Global IT outsourcing deals take a beating

The impressive revenue growth witnessed by the top Indian information technology (IT) companies in the April-June quarter this year over a year ago period, was rather in contrast with the real situation in the global outsourcing market.

The total contract value (TCV) for the global broader market for IT outsourcing (ITO) and Business Process Outsourcing (BPO), together, has dropped 18 per cent to $16.4 billion in the April to June 2011 over the same quarter in 2010, showed TPI’s recently-released Global Outsourcing Market Data & Insights. TPI is a global IT sourcing advisory firm that tracks larger IT deals worldwide.

Things looked worse when the first half (H1 or first six months from January to June) of 2011 is taken into consideration as the TCV for the global broader market has fallen 20 per cent YoY (year on year) to $37.20 billion against $46.40 billion in the H1 2010. The TPI Index covers ITO and BPO deals larger than $ 25 million, which, according to industry sources, account for nearly 30 per cent of the IT outsourcing deals and is fairly representative.

There are several reasons why the IT outsourcing market has taken such a beating after a slow recovery in 2010 to $88.40 billion. The main cause is that the US market, which at $24 billion accounted for 52 per cent of the global market in the H1 of 2010, has dropped by half to only $12.2 billion in the H1 2011. While the EMEA (Europe, Middle East and Africa) and Asia-Pacific markets have grown in H1 2011, it was not enough to compensate for the drop in the America market. (See table).

Weaker and smaller value deals in the American IT market were due to a major transformation that market is undergoing, said experts. According to HCL Vice Chairman & CEO Vineet Nayar, many large client organisations who were locked in with deals having high billing rates during the recession time starting from 2008, are now restructuring such deals by opening them up for competitive bidding.

“We are seeing that the deal sizes are getting smaller and vendor-churn is happening in 30 per cent of the deals as against only 5 per cent earlier,” Said Nayar. This, in other words, means that many old large deals are now coming up for re-bidding, they are being broken into smaller deals and incumbent vendors are losing out to new players. As deal sizes are falling, many of them are going out of the TPI index.

Yet another reason is that many large IT infrastructure projects in the US are also getting restructured and are being scaled down to smaller sizes mainly because of the slowdown in the economy. “Restructuring of IT infrastructure deals are happening for quite some time now. Basically, clients are multi-sourcing and going to best-of-breeds providers for their requirement,” said the Chief Marketing Officer in one of the top five IT companies in India, who did not want to be named. 

Another interesting takeaway from the TPI Index is that among the business verticals, deals in financial services has dropped 20 per cent to in H1 2011 to $9.30 billion and in manufacturing it has dropped 16 per cent in H1 to $8.20 billion. The vertical telecom & media was a big winner as it grew 59 per cent in H1.

What it means for India?

The most important implication for the Indian companies from the downturn in IT outsourcing deals is that they are in a better position to grab a piece of cake, though smaller, because of the most efficient offshoring facility and the global delivery models perfected by them. Of course, there will be margin squeeze in many deals but it is the time to go for growth.

As HCL’s Nayar put it succinctly, “We don’t want to fall in the margin trap as it is time to grab as many deals possible. We shall try and enter every door before they close.” HCL added 31 major clients as on June 30, 2011 compared to the same date a year ago. No wonder HCL is the only Indian company in the TPI list of ‘Top 15 Service Providers by TCV’. Similarly, IT biggies like Infosys added 26 new clients and Cognizant Technology Solutions added 76 new customers.

Nayar pointed out that restructuring of deals is a good opportunity for Indian companies who are grabbing new customers from the big multinational players, more so in the North America even though the overall size of the market is down. “We are eating their lunch and enjoying it,” he said. Agreed Cognizant President & CEO Francisco D’Souza, who at the company’s result announcement said, “We continue to see stronger than anticipated demand for our increasing range of services across the industries we serve. Over this past year, we have seen clients seeking our services not just to drive operational efficiencies, but also to transform their businesses to adapt to next generation technologies and to a new generation of ‘born digital’ workers and consumers.”

Indian players expect that as the market gets tougher, they will gain more compared to the international giants as many more IT deals will come for restructuring in the next two quarters.  Also, there will be many transformational deals as companies in the US and in Europe are recovering and rediscovering their business models post recession and are also entering emerging markets in a big way which needs large investments in IT. No wonder, despite sharp drops in first half, TPI expects the TCV in 2011 will be close to the 2010 level of $88 billion.