Cost takeout deals put big IT firms at advantage

The bigger Indian information technology (IT) firms are breathing easy despite the global economic slowdown threatening to moderate growth prospects in the next financial year. With rising inflation amid the Russia-Ukraine war, most enterprises are facing increasing cost pressure. This is leading to more cost takeout and large deals coming to the market, as companies outsource technology work.

Historically, the Indian IT industry has gained from offshoring (work coming to India & other outside locations) with vendor consolidation (giving more technology work to one big firm) during periods of slowdown. So, these factors are likely to work in favour of large firms at a time the global IT industry is staring at slow sales growth in 2023.

Glimpses of this phenomenon are already visible. Tata Consultancy Services announced winning a large deal over $700 million from the UK insurer, Phoenix Group in February. In December 2022, TCS won an ~$300-million, multi-year IT contract from the British Petroleum(BP) Group. Similarly, Cognizant signed a 10-year $1-billion renewal contract with its long-standing client, CoreLogic in January 2023.

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“In the large accounts, they (large IT firms) are likely to benefit from portfolio rationalisation. However, in smaller clients, the smaller vendors have a modest advantage. Net, net; it will be beneficial for the larger firms,” Peter Bendor-Samuel, CEO of global consultancy firm, Everest Group told DH.

“The larger IT services firms will benefit from the cost-pressure deals as they have more scale and depth of resources,” Phil Fersht, CEO and Chief Analyst at HFS Research told DH in an email reply.

Digital investments under evaluation

As cost pressures increase, enterprises globally are prioritising projects with the immediate return. Therefore, a lot of digital projects are facing delays. A survey done by global consultancy firm HFS Research found that up to 67% of major enterprises, comprising predominantly IT leaders, are facing reduced IT sourcing budgets.

Technological research and consultancy firm, Gartner has also cut its forecast for worldwide IT spending growth to 2.4 per cent in 2023, from a 5.1 per cent projected earlier. In such an environment, new digital initiatives are the first to be axed. However, experts pointed out that digital projects with immediate return potential were getting executed.

“We see the torrid post-pandemic market for digital slowing, but still growing. We see headwinds for modernisation, but an eagerness for digital pragmatism, where the new digital work can deliver clear and immediate results. Hence, the demand is shifting from hyper-growth to a more mature and sustainable level of growth,” Bendor-Samuel of Everest Group said.

Agile mid-tier IT firms can sit pretty

Though slow decision-making in digital projects is expected to moderate growth prospects for several mid-tier firms, those with an agile business model, with an ability to adapt to the new dynamics will continue to outperform their larger peers. Interestingly, most mid-tier firms have witnessed higher revenue growth in the last two fiscal years, as compared to large companies. This is unlikely to change for many, despite more cost takeout deals coming to the market, in which mid-tier firms usually don’t participate.

“It will be more about the fight in the dog than the size of the dog in the fight. In other words, well-run firms, which are able to pivot into the changing market conditions, will outperform those that are slower to do so. The larger firms have some advantages due to a wider portfolio of offerings and the tailwinds of clients reducing the number of vendors in their mix. However, this is likely to be more than offset by the ability of the well-run smaller firms to pivot faster and the relative ease of growing faster from a smaller base,” Bendor-Samuel of Everest Group said.

That has allowed most mid-tier firms to remain cautiously optimistic about revenue growth this year.

Post announcement of third-quarter results, the management of mid-tier firm LTIMindtree has indicated that the demand for digital projects remains sound, along with cost take-out deals for the company.

However, as far as manpower planning is concerned, HR experts pointed out that big firms will have an upper hand. “Big firms will win this game as they will be able to exercise a greater degree of flexibility in terms of manpower planning. With regards to the ratio of permanent workers versus contractual, large firms will be able to get a cost advantage because of the brand name and volume (in hiring). Mid-tier firms may struggle a bit to do it at a similar level,” said Aditya Narayan Mishra, CEO of HR consultancy firm, CIEL HR.

From this perspective, it will be interesting to see the revenue growth guidance of both large and mid-tier firms, as we fast approach the next financial year.