Outsourcing deal value shrinks the most in 10 years

Indian information technology (IT) services story remains intact despite the TPI global index showing that total contract value (TCV) of commercial outsourcing in the first quarter of this year slipped the most in a decade.

The index fell 25% sequentially to $17.4 billion from $23.1 billion in fourth quarter of 2010 and 28% from $24.3 billion in the first quarter last year.

Positively for Indian tech firms, however, the technology advisory firm’s index, which measures

commercial outsourcing contracts valued at $25 million or more, has been dragged down more by decline in restructuring contracts than new scope signings. Multinationals such as Accenture, IBM, HP and others have a bigger play in the restructuring segment, while Indian tech firms figure more prominently in the new scope deals space that was more or less stable.

The TPI index reveals restructuring contracts —- those that are renewed, renegotiated or restructured — fell 64% in the last quarter to $2.5 billion from $7 billion in the fourth quarter of 2010 and 73% from $9.4 billion last year. New scope TCV of $14.9 billion was unchanged year on year (yoy) and declined just 7% sequentially.

Subhash Dhar, senior vice-president and head, global sales, alliances and marketing head — communications, media and entertainment, Infosys Technologies Ltd, confirmed that the second-largest IT vendor had not seen any dip in the restructuring contracts in the previous quarter.

“It (restructuring contracts) has been stable for us, while the new contracts have improved over last year. It’s always a game of two steps forward (with signing of new contracts) and one step backward (with loss of old contract if they are not renewed),” he said.

Generally, restructuring contracts are the highest in the first and fourth quarters of the calendar year when customers take a decision on restructuring of a contract.

Dhar believes restructuring contracts could have plunged because many outsourcing clients were still not fully out of “hardship of downturn” and cost still playing a factor in renewal of contracts.

“The growth has still not returned to original levels. This could have led to a drop in restructuring contracts. However, since they have started looking at discretionary spend, fresh contracts are being signed. This is benefitting us,” said Dhar.

Morgan Stanley analysts Vipin Khare and Gaurav Rateria also feel the TCV trend depicted in the TPI index was in favour of the local tech firms.

“We believe MNC vendors may be more dominant in the large restructuring contracts space than the India IT vendors. Hence, we would expect new scope signings (flat yoy) to be more relevant for India IT vendors, whereas volatility in restructuring contracts could be more relevant for large MNC vendors like IBM in our view,” the duo wrote in their report brought out on Wednesday.

The financial numbers of IBM in the last quarter endorse this trend. While its outsourcing business, which constituted 47% of the total global services revenue of $14.6 billion, grew 7%, its outsourcing signing dipped 67% sequentially and 31% annually. The overseas tech major’s new signings saw a less steep decline of 53% quarter-on-quarter and 15% yoy.

“IBM management attributed weak signings in the outsourcing business to seasonally strong 4Q10 and indicated that total order backlog ($142bn) is a more relevant metric than new signings. The outsourcing order backlog ($95bn) was up 4%yoy and drives 85% of outsourcing revenue performance,” Khare and Rateria wrote in their note to investors.