For IT companiess, it’s now about small and medium deals

Budget constraints, saturation of outsourcing and the general state of the global economy are among factors driving down the extent of re-scoping of information technology (IT) deals coming up for renewal this year.

According to outsourcing advisory firm TPI, new scope deals were down 15% year on year in the first quarter of this calendar year.
This is in contrast to the trend in 2009, when most outsourcing customers had significantly extended the scope of work for IT contracts at the end of their tenure.

Scope expansion of contracts last year had helped Indian tech service companies push up volumes in a year when customers had extensively slashed their IT budgets due to economic slowdown.

Sid Pai, partner and managing director of TPI India, said customers were not adding new scope to their contracts because many of them had hit the “natural ceiling of outsourcing.”

“There is a natural ceiling to what can be outsourced and some of customers have hit that. There are some customers who have been outsourcing for over 7-8 years now and have outsourced as much as possible and don’t see any more scope of expanding it,” he said.

This, coupled with a “patchy recovery’ in Western markets, is keeping the addition of new scope in existing deals low this year.
Subhash Dhar, senior vice-president and head of the communications service providers business unit at Infosys Technologies, disagrees with Pai. He believes customers are not re-scoping deals because they lack affordability even today.

“I think there is still a lot that customers can outsource (to become more competitive), but they are bogged down by the affordability issue. The current state of global economy is also limiting the number of large deals,” Dhar said.

According to him, at present, volume growth for most Indian IT vendors is from small and medium deals, large deals being few and far between.

“There were very few large deals in the last two years (2008 and 2009). This (trend) is continuing this year. However, last year we had seen our customers increasing scope of work in the existing contracts, but this year that’s not happening much. Most of the growth is now coming from small and medium new deals,” he said.

Another interesting trend emerging from the restructuring of ongoing deals is of incumbents losing a large number of contracts to new vendors.   

Typically, in 85-90% of cases, the incumbents win a significant portion of contracts when they come up for renewal.

“It is observed that market share shift is certainly taking place among vendors. The volume growth seen in Indian vendors recently might have been a derivative of market share gains rather than increased client spending,” Analysts Vihang Naik and Neha Garg of MF Global wrote in a report published on Monday.

Another report, brought by Bank of America Merrill Lynch analysts Mitali Ghosh, Pratish Krishnan and Kunal Tayal last month, said Indian vendors have been able to gain “wallet share” in the restructuring deals with incumbents retaining only 85-90% of the pie.

Anand Rathi’s Tarun Sisodia and Naushil Shah in their report on Wednesday said Indian IT vendors would increase their market share by grabbing business from incumbents. The share of domestic IT service providers has swollen to 4.6% in FY10 from 3.7% in FY07.

Pai, however, pointed out that the three top Indian IT companies could also fall in the incumbent category considering they have been a part of some large deals for some years now. “In some deals, the shift in the market share could also be happening from Indian incumbents to other vendors,” he said.

However, there is no doubt Indian offshoring firms were enlarging their market share, especially in the application development and maintenance space where they have over 40% share, said Pai.

Gartner data also validates the growing dominance of Indian players in the global IT market. According to the global IT research firm, the top five largest IT service providers saw their revenues fall in 2009 by an average 7.4%, with HP and Accenture reporting the largest declines at 10.4% and 11.8%, respectively. In sharp contrast, the revenues of India-based vendors grew 3.6% in 2009, although down from 15.4% in 2008.