India's $245 billion IT sector swallows tougher terms amid scramble for
contracts
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[December 19, 2023] By
Sai Ishwarbharath B
BENGALURU - India's information technology firms are accepting tougher
contract terms to win large deals from clients as they compete for fewer
orders in an uncertain global economy, industry insiders and analysts
say.
The $245-billion sector, which gained immensely from the
pandemic-induced boom in digital services, has struggled in recent
quarters as clients slashed spending on discretionary projects amid
inflationary pressures and recession fears.
That is forcing companies including Tata Consultancy Services, Infosys
and HCLTech to accept contract conditions such as guaranteeing minimum
cost savings, billing the client only if certain goals are achieved and
reviewing cost overruns.
"Whenever economic challenges appear and demand recedes, it becomes a
buyer's market. The clients try to push more clauses including capping
the pricing and asking for outcome-based deals," said former Infosys CFO
V Balakrishnan.
"It was witnessed during 2008 when the global financial crisis happened,
and in 2001 during the dot-com crash," he said.
Tata Consultancy Services and Infosys did not respond to Reuters'
requests seeking comment. HCLTech declined to comment on specific deal
terms.
More than 80% of more than 1,600 IT and business process management
deals tracked in 2023 had some form of committed-savings clause, versus
around 65% in 2019, data from IT research firm Everest Group showed.
Such cost-saving clauses are either baked into the pricing, or companies
risk a cut in fees if the savings are not achieved, Everest Group CEO
Peter Bendor-Samuel said.
Contracts with such clauses that were signed this year include HCLTech's
$2.1 billion deal with Verizon and a $454 million deal between Infosys
and Danske Bank, a person familiar with the deal terms said.
Under the Danske Bank deal, which runs for five years, Infosys will
digitise the lender's operations and take over its delivery centre in
India, while the Verizon deal, which runs for six years, will see
HCLTech become the U.S. firm's primary tech partner for network
deployments, according to exchange filings.
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An employee arrives for work at HCL Technologies headquarters in
Noida, on the outskirts of New Delhi, India, August 28, 2023.
REUTERS/Adnan Abidi/File Photo/File Photo
TOUGH TIMES
The tougher contracts are likely to add pressure on an industry that
is already struggling. India's second-biggest software-services
exporter by sales Infosys has already predicted its slowest annual
sales expansion in at least a decade for the current financial year
ending March 2024.
The big IT firms classify contracts worth $100 million or above as
large deals and those above $500 million as mega deals, which are
typically struck when demand is low.
TCS, Infosys and HCLTech have won seven mega deals since May,
company disclosures show, while Wipro did not win any mega deals.
Its Chief Growth Officer Stephanie Trautman, who was leading the
large deals team, resigned earlier this month.
The tougher terms tied to the large IT deals are an attempt by
clients to hedge against the global economic uncertainty, deal
advisors said.
"Clients are increasingly seeking predictable business outcomes and
assurances to protect their interests in large deals that often span
five years or more," said Avinash Baliga, partner at deal advisor
Avasant.
The inclusion of committed-cost-savings clauses in deal agreements
has climbed to 50-60% presently versus 20% in the last decade,
Baliga added.
The clauses also reflect a rise in client maturity.
"Customers have become much more aware of the possibilities and
scenarios that could play out during a deal tenure," said Ashutosh
Sharma, vice-president and research director at Forrester India.
"Now, clients are asking IT players too to share risks and rewards."
(Reporting by Sai Ishwarbharath B; Editing by Dhanya Skariachan and
Miral Fahmy)
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