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Tech firms sweeten deals for U.S. banks cutting costs in crisis

[May 18, 2020] By Anirban Sen

BENGALURU (Reuters) - Top technology services firms are offering payment deferrals, discounts of up to 20% and other sweeteners to some U.S. banks to keep their business as the pandemic forces Wall Street to cut tech budgets, according to executives involved in the talks.

Large Wall Street banks are widely expected to reduce overall budgets and discretionary tech spending, which includes areas such as technology consulting services, business analytics, research and design and process management projects.

Accenture, Tata Consultancy Services, Infosys and Cognizant Technology Solutions - among the world's largest tech services vendors - have offered to do more for them at lower rates, three executives who have taken part in the discussions told Reuters.

The aim is to secure new contracts as well as to keep the relationships with the banks ticking over so that they can be expanded once more post-pandemic, they added.

At least half a dozen meetings have taken place over the past month between the tech companies and some of the largest U.S. banks including JPMorgan Chase & Co, Bank of America and Citigroup, said the executives who all requested anonymity as the discussions were confidential.

"The current crisis facing the IT industry is potentially bigger than the 2008 recession. We have no option but to use every tactic necessary, including heavy discounts, to gain a competitive edge," said one.

Major IT outsourcing contracts, which include software maintenance, cloud computing and analytics, are worth several hundreds of millions of dollars and typically stretch over many years.

As well as some discounts and payment deferrals of typically between one to four months, the tech companies are in some cases offering to buy up computer data centers from their clients and the existing systems and hardware that are being replaced or upgraded at banks, the executives said.

Accenture said it was working with banking clients to address the implications of the crisis but did not comment on pricing talks. Cognizant and Infosys also declined to comment on its talks with clients, while Tata Consultancy did not respond to a request for comment.

JPMorgan, Bank of America and Citigroup declined to comment on their discussions with vendors.

The negotiations are ongoing and no agreements have been struck yet as many leading banks have delayed finalizing their tech budgets due to the uncertainty caused by the coronavirus crisis, according to the sources.

WIDER INDUSTRY TREND

The proposals reflect a wider trend, about half a dozen of tech industry insiders told Reuters, with discounts of varying size and investment commitments featuring in many discussions between vendors and their financial industry customers.

Research and advisory firm Gartner estimates the banking and financial services industry's spending globally on IT and information security will fall 5.6% in 2020 to $502 billion.

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The Wall Street sign is pictured at the New York Stock exchange (NYSE) in the Manhattan borough of New York City, New York, U.S., March 9, 2020. REUTERS/Carlo Allegri/File Photo

India's IT outsourcing sector, which includes the likes of Tata Consultancy and Infosys, is likely to be particularly hard hit. It has grown into a nearly $200 billion a year industry over the past two decades, offering technology services to corporate heavyweights across the world.

Developing and maintaining the plumbing of the world's financial services industry accounts for 40% of its revenues, with Wall Street banks among its biggest customers.

The top 10 U.S. banks collectively spend roughly $70 billion on technology annually, according to public statements and executives.

Cognizant, IBM, and Infosys have all withdrawn their 2020 forecasts in recent weeks, citing concerns about pricing and budget cuts at their major clients. Accenture cut its full-year guidance in March, while Wipro withdrew its revenue forecast for the current quarter.

"We've seen some delays in ... discretionary spending and select requests for furloughs, rate concessions and extended payment terms from our clients," Cognizant CEO Brian Humphries said in an earnings call this month.

IBM and Wipro declined to comment on any pricing talks with clients. But IBM said its broad client base provided a measure of stability in terms of recurring revenues and profit in "these challenging times".

SWEETNESS HAS LIMITS

Banks are not, however, slashing tech spending as heavily as sectors such as travel, hospitality and retail. Many are also investing in technology that helps staff work from home.

For instance, Standard Chartered, which typically spends about $1 billion a year on technology, is preparing cuts in many areas, but also plans to invest in remote working tech, and wants to dedicate some of the money saved on travel to that, group chief information officer Michael Gorriz told Reuters.

"What has happened with COVID-19 is that these plans have been rapidly accelerated," he said.

For technology companies looking to keep customers on-side and weather the storm, there are limits, though.

While vendors have little choice but to offer discounts to remain competitive, they are unlikely to go as far as to accept losses, said Ray Wang, founder of Silicon Valley technology research and advisory firm Constellation Research.

"The discounting for client business will intensify as the number of contracts drop overall in the market," said Wang, but he added: "I don't think they will hurt their own margins for growth right now. Profitability is very important."

(Reporting by Anirban Sen in Bengaluru; Additional reporting by Imani Moise, Elizabeth Dilts and Munsif Vengattil; Editing by Lauren Tara LaCapra, Tomasz Janowski and Pravin Char)

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