higher focus on efficiency and cost reduction. Additionally, competition has expanded beyond traditional firms to include boutique companies and global capability centres,” Mirae Assets, a brokerage firm, wrote in a note.

This trend has already played out in the second quarter (July-September) performance of In-dian IT services companies. Most firms have seen dip in their deal pipeline during this period.

“IT services companies reported slower sequential growth in the total contract value (TCV) of their deal wins compared to the previous quarter. This was primarily due to the absence of large-scale deals, delays in deal closures, and lower discretionary spending,” the brokerage firm noted. For instance, Infosys’ deal TCV declined around 30 per cent on sequential basis during Q2 of FY25.

Importantly, mega deals were completely missing during the second quarter, indicating deal sizes getting smaller. Mega deals are usually higher than $500 million and spread across multi-ple years.

“Enterprises are no longer opting for outsourcing mega deals to a single vendor. They are ra-ther dividing the contracts into many smaller deals and working with many vendors. The ad-vent of AI is accelerating this trend as cost saving becomes the key in an inflationary envi-ronment,” said the person familiar with the development. Despite the rate of growth slowing down in terms of TCVs, IT companies’ deal pipeline re-mained robust. Therefore, IT firms are likely to see better revenue conversion from the last quarter of ongoing financial year.

Analysts are also predicting that deal conversion ratio to improve from next year as discre-tionary spend comes back.

“The management of many companies also expressed confidence in their record-high deal pipelines. While a strong recovery in deal TCVs in the Q3 of FY25 is unlikely owing to weak seasonality and lower discretionary spending, we expect a pick-up in the ACVs (annual con-tract value) with the recovery in discretionary spending,” the Mirae Assets report noted.

Usually, third quarter (October-December) of any financial year is considered as a seasonally weak quarter due to high number of furloughs. Analysts are expecting next year to be a better one after Trump takes over presidency in the US.